In October 2008, John Paulson and his team were at the forefront of a highly profitable experience. They managed to enter the market in time to short it before the economic recession hit. This was a brilliant move, but not for others by this time.
John’s shorting ways triggered a chain reaction with other investors who saw what he was doing and started following suit down the market’s side. The stock market crashed in 1929, with almost no way out for investors.
John Paulson had his eyes set on AIG, the largest insurance company in the world. It had a fully guaranteed AAA rating for its bonds. Back then, everyone thought it would be a good investment, but not Paulson. He saw other opportunities in companies like Lehman Brothers and Bear Stearns, which were on the verge of bankruptcy. The big difference between these two was that Lehman Brothers had mortgage-backed securities while Bear Stearns did not. These two were at opposite ends of the spectrum, and Paulson made sure he hit their weak spots with precision to make him millions in profits (“The Big Short”).
AIG had made its name as a company that would not fail. People thought they were invincible. They believed they could always count on them when anything went wrong because their guarantees were 99% safe. Although AAA has nothing to do with its reliability, this company was trusted by almost everyone, and Paulson tried his best to see through the facade. He realized early on that AIG’s insurance-linked securities (ILS) were very risky and full of red flags. They had the same housing crisis issues as Lehman Brothers and Bear. AIG was not very transparent in the way they were handling its finances. The government-insured the ILS for $165 billion in question, meaning that it wasn’t just Paulson’s imagination that AIG was a ticking time bomb.
John Paulson knew he had to make a move to protect himself from losing all his money overnight and save other investors from getting wiped out. He did this by shorting AIG’s stocks which could be bought at almost any time in the market other than during peak trading hours.