John Paulson: Wall Street Visionary

But Paulson's bet did not pay off. Real estate lenders were generous enough to lend money to buyers, who were happy to accept easy lending terms. Paulson began to suspect that the rating agencies were grading subprime mortgage products with lax standards, so he had his team conduct a large-scale investigation, which found that lenders were having a harder time collecting loans.

In January 2006, Paulson's bearish sentiment was reinforced by news that Ameriquest Mortgage, America's largest subprime lender, was investing $325m to investigate improper lending practices in the sector.

Mr. Paulson decided to set up a hedge fund dedicated to betting against mortgage bonds, and although some wary investors urged him not to plunge into unfamiliar territory, he raised about $150 million for the new fund. The fund began operating in mid-2006.

But the housing market continued to boom, and Paulson's new fund continued to lose money. A friend also called Paulson and asked if he was ready to cut his losses. "No. I want to raise it." "He replied. To ease his stress, Mr. Paulson runs five miles through Central Park every day and tells his wife that "these things wait."

"In a situation like this, a lot of experienced people would opt out of the trade to stop their losses, but strangely, the losses seem to have made him [Mr. Paulson] more determined." Peter Soros, a relative of the financier, also invested in Paulson's fund, he said.

Paulson's "betting" was too short ABX, an index of the subprime mortgage market that was created in early 2006. By the end of 2006, the ABX was down and Paulson's fund was up 20 percent. He then started a second fund of its kind.

On Feb. 7, 2007, a dealer ran to Paulson's office with a press release: New Century Financial, the nation's second-largest subprime mortgage lender, forecast a quarterly loss. At the same time, the ABX has fallen from 100 points in July 2006 to more than 60 points, and Paulson's second fund is up 60 percent in February alone.

Soros invited him to dinner, too

But just when things were going well, Paulson got worried. In barroom chats, some of his peers and former colleagues at Bear Stearns, then Wall Street's sixth-largest investment bank, told him that Bear Stearns was preparing to buy individual mortgages to revive the housing credit market.

He also heard that Bear Stearns was lobbying financial regulators for regulations that would allow insurers to modify or buy distressed debt. None of this was good news for Paulson's fund, and he went around calling Bear Stearns's practices "market manipulative."

Later, for various reasons, Bear Stearns withdrew both plans. In mid-2007, two Bear Stearns hedge funds that had invested in subprime mortgages collapsed.

Overnight, investors began dumping subprime mortgage bonds. Paulson's fund soared. When some complacent fund investors revealed his trading methods to friends, a furious Mr. Paulson installed special software to prevent his emails from being forwarded.

In the fall of 2007, with the ABX index in the low 20s, Paulson's time was ripe. Alarmed Wall Street institutions and big banks piled into CDS, the subprime mortgage-backed products that Paulson had been hoarding at bargain prices, and he had no trouble cashing in.

Eventually, in the subprime crisis of 2007, Paulson's first fund rose 590% and his second by 350%. In 2007 alone, $6 billion poured into Paulson's fund, not counting their investment gains that year.

Paulson himself earned a Wall Street record $3.7 billion in 2007, according to Alpha magazine, making him the top money-making fund manager of the year, edging out financial Titan George Soros (who earned $2.9 billion in 2007). Paulson also rose from nowhere to become the 165th richest person in the United States by Forbes in 2007.