John Paulson: Goldman Scandal's Hero or Villain?

A scapegoat is emerging for the U.S. housing market meltdown -- and as a reason for more Wall Street regulation -- and his name is John Paulson.

As the very smart manager of a hedge fund bearing his name, Paulson and Co., he created a controversial investment vehicle called the Abacus Fund for Goldman Sachs. The Abacus Fund bought risky mortgage loans and literally bet that they (and the homeowners who held them) would default to the detriment of investors and consumers ... while Goldman and Paulson profited immensely.

The Abacus Fund was designed from the blueprint of another hedge fund called Magnetar. In a nutshell, Magnetar created dogs -- securities (like Abacus) -- and sold them to investors and made money when a security defaulted en masse.

It appears Congress and the SEC will parade this man in front of the world and attempt to label him as an enabler to the worst financial crisis of our generation, as evidenced by the SEC's lawsuit against Goldman Sachs. Some rightfully question the timing of the suit as part of a greater political agenda for tightening financial oversight on Wall Street. In any case, an epic blame-game battle is about to begin.

The irony for Paulson is that he very likely didn't do anything illegal. However in the court of public opinion, and in front of a Democrat-controlled Senate, that isn't likely to matter.

As it gets easier for the general public to wrap their heads around this picture of Paulson and Co. (and others) creating designed-to-fail mortgages for unwitting consumers, those who partook are going to be painted as pariahs, whether they acted legally, unethically or otherwise .

In regard to the lawsuit, proving intent will have a lot to do with how this train moves down the tracks. If intent to deceive investors can be proven (highly doubtful), Goldman and Paulson could be found guilty of fraud -- a career-ender for the latter.

Second to that, his reputation will be highly questioned in front of the press and the world. And that's just not good for business, I don't care how smart you are.

To this point, Paulson is being very pro-active as this news hits the street, sending out letters and having conference calls with his company's investors. Saying 'trust me' or something to that effect.

He claims to be confident that public sentiment will diminish.

Maybe, maybe not. Regardless, Paulson probably won't be able to engage in such '"exotic" and "dangerous" trading practices anymore, as Washington shackles Wall Street.