John Paulson Exits Citigroup, Bank of America; Should You Follow?

Hedge fund manager and billionaire John Paulson has sold all of his holdings of Citigroup (NYSE: C) and Bank of America (NYSE: BAC). In total, he has sold off over $1 billion in stock in the two traditional banks. The investor's 25.1 million shares of Citigroup (valued at $643 million at the end of 2011) and 64.3 million shares of Bank of America (valued at $394 million at the same time) will be sold at a loss.

Paulson may be expecting a bear market after two months of rallying, and he would not be alone. Thin volumes in equity markets and editorials in financial papers have pointed to an end to the recent rally, as poor retail figures in America and political uncertainty in Europe regarding a bailout of Greece point to structural flaws in the market. Some commentators have suggested in no uncertain terms that it is time to sell.

John Paulson is not selling in response to the rally, however, since he sold the shares before December 31st, meaning that he's lost out on a 21.9 percent jump in Citigroup's value and an eyewatering 43.5 percent jump in Bank of America's value.

To prove that even billionaires and insiders can lose in the stock market, Paulson's Advantage Plus Fund lost 51 percent in 2011, with Paulson pointing the finger at financial companies as the "primary drag" on the fund's portfolio.

Paulson is still far ahead most investors after earning $3.5 billion in 2007 and $5 billion in 2010 by betting against subprime mortgages, but his loss on the traditional banks last year cut into those figures and may put pressure on his fund's investors.

At the same time, Paulson is putting pressure on Hartford Financial (NYSE: HIG), which he believes should split into two companies. Paulson wants the firm's property and casualty insurance business to spin off from its life insurance practice, arguing that the firm's "low multiple is because the company combines both" in a single firm.

Shares in Hartford, which had fallin almost 3 percent in trading on Tuesday, rose by over 5 percent in after hours trading in response to Paulson's comments. The stock has lost over 33 percent in the past year, but has maintained its 10 cent quarterly dividend despite a thinning net profit margin.

Financials have been a headache for Paulson & Co.,, the private hedge fund that has been operating since July 1994. The company owns 37.5 million shares in Hartford as well as 31.6 million shares of Bank of America, but Paulson's comments suggest that the company sees hidden value in its Hartford holdings that a spinoff would help realize. Paulson's comments that a company split would "produce an increase in value for Hartford shareholders" probably drove the after-hour rally more than anything else.

That rally may continue today unless profit-taking and scepticism at Paulson's view on the financial giant challenge the billionaire. Also, Hartford has not responded to Paulson's demand, and it is unlikely that the Connecticut-based insurance company, which has been operating for over 200 years and is one of the oldest companies in America, will immediately cowtow to one investor's angry demands.

Citigroup and Bank of America, on the other hand, are up slightly in pre-market trading, suggesting that the market may have already moved on from Paulson's sell off.