In 2005, a hedge fund manager from Queens became suspicious of undue optimism when his bets that certain bonds would lose value weren’t paying off, even though some of the companies were in bankruptcy. John Paulson, or J.P. as he is known, urged his traders to buy up credit default swaps, or insurance instruments that would pay out if mortgages began to sour. At first, they lost money, but in January 2006, Ameriquest Mortgage Co. paid 5 million for improper lending practices. Paulson doubled down. Last year, his two funds dedicated to betting against the housing sector rose 590% and 350%, respectively.