Paulson’s Ties To Lending Group Questioned

Jun 8 2010 | 5:11pm ET

A California congressman has alleged that Paulson & Co. cultivated ties with a group that seeks to clamp down on abusive lending practices in order to pressure banks into making more subprime mortgage loans.

Rep. Darrell Issa (R-Calif.) demanded to know why firm founder John Paulson gave $15 million in 2007 to the Center for Responsible Lending. Quoting from an article from a conservative group, Issa asked whether Paulson’s donation was used to “shake down and harass banks into making bad loans to unqualified borrowers.”

New York-based Paulson, of course, profited handsomely from those practices when the subprime mortgage market collapsed, reaping billions for it clients betting against securities containing the very mortgages Issa implies it sought to facilitate. The subprime short put Paulson on the map; the firm now manages $30 billion and is the third-largest hedge fund manager in the world.

Issa’s letter comes after the Securities and Exchange Commission accused Goldman Sachs of defrauding investors in a collateralized debt obligation allegedly structured and marketed on behalf of Paulson. The hedge fund paid Goldman $15 million, the SEC said, and then bought credit default swaps on the CDO, called ABACUS-AC1-2007. Investors in the CDO lost $1 billion; Paulson, by contrast earned $1 billion.

The hedge fund has not been accused of any wrongdoing.

Paulson told that it would respond to Rep. Issa, but added that the “donation was used exclusively to provide legal assistance to people facing foreclosure to help them stay in their homes.”

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