Against Whom Did Paulson Bet?

I listened to the following report on NPR as I was driving my kids to Brigham & Women's hospital where my wife had given birth.

Maybe John Paulson made the smartest Wall Street bet ever, but

• if he really believed that CDOs (Collateralized Debt Obligations) and mortgage debt were outrageously overvalued while CDSs (Credit Default Swaps) were tremendously underpriced and
• if he realized that banks carrying toxic mortgage assets on the books were still selling CDSs (Credit Default Swaps),

shouldn't he have worried that the institutions against which he was betting would collapse and not make good on the bet?

A responsible banker-speculator would have to have thought twice about placing the wager.

Thus, Paulson did not so much bet against the CDOs but for the willingness or stupidity of the US government to make good on the bets of the losers.

Does Paulson really differ much from the guy

• that stakes an illegal craps game and
• that sends some thugs out to break the legs of a player for failing to pay up after losing everything?

Because Paulson won his gamble only because the government bailed out the banks with taxpayer money, in Paulson's scenario the thugs broke the legs of the US taxpayer metaphorically.

In a Sholem Aleichem story set in a time period before Jewish Zionist Wallstreeters managed to subvert both government and the banking industry, Paulson would have been the speculator that outsmarted himself.

Unrecoverable gambling winnings made good because of the bank bailout constitute income that is as unearned as income possibly can be and should be taxed at confiscatory rates.

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