The Paulson who's been most in the news over the last few years has been former Treasury Secretary Hank. But the Paulson who has made the most money during that time is a fellow you've probably never heard of -- another Harvard Business School graduate in the hedge fund industry -- John. Through his Paulson & Co., John Paulson pulled in a $4 billion pay check in 2007 -- that's more than J.K. Rowling, Oprah Winfrey and Tiger Woods combined.

How did he pull it off? The Wall Street Journal reports that it was Paulson's share of Paulson & Co.'s $20 billion profit from betting on a drop in the subprime mortgage market. He spent $1 billion in 2006 to buy insurance on what he then saw as risky mortgage investments. This was not a surprise to everyone back then -- that December, I had suggested betting against subprime mortgage lender NovaStar Financial (NOVS), and its stock has since fallen more than 99% from $116 to $0.99.

But Paulson's bet really paid off for him. When the housing market collapsed and the mortgages fell, Paulson's insurance policies soared in value. One of his funds rose more than 500% that year. Then, in 2008, he won again by betting against the stock prices of financial firms -- and he made big bank again when their shares imploded, according to the Journal.

What is Paulson doing now? He has sold $328 million worth of stock in Goldman Sachs Group (GS) and invested $1.45 billion in Citigroup (C). With $306 billion in government cash and obligations on its books, Citi is probably not going to collapse into bankruptcy. I don't know why Paulson placed this bet, but it sure is a big one.

It's also a bet you can follow easily. We'll also know in the next few years whether lightning strikes again for John Paulson on his Citi gamble. Come to think of it, there's probably only a little luck involved in his investment success.

Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He owns Citi shares, but has no financial interest in the other securities mentioned.


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