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Seth Klarman - A Big Winner in the Government Suit Against JPMorgan

October 16, 2012 | About:

In a Wall Street vs. Wall Street fight, the NY AG Eric Schneiderman just gave hedgie Seth Klarman the upper hand.

FORTUNE -- A hedge fund manager who made money betting against the housing bubble, and the terrible mortgage loans that came with it, is cashing in on the prosecutions as well.

Seth Klarman, the reclusive Boston hedge fund manager, could be the big winner in the recently filed New York Attorney General's lawsuit against JPMorgan Chase (JPM).

Klarman's Baupost Group is acting as the lead plaintiff in a private case against EMC, the former Bear Stearns mortgage unit that is also the focus of NY AG Eric Schneiderman's case against JPMorgan. And if things go Klarman's way, Baupost alone could end up collecting about $310 million from JPMorgan, with a big assist from the government.

Klarman's suit is one of the many so-called put-back cases bedeviling the banks right now, in which investors who bought mortgage bonds in the year or so leading up the credit crisis, when loan officers were basically handing out mortgages like candy on Halloween, are demanding their money back.

But here's what's interesting about the Baupost case: Klarman isn't one of those investors who got burned in the mortgage bust. In fact, Klarman is famously one of the few investors on Wall Street who made money betting against the housing market. Then, in early 2009, Klarman shifted gears. He began snapping up mortgage bonds. At the time, subprime mortgage bonds were selling for $0.40 on the dollar. That means Klarman probably spent around $160 million on the bonds related to the JPMorgan litigation. And once he did, Klarman put himself and his investors in a position to claim, even though he predicted better than most Wall Street's house of cards, that they, like other investors, were lied to.

Klarman has a history of unusual investments. Earlier this year, Fortune wrote about how Klarman had bought up a big chunk of Canadian farmland, and that locals were doing everything they could to stop him from turning some of their country's most fertile land into a quarry.

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