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The $700 billion Troubled Asset Relief Program was originally intended to purchase troubled mortgages and securities to stem the flow on foreclosures.
However, in a U.S. Congressional committee hearing, Secretary Henry Paulson of the Treasury Department has announced that the fund would be more beneficial to the nation by investing it in banks and financial institutions than purchasing mortgage loans in danger of foreclosures.
With the approval of President Bush, the Treasury Department would pull out TARP funds off the troubled mortgage loans market.
With this development, John Paulson, a hedge-fund manager who owns Paulson & Co. in New York, plans to start buying loans from mortgages in danger of foreclosures. With $36 billion in assets, Paulson is seeing a big opportunity in this market, where ABX indexes have fallen 35 percent. Other investors are saying that this is perfect timing for Paulson, with the TARP program already pulled out from the market. With Paulson buying in, many investors might join in this bandwagon of purchasing foreclosure properties.
John Paulson have profited last year by purchasing credit instruments against subprime mortgages. These credit default swaps on mortgage assets rise in value when the risk of foreclosures increases, which is more evident with subprime lending. Subprime lending has been a significant factor in the case of several foreclosures in California and other states.
While other fund managers are suffering a bad year in 2008, Paulson’s firm has gained 29 percent, after profiting six-fold from last year. He is expected to gain more with this new venture.
While Democrats have criticized Henry Paulson for delaying efforts in stopping the flow of foreclosures with the way the TARP money is being handled, John Paulson has defended his namesake. Paulson has lauded the efforts put forth by the Treasury Secretary and his willingness to change his views depending on the situation.
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