John Paulson may catch a break on Bank of America deal

BOSTON Wed Jun 29, 2011 12:36pm EDT

BOSTON (Reuters) - Hedge fund manager John Paulson may have finally caught a break -- even if it is for just one day.

As a long-term optimist on financial stocks, Paulson has suffered losses for most of the year on the 1.22 percent stake he has in Bank of America (BAC.N). But on Wednesday, shares of the Charlotte, North Carolina-based lender were up half a percent at $23.68 at midday on the news that the bank reached an $8.5 billion settlement with a group of mortgage investors.

Bank of America's stock appeared to climb on the belief that the bank is starting to put its mortgage troubles behind it. While it is too soon to say whether the gains in the stock price will be lasting, it was the first good news for the billionaire hedge fund manager in quite some time.

The past few months have been brutal for Paulson, who oversees $37 billion in investor assets spread across several portfolios, and whose firm, Paulson & Co, ranks among the world's five largest hedge funds.

A spokesman for Paulson declined to comment.

His Advantage Fund fell 15.5 percent through the end of last week, in large part because of a disastrous $100 million loss on Chinese forest company Sino-Forest. Even before this hit, declines in bank stocks, including Bank of America, were pulling Paulson's biggest portfolios into the red.

Paulson, long known as a patient investor, stuck by his Sino-Forest bet even after the shares started sinking fast in the wake of short-seller's critical report. Paulson finally liquidated the position two weeks ago and opened up told investors how disappointed he was last week.

While it is not possible to tell exactly how many Bank of America Paulson shares owns right now, a regulatory filing shows that his firm owned 123.6 million shares at the end of the first quarter, making the lender Paulson's sixth-largest investment. Rival lender Citigroup ranked as Paulson's third-largest holding with 41.2 million shares owned.

Paulson may be getting something of a two-for-one in the deal that Bank of America reached with mortgage investors.

That is because the man who rose to hedge fund fame on his early bet that the mortgage market would collapse is now an investor in some of those beaten-down mortgage securities.

Paulson has been a backer of the association that supports residential mortgage-backed securities investors and could benefit from any settlement between the bank and investors.

Chris Katopis, executive director of the Association of Mortgage Investors, declined to identify individual members or say which ones might make out especially well, keeping his comments general.

"The AMI welcomes the news of a settlement and now will study it in more detail," he said, adding that other large banks might use this settlement as a template to solve their disputes.

(Editing by Matthew Goldstein and Robert MacMillan)