Paulson Shorts 4 of 5 Largest U.K. Finance Companies

Paulson & Co., whose main hedge fund made a sixfold return last year betting on a collapse in U.S. subprime mortgages, said it's wagering four of the U.K.'s five largest financial-services stocks will decline.

Paulson has short positions of 0.95 percent in HBOS Plc, the U.K. largest mortgage lender, and 1.76 percent in HBOS acquirer Lloyds TSB Group Plc, the New York-based hedge fund said today in separate statements. Paulson also said it's short 1.18 percent of Barclays Plc, which is buying a portion of bankrupt Lehman Brothers Holdings Inc., and 0.87 percent of Royal Bank of Scotland Group Plc.

The disclosures were required under rules pushed through by the U.K.'s Financial Services Authority last week. John Paulson, founder of the $35 billion hedge fund, in June said banks will need to write down about $1.3 trillion from the subprime crisis after more than $522 billion in losses and writedowns so far.

``Paulson & Co. empathizes with financial firms as to the difficult positions in which many find themselves,'' Paulson & Co. said in a statement distributed by PRNewswire. ``We support the FSA's desire to establish fair trading practices and to eliminate fraud and market manipulation. We will continue to comply with the FSA's requirements.''

The FSA's emergency measures were introduced after politicians and some investors blamed short sellers for a plunge in HBOS's market value last week before it agreed to a takeover by Lloyds TSB. Under the rules, no new short positions can be taken in U.K.-listed financial services companies. While existing short positions don't have to be closed, they can't be increased.

Not HSBC

``Our short positions are taken on a passive basis the success of which will be determined by the merits of the particular company,'' the statement said.

HSBC Holdings Plc, the U.K.'s largest financial services company, is the only one of the five biggest that Paulson didn't disclose it was shorting.

Short selling is when investors sell shares they have borrowed on the hope the price will fall. If it does, they buy back the shares at a lower price, return them to their owners, and pocket the difference.