John Paulson expected housing prices to go down. The ABACUS vehicle at the heart of the transaction allowed him to profit when they did go down. Who was on the other side of the transaction? Who lost the $900 million that Paulson collected? [typo corrected]
...So the ultimate guarantor of Paulson's play were the taxpayers of Germany and the UK.
Read the whole post if you want to see how it happened. I really wish we could run the experiment where we repeat the same financial euphoria but no country's banks get bailed out. They just get shut down, with depositors getting first crack at the assets, followed by other senior debt-holders.
Would the economic damage have been worse? All respectable people say, "yes." I happen to disagree, but I don't see a way of proving my case. Go back and re-read what I wrote early in October of 2008. I haven't changed my mind one bit.