Exclusive: OneWest gains a ray of hope for Paulson in glum times

(Reuters) - John Paulson's roll of the dice on a lender that rose from the wreckage of the financial crisis is emerging as one of the few big winners for the hedge fund manager in what is shaping up as a downbeat year.

A 2009 investment in a company that acquired assets from failed lender IndyMac is up some 200 percent, the billionaire hedge fund manager told investors when he met with some of them in Paris earlier this month.

The paper gain in the value of OneWest, the newly minted Pasadena, California-based bank, is responsible for much of the 24 percent gain in Paulson's $3 billion Recovery Fund last year and it has helped to push it up a further 4.22 percent in the first five months of 2011.

The sharp gain in OneWest stands in stark contrast to the high profile losses some of Paulson's portfolios are suffering right now thanks to declines in some of his biggest holdings including Bank of America and Citigroup and, in particular, the Toronto-listed Chinese company Sino-Forest.

In the first three weeks of June, Paulson's Advantage fund lost nearly 9 percent, leaving it down nearly 15 percent for the year, according to investors in the fund.

Much of the devastation in Paulson's largest fund is due to a now disastrous bet on Sino-Forest, a forestry company which lost much of its value in the wake of a critical report from short-seller Carson Block and his Muddy Waters LLC research firm.

Unfortunately most Paulson investors are not reaping any of the benefits from the rise in OneWest's fortunes. That's because Paulson's investment in the privately-held bank is sequestered solely in the Recovery Fund, which is one of the smallest in Paulson's $37 billion empire.

Academic research has shown that smaller funds tend to outperform larger ones and this appears to be holding true, for now, at Paulson & Co.

Paulson certainly appears to be having a tougher time putting the roughly $18 billion in the Advantage funds to work than the much smaller amounts in his other offerings including the roughly $1.1 billion gold fund.

Still, the gains in OneWest are an indication that Paulson, who earned billions betting against subprime mortgages in 2007, hasn't totally lost his magic touch--even in the face of the Sino-Forest debacle.

Paulson isn't the only wealthy investor who made a savvy call betting on the ruins of IndyMac after it was seized by federal bank regulators in July 2008 in what was at the time one of the biggest and most dramatic bank collapses for many years.

The true architect of the financial crisis deal is Steve Mnuchin, a Goldman Sachs Group alumnus and founder of hedge fund Dune Capital, who currently serves as OneWest's chairman. And the list of other initial owners reads like a Who's Who of the investment industry, featuring George Soros, financier Christopher Flowers and Michael Dell, the head of the Dell Inc computer group.

Although the precise ownership stakes for each of OneWest's investors has never been publicly disclosed, papers filed with the Federal Deposit Insurance Corp. indicate that Paulson, at least at the outset of the deal, intended to own just under 25 percent in the holding company that purchased the IndyMac assets.

According to federal documents, investors promised to make an initial equity commitment of $1.55 billion after the FDIC offered $8.1 billion in financing and agreed to guarantee some of the thrift's worst assets. A quick, back of the envelope calculation would suggest that Paulson may have put in as much as $387 million into the deal.

A spokesman for Paulson declined to comment.

Ever since Mnuchin moved from New York to California to become OneWest's chief executive officer and now the bank's chairman, the lender has been a sweet turnaround story for its new owners.

In the first three months of 2011 alone, OneWest had $2.5 billion in retained earnings, federal documents show.

A spokesman for OneWest declined to comment.

Indeed OneWest is looking and acting ever more like a growing bank, having last year hired Joseph Otting from U.S. Bancorp. to be president and chief executive officer.

Many industry analysts and investors say they expect the success story to keep going until some sort of catalyst, most likely a public offering of shares, allows early investors to cash in their bets.

While an IPO would be many months off -- public documents show that nothing can happen before the end of 2012 -- Paulson has already whet his investors' appetite for a potentially dramatic payoff.

If OneWest were valued in a similar way to BankUnited, the failed Florida bank that made a splash with its initial public offering in January, Paulson's investors would see an additional 70 percent gain in their position, the manager said, according to investors who can't discuss the matter publicly.

Paulson's rosy prediction for success at OneWest appears at odds with the drag that some of his other big financial bets are putting on his firm.

Known for being a patient investor, Paulson has stuck with Citigroup and Bank of America -- two of his top six positions -- even as both lenders have lost more than 19 percent each this year.

Some investors may be getting antsy with the losses in the Advantage funds and might hand in redemption notices in the next month to get out by the end of September, people familiar with investors' thinking said.

Paulson is ready to cut a position if it is potentially unsalvageable, like his ill-fated bet on Chinese forest company Sino-Forest which has tumbled more than 80 percent this year on allegations of accounting fraud made by short-seller Carson Block at Muddy Waters.

However some outsiders have noted that Paulson, known for his long-term bets, may have stuck with Sino-Forest far too long after the first red flags began popping up and the stock began crashing. Paulson sold his entire 34 million share stake in the past week.

(Reporting by Svea Herbst-Bayliss and Matthew Goldstein, editing by Martin Howell)