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A Big Win for John Paulson

July 25, 2014 | About:

In this article, let´s see the last gain of John Paulson (Trades, Portfolio), the hedge fund manager who made a fortune using credit default swaps to bet against the housing market in the 2008 financial crisis.

A Billion Dollars Richer

John Paulson (Trades, Portfolio)’s hedge funds made almost $1 billion on his investment in OneWest Bank, which is being purchased by CIT Group Inc. (NYSE:CIT), a leading provider of commercial lending and leasing services.

The Transaction

A few days ago, CIT Group announced that it has entered into a definitive agreement and plan of merger with IMB Holdco LLC, the parent company of the bank, for $3.4 billion in cash and stock. OneWest Bank is a privately-owned regional bank formed in 2009 that operates 73 retail branches in Southern California and has $23 billion in assets and $25 billion in deposits. The deal has been approved by the boards of directors of both companies and is subject to closing conditions and as usual to regulatory approvals. The transaction will take six to nine months to close and Paulson & Co. will be restricted from trading the stock for six months. The firm expects the deal to add 20% to CIT Group's earnings per share for 2016.

The share price of CIT has not done very well in the past year, it is down 9.94% and has underperformed the S&P 500. But following the news, the shares soared 10.8% as we can see in the next graph:


Total Gain

Bloomberg news reports that the hedge fund Paulson & Co. owns the investment through its Recovery Fund, which was created in October 2008, and a credit pool. The funds spent $400 million to purchase a 24.9% stake in Pasadena, California-based OneWest in 2009. The sale values that stake at $788 million and Paulson also received $551 million in dividends. The total gain for the funds is $939 million.

More About the Zacks Rank #3 (Hold)

CIT beat Wall Street's estimates in the second quarter, coming in with earnings per share of $1.02 compared to the Street's expectation of $0.71 per share and Zacks Consensus Estimate of 86 cents. CIT also announced a stock repurchase agreement of up to $500 million, which would follow its repurchasing of $745 million worth of its shares in 2013. Further, we can mention that the current return on equity exceeded its ROE from the same quarter one year prior.

Final Comment

What a wonderful week to become a billionaire! Other investors involved were Christopher Flowers, Michael Dell (Trades, Portfolio) and George Soros (Trades, Portfolio). They bought the assets in 2009 of the former IndyMac, one of the nation’s largest bank failures ever, from the Federal Deposit Insurance Corporation, which had seized its assets.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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