After two years of ridicule for his ludicrous bet that Bank of America (about which we will have much more to say shortly) would triple, John Paulson has finally capitulated on his rose-colored glasses call that there is nothing but smooth sailing ahead for US financials. Reuters reports that "he pseudo-mutual fund manager "told investors on Thursday he was "too aggressive" with some of the stock bets in his flagship funds and he is trimming back some of his riskiest holdings. The hedge fund manager told investors in a conference call that he is limiting his funds' riskier stocks by moving away from bank holdings with heavy mortgage exposure." Translation: goodbye Bank of America. For those wondering what caused the drop in BAC from $14 to $9.5 in the past several months, now you know: VWAPed selling of 100MM+ shares of BAC stock will do that to you.
And while BAC was unwound at a modest profit, the biggest loser was Sino-Forest: the firm exposed as a Fraud by two guys with none of the amenities that $35 billion in AUM can provide.
"The biggest loss was Sino Forest. We took a nasty hit on it, but there was also other losses," said Paulson during the investor call, which Reuters heard portions of.
The Advantage Funds oversee roughly $18 billion in assets, a big portion of Paulson & Co's roughly $38 billion in assets.
And the biggest concern for 13F copycats is that the slashing of holdings is just beginning:
Paulson said he cut the net long exposure from roughly 81 percent to about 60 percent, and plans to cut it more. "Eighty-one percent was way too high. We cannot operate the fund at level," he said. "I'd like to bring the risk down further to about 50 percent."
As a long-time owner of large financial companies such as Bank of America and Citigroup, Paulson called said the former -- his sixth largest position at the end of the first quarter -- was "somewhat of a disappointment."
Follows the funniest thing we have read today:
He said his team of analysts did not expect the magnitude of the mortgage problems to be so great.
Perhaps if Paulson had read some fringe blogs... Yet it seems he still has not learned his lesson:
To reposition the portfolio, Paulson said he diversified into financial companies with less exposure to mortgage loans, noting that he liked Capital One and Wells Fargo, two names he owned at the end of the first quarter.
Funny: it is only an hour ago that we wrote how credit card companies are about to be burried under a tsunami of bad debt and delinquencies. But Paulson will learn that with the traditional 2 year delay.
And the biggest concern to FX traders, which is everyone these days, is that the Pauslon mutual fund is now actively dabbling in FX:
He also said he increased his bet that the euro currency would fall as a hedge against further fallout from Europe's debt crisis.
i.e. Another massive daily P&L wipeout for JP. We may have to reevaluate our near-term bearish stance on the EUR. which is only matched by our near-term bearish stance on the USD.
As a reminder here are the shares that Paulson is dumping, per his latest 13F: