Boklan saw to it that his grandson had an early appreciation for the principles of capitalism. When John was a small child, Boklan was the one who encouraged him to buy Charms candy in bulk at the supermarket and then sell the individual candies to kids in the schoolyard at a substantial markup. His profits grew, as did his appreciation for economies of scale and the tendency of certain commodities to become mispriced through ignorance or carelessness. It was also the point at which he would become transfixed by the process of turning pennies into dollars. Paulson would spend much of the rest of his career under the tutelage of older Wall Street role models, seeking to replicate those days with his grandfather.

Following high school in Brooklyn, Paulson moved on to New York University, which in the 1970s offered a popular seminar taught by John Whitehead, then a senior partner at Goldman Sachs. Paulson listened, fascinated, as Robert Rubin, later secretary of the Treasury under Bill Clinton and now an unofficial adviser to Barack Obama—talked about the mysterious and new (to Paulson, anyway) world of risk arbitrage. At the time, the scholarly, soft-spoken Rubin was viewed, at least by Paulson’s professor, as the smartest partner at Goldman Sachs; he was certainly the richest. Paulson graduated first in the class of 1978, with visions of arbitrage in his future.

Harvard Business School followed. There, Paulson came under the spell of another established star in finance, the leveraged-buyout titan Jerry Kohlberg. “I had never heard of Jerry Kohlberg,” Paulson recalls, “but one of my friends told me, ‘Forget about investment banking. You’ve got to hear Jerry Kohlberg. These guys make more money than anybody on Wall Street.’ ” According to Paulson, Kohlberg described how he engineered the L.B.O. of a company by putting up just $500,000 in equity and then obtaining a $20 million bank loan secured by the company’s assets. The company was turned around and sold at a profit of $17 million in two years’ time.

Paulson received his M.B.A. and then spent his time in pursuit of as much money as he could earn. In 1980, the hottest jobs were not in investment banking but in management consulting. So when Paulson finished at Harvard that year, he joined one of the leading lights in the field, the Boston Consulting Group. Though the starting salaries were far higher than those in investment banking, he realized that even the partners didn’t manage to pull in the kind of money he was hoping for. Thus, following a chance social encounter with Kohlberg, Paulson moved to Wall Street, where he was introduced to Leon Levy of Oppenheimer & Co. Paulson was soon hired by Levy’s new venture, Odyssey Partners.

After a couple of years at Odyssey, Paulson realized he was not getting the training he needed to climb the ­investment-banking money tree. So in 1984, just as the bull market was beginning, the 28-year-old joined Bear Stearns as an investment-banking associate. Four years later, he was promoted to managing director but soon opted to strike out on his own. After dabbling in real estate and beer—Paulson was an early investor in what would become the Boston Beer Co.—he joined the great, long march of former investment bankers and traders into the hedge fund business in 1994, going where he thought the money was.

Paulson began with about $2 million of his own money, just a blip in the hedge fund world, even then. The firm consisted of just Paulson and an assistant. He shared office space in a Park Avenue building with other small hedge funds.

At first, growth was slow. Paulson, who lived in an apartment in Lower Manhattan above what is now a discount shoe outlet, shepherded his money carefully and began to establish a track record. In keeping with the norms of the time, he charged a fee of 20 percent of profits and 1 percent of assets—a comfortable sum when the size of his fund was $20 million but nothing like what he has made recently.

Then, in the late 1990s, came the tech bubble, and more important for Paulson, who was shorting stocks and betting big on corporate mergers, its bursting in 2001. When the market crashed after stocks lost steam that year, Paulson’s funds climbed 5 percent and rose the same amount in 2002, demonstrating his uncanny ability to avoid losing his investors’ cash as the rest of the market cratered. (Indeed, Paulson has had only one down year out of the past 15: His funds recorded a 4.9 percent decline in 1998, the year of the debacle in the Asian markets.) Money continued to pour in. By 2003, his funds had $600 million under management; two years later, their value was upwards of $4 billion.

Paulson began branching out, moving away from betting on mergers and into the financial instruments of firms in bankruptcy. He was still as obscure as he could be, keeping his name and that of his wife, Jenny, out of the papers, though they did begin to accumulate the usual symbols of hedge fund wealth. He left his apartment on Broadway for the palatial quarters of a mansion on East 86th Street and bought an opulent, though not extravagant, house in the Hamptons, outside of New York City.

Paulson got wind of the coming storm in the credit markets through the infallible barometer of prices. By 2005, the amount of money he could make on the riskiest securities was not enough to justify the risk he was taking. Pricing, in his view, made no sense. Paulson concluded that he could do better on the short side—wagering that prices of risky securities would fall.

“We felt that housing was in a bubble; housing prices had appreciated too much and were likely to come down,” he says. “We couldn’t short a house, so we focused on mortgages.” He began taking short positions in securities that he believed would collapse along with the housing market.