Credit Crisis Not Over: Hedge Fund Manager Paulson
The credit crisis is not over, and losses in the financial sector are set to be around $1.3 trillion, according to star hedge fund manager John Paulson, who says he remains short on credit.
In its twice-yearly report in April, the International Monetary Fund had said total potential losses on both subprime and other loans as a result of the credit crisis could reach $945 billion.
Paulson, who earned $3.7 billion in 2007 according to Alpha Magazine by going short the subprime sector during the U.S. mortgage meltdown, also said a deterioration in consumer spending was set to drive the U.S. economy into recession this year.
"I don't think we're through the credit crisis. There are lots of problems out there, and I think we'll continue to experience problems for the remainder of the year," he told the GAIM International 2008 hedge fund conference in Monaco.
"I believe we're going to go into recession, I think the second half (of the year) will be worse than the first half, and I think the recession will last into 2009 ... The primary factor leading to recession will be a decline in consumer spending, and I believe that will be more pronounced in the coming months."
Paulson said his funds maintain a short credit bias, and said he was short financial stocks likely to have to raise further capital and had bought protection against default on debt payments on these companies.
Shorting means betting on a lower price for a security in the future.
He also said his funds had minimum exposure to equity markets because of a likely recession and that it was too early to start distressed debt investing, though a huge opportunity would eventually emerge.
"I do think, long-term, distressed presents an opportunity that is as much as $10 trillion. That is a reflection of how much the credit markets were overvalued on the upside."