John Paulson Capitulates; Sells Bank Stocks

Reuters is reporting that John Paulson told investors in his sprawling hedge fund, Paulson & Co., that his bets were "too aggressive" and that he is trimming back on some of his riskiest positions. In a conference call, he said that he has pared positions in bank stocks that have significant mortgage exposure. In the first half of the year, Paulson, who made billions betting against sub-prime mortgages, has seen the value of some of his funds fall sharply. The flagship Paulson Advantage fund was down around 12% and the Advantage Plus fund had lost around 18%. In June, a Chinese timber company called Sino-Forest TRE, lost most of its value after accounting concerns were raised by a short-selling research firm. "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. Paulson has long been bullish on beaten up banking stocks such as Bank of America BAC and Citigroup C, and he held significant positions in both. He said that Bank of America has been "somewhat of a disappointment" and that his analysts did not foresee the severity of the bank's mortgage problems. He has subsequently pulled back significantly from financial stocks with heavy mortgage exposure and diversified into stocks such as Capital One COF and Wells Fargo WFC which have not been weighed down by mortgage issues. Paulson also told his investors that he is looking to de-risk and has cut his net long exposure from 81% down to 60% and that he plans to cut it even 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," he said on the call. Paulson also told investors that he is increasing his bets againt the euro as a hedge against debt contagion in the region. Paulson & Co. manages around $38 billion.