Thursday, 17 April 2008

Co-op to buy Somerfield & how John Paulson made billions from the credit crunch

The UK’s fifth largest supermarket chain, The Co-operative Group (Co-op), is in talks to buy rival Somerfield. Discussions are at an early stage between Co-op and the owners of Somerfield, Apax & Barclays Capital, but the Co-op said there would be a strong fit between the two companies. The news came after Co-op said it was investing £1.5 billion in an attempt to double its profits by 2010.

The Manchester-based Co-op is a mutual business, run on behalf of its 2.5 million members. It expanded in July of last year when it merged with fellow mutual United Co-operatives. With more than 4,300 retail outlets across the UK, it employs 85,000 people. Bristol-based Somerfield has 900 stores.

Dividend payments to its customer members have more than doubled from £22 million to £45 million. Apax, Barclays Capital and a private equity consortium led by property tycoon Robert Tchenguiz bought Somerfield for £1.1 billion in 2005. (source: BBC News)

It is a jarring comparison for the millions of American homeowners struggling with their soaring mortgage payments, but there is one man who has profited so much from the credit crisis that he is jumping a few rungs on the property ladder this year.

He is John Paulson (pictured), a previously obscure hedge fund manager from New York, who took home $3.7 billion (£1.9 billion) last year, after betting on a calamity in the mortgage market. This is the equivalent of a lottery jackpot every day for a year.

Mr Paulson bought a 10.4-acre lakefront compound in Hamptons, the upstate playground for New York's rich and famous, complete with staff quarters, two outhouses and ocean views for $41 million. His more modest seven-bedroom, three-acre "cottage" a mile down the road, is up for sale with a price tag of $19.5 million.

It has turned Mr Paulson into an industry legend overnight, courted by powerful bankers and politicians, anxious for insight on how bad the housing crisis in the US and the global credit crunch might still get.

Mr Paulson's story is rich with other ironies. Now 52, he learnt his trade in part during four years at Bear Stearns, the investment bank which lost billions in 2007 making optimistic bets on mortgages that were the mirror image of Mr Paulson's. Its collapse last month is the defining catastrophe of the credit crisis. He also shares a name with – but is no relation of – Hank Paulson, the US Treasury Secretary, whose tenure has been spent trying to shore up the housing market.

John Paulson set up his hedge fund in 1994 and spent more than a decade as a middle-ranking fish in an increasingly crowded pond, until realising 18 months ago that the mortgage market was headed for disaster as millions of US homebuyers were signing up to loans they would not be able to afford. There would soon be a day of reckoning for borrowers and their profligate lenders, he calculated, and the multi-billion dollar market for mortgage derivatives was bound to collapse.

Putting his own money, his clients' money and billions of dollars of borrowed funds into the bet, he won big. Paulson & Co, his fund, had $6 billion under management at the start of 2007 and $28 billion at the end. The gains on his own capital and his cut of the fund's fees netted him $3.7 billion over the period.

That puts him atop Alpha's list of top earners ahead of George Soros, the veteran trader who has also been betting on economic calamity in the US and who took home $2.9 billion. A hedge fund manager had to earn $210 million to make the top 50. (source: The Independent)

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