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Comment by marketer | Hacker News Reader

All the hard-earned money people pay on mortgage interest rates ultimately goes to people like him.

Really? What path does the money take from them to him?

Arguably the bets this guy made resulted in the banks' losses on each of their sub-prime mortgage loans being greater; ultimately this will raise the cost of mortgage borrowing as banks price risk higher.

On the other hand, this guy probably helped to make the bubble burst sooner -- and thus before the banks could make even more sub-prime mortgage loans -- and that would have the effect of reducing the banks' ultimate losses (and resulting in them applying less of a risk premium to mortgages).

Trying to figure out which of these effects is larger would be pure speculation.

No, shorting mortgage-backed securities doesn't cause losses for mortage lenders. And it was not just banks that were issuing mortgages.

According to the article,

One concern was that even if Mr. Paulson bet right, he would find it hard to cash out his bets because many were in markets with limited trading. This hasn't been a problem, however, thanks to the wrong bet of some big banks and Wall Street firms. To hedge their holdings of mortgage securities, they've scrambled to buy debt protection, which sometimes means buying what Mr. Paulson already held.

In other words, Paulson was buying mortgage insurance contracts, driving their prices up, and now banks are buying those contracts from him (at higher prices than they would have if he hadn't been involved in the market).

He didn't drive the prices up (at least not by much). The fact that more and more people started defaulting on their mortgage drove up the price of insurance. That's what he was betting on (and he was right). So if he didn't make the money someone else would have (whoever was holding on to those insurance contracts).

You can't buy a financial instrument without driving its price up. This applies even more if you're buying hundreds of millions of dollars worth of a financial instrument.

True in general, but when he bought them, they were priced very low. Even after he bought millions (presumably) of the swaps, other investors thought he was an idiot and didn't follow suit, so the price of the swaps probably didn't go up much. It was only after the sub-prime fiasco got into third gear that other investors began clamouring for the swaps.

By all rights, his initial foray into buying the swaps most likely had minimal effect on the price. Ultimately he felt they were incorrectly priced by the market and made a bet on them.

Yes, but this still doesn't actually hurt the people that hold mortgages (the homeowners). Whether or not my bank can handle the fact that I'm about to foreclose has nothing to do with my ability to (not) pay.

Speculation provides liquidity to the market. That generally lowers the cost of financial transactions ceteris paribus.

Which raises the future cost of lending to deadbeats, because the only banks with capital will be the ones who were conservative.

I made quite a few assumptions - namely that mortgage banks are huge players in the various mortgage markets, and because Paulson extracted billions of dollars from these markets, the banks lost money as well. And the money that they would invest in these markets comes from their earnings, which is derived from interest rates.

He's short mortgages. That's what you do when you buy a home, too, except you get a home and he just keeps the cash. Paulson is actually one of the world's biggest subprime borrowers -- so however much pity you have for the average borrower, multiply it by about 20,000 or reconsider your assumptions.

Thanks for sharing that insight.

"While we never made a subprime loan and are not predatory lenders, we think a lot of homeowners have been victimized," Mr. Paulson says.

Well a lot of the money earned any which way goes to people like him. That is why they are rich.

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