He made most of his money betting against the housing bubble. As a result, it made the crash slightly softer (as he bid down the value of the assets that were in bubble territory, making the fall not as deep since his betting against it prevented the assets from rising even higher than they did) and therefore made the government's tab slightly lower.
The government bailouts actually hurt him since the bailouts prevented bankruptcies and prevented the housing related financial assets from going down as much as they otherwise would have, meaning he would've made even more money otherwise.
You are right, if we are just looking at a supply and demand curve. And Paulson is in the clear by the letter of the law; he did get rid of all his Goldman holdings before becoming Treasury Secretary.
Now, for those of us living in the real world there is a foul stench about the story. The chummy relationship between the government, the private sector, and to some extent the Federal Reserve is obvious.
You are not going to convince me that the $700 billion bailout didn’t have to happen – we might have been fine, but if that assumption were wrong then we would probably be living in the dark ages version two right about now.
I’m also not convinced by the other simple explanation: that this can all be traced back to the repeal of Glass Steagall. As society changes and as innovation happens we need financial innovation as well. Depression era regulations are probably a poor fit for today. There was nothing inherently wrong with the idea of CDOs, but the game just went WAY too far.
How do we solve this problem? I’m not sure we can. It’s easy to see the problem looking back, but the next crisis will probably be something we can’t conceive of right now. Maybe the economy just needs to shit the bed every generation or so?
