Sickened by the shorting greed that pulled in £270m

Chris Blackhurst
02.02.09

SO I'm eating my cornflakes and I read that John Paulson, the New York hedge fund king, has made £270 million betting that the Royal Bank of Scotland share price would fall over the last four months.

As I find the cereal increasingly difficult to swallow, I'm informed that Paulson, 52, is "an unassuming, quiet man. He wears sombre suits, his offices in Manhattan are understated". The father of two is worth £3.4 billion and is "always home for tea". That home is an £11.5 million palace on the Upper East Side.

What an absolute... you know the word I want to use but can't because someone of a sensitive disposition might complain. Derek Simpson, boss of the Unite union, said as much.

"Paulson's greed would make Midas blush. His immoral behaviour and the billions he pocketed are a reminder the global banking system has gone haywire," he raged. "When one man can make such vast sums on the misery of millions of others, it is obvious the system is wrong."

Derek, I'm with you - prison isn't good enough for the short-selling fiend! He should be paraded down Fifth Avenue, naked, and then tied to a lamp-post so we can all take out our anger and despair on the grasping monster!

As I pick myself off the floor, reassemble the crockery and start to sweep up the soggy Kellogg's that had scattered across the table, a bell goes off in my boiling brain. Where, exactly, did Paulson get the stock from to make his evil wager?

Er, he borrowed it from the institutions that own RBS shares. They loaned their stock to him. He sold it, and then bought it back cheaply and returned them. He pocketed the difference - in this case, a giant, fat profit. Oh, and he also paid a fee to the pension funds that let him use their shares.

Does that fee equate to the amount the shareholders lost in the fall of the share price? Of course not. But they get some money in their pocket now, which they can use to bump up their quarterly returns.

If you think Paulson is the incarnation of Satan, then you might like to consider his mind-numbingly stupid accomplices, without whom he could not carry out his nefarious deeds. For the sake of a bit of money upfront, they're prepared to engage with someone taking a keen interest in having their investment destroyed.

It's the same as you lending out your house to a bloke you know wants to see the place trashed before he hands it back to you. Most normal, sane people wouldn't let him through the door.

But since when have the pension funds been able to rouse themselves to do anything? Just tracking an index is exhausting enough - having to say no, when he's dangling a wad of cash in front of their noses is clearly beyond them.

They will say, of course, that their new best friend John is taking a punt. That when they lend to him, they don't actually know the shares are going to fall. To which I say, wake up and get real. You're John and you've just placed an almighty wager on the shares heading downwards (you're not alone, either - others are borrowing stock in the expectation the shares drop).

You're hardly going to say what a great company it is, are you? No. Anything you can do - legally, naturally - to lessen the risk of your gamble failing, you will do.

Paulson's fund said it "empathises" with the tough positions banks find themselves in, and its short bets were based on long-term research "rather than short-term market movements".

It's a lovely word, "empathises". But more fool the institutions for letting him have the stock in the first place. Hang on. Aren't they pension funds, don't they have thousands, millions of pensions tied up in their portfolios? It's no use. I need to go and be sick.

The middle men taking the credit and heading for the top

Now and again I come across a person with an idea that's so clever, yet simple, that I kick myself for not thinking of it first.

One such is Giles Andrews and Zopa. He and his colleagues — there were five in total when the firm started three years ago and they now number 14 — collect money in from individuals and lend it out. That's pretty much it.

Borrowers are vetted and divided into categories, with A* being the safest and D young borrowers (“creditworthy young people who have a good but thin credit history”, says Andrews). Each type pays a different rate of interest. Loans are for three or five years.

To spread the risk, lenders only lend small chunks to individual borrowers. One lending £500 or more would have his money spread across at least 50 borrowers. Zopa makes its profit by charging borrowers a £94.25 transaction fee and lenders a 1% annual servicing fee.

So far, they've lent £33 million and only 2% of loans have gone bad. As bank credit has dried up, business has soared. “We're growing like Topsy. We loaned £2 million in January alone.”

It's not just that. They're able to offer a better rate of return to those with spare cash to invest than they could get in bank saving accounts or the stock market.

Zopa is, in the jargon, a P2P business, as in peer-to-peer, with Zopa as middle man. “The challenge we face in the recession, is to make sure we're not lending to the desperate who can't then repay,” says Andrews.

Why Zopa? “We'd been to business school and at business school you hear about zopa' or Zone of Possible Agreement. It means the boundaries the parties can agree upon as they negotiate a deal.”
They're expanding overseas but may have to rethink the name if they go to Russia. “We discovered after we'd chosen it that Zopa means arsehole in Russian.”

Just why are we so wary of closing tax loopholes?

There's Gordon saying his Government will crack down on tax havens. Not a bad idea, even at the best of times, but all the more creditable now, given the pressure on state finances.

He has also got allies across Europe and in the new US President who think along the same lines. But wait, here's the new Taskforce on Financial Integrity and Economic Development launched in Washington. It's the international body set up and backed by more than 50 countries to head the drive against offshore secrecy. Has Britain joined? No.

Despite what the Prime Minister has said in public, something different is being relayed behind closed doors. We've objected to giving additional powers to a United Nations subcommittee on tax; we've voiced worries in Brussels about the EU savings directive that will close some tax loopholes; and Alistair Darling writes in a leaked letter, advocating light-touch regulation.

Meanwhile, in the US, Barack Obama's officials reckon that by stamping down on tax havens, they will raise $50 billion (£35 billion). And Britain's financial position worsens.