Paulson & Co. Founder Says Credit Losses May Exceed $1.3 Trillion

John Paulson, of the eponymous hedge fund Paulson & Co., contends that the credit contraction has run only about 1/3 of its course as far as writedowns are concerned. He anticipates that the total credit losses will reach $1.3 trillion, which exceeds the IMF’s forecast of $845 billion.

Paulson, who made a spectacularly successful bet against subprime last year and secured the services of Greenspan as an advisor, is far from an orthodox source, but the flip side is he has no conventional institutional or political constraints to blunt his predictions.

From Bloomberg:

“We’re only about a third of the way through the writedowns,” [John] Paulson, 52, told the GAIM International hedge fund conference in Monaco today. “There are a lot of problems out there and it will continue to be felt through the year. We don’t see any signs of stabilizing.”

Paulson, whose New York-based company manages about $33 billion, made bets last year that subprime-mortgage debt would fall after he noticed “bubble like” prices. His Paulson Partners fund rose 18 percent a year since it started in 1994, and his main subprime-debt fund rose 591 percent last year. Banks and securities firm worldwide posted more than $395 billion in losses and writedowns since the subprime crisis started last year.

The U.S. is heading into a recession as falling home prices weigh on consumer spending, Paulson said. The second half of this year will be worse than the first as the economic slowdown spills into 2009. Signs of stress are “accelerating” in the housing market, and he’s betting on falling securities prices, he said.

“I don’t consider myself a bull or a bear,” he told the audience at Monaco’s Grimaldi Forum. “I’m a realist.”….

Ambac Financial Group Inc., the second-biggest bond insurer, is “the most leveraged, troubled company out there,” Paulson said. It’s at risk of being downgraded to non-investment grade, he said. Ambac spokeswoman Vandana Sharma declined to comment….

Paulson’s outlook is consistent with the view of hedge funds meeting in Monaco this week. More than 80 percent of the 1,300 fund managers, investors and service providers gathered in Monaco for the annual conference said they expect the credit crisis will continue, according to a GAIM survey. About 23 percent said the situation “will deteriorate significantly.”

Bill Browder, founder and head of Hermitage Capital Management, said securities firms have a “vested interest” in claiming an early end to the crunch. “If we’re in the seventh or eighth inning, this is a 100-inning game,” he said….

Paulson said he’s preparing to buy distressed securities such as bank loans, call them a “potentially $10 trillion opportunity.” While it is still “premature” to invest in many of them, he sees “opportunities this year” to buy mortgage backed debt, he said.

He hired employees this year to research securities firms such as Citigroup Inc. for long-term investment positions. “We’re trying to see the right entrance point,” he said. “If you invest too early, you lose money.”

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  1. Shantanu B.

    When Ambak gets down-graded to Junk (hopefully soon), what will be the repercussions on the broader financial markets? Which banks have the maximum counter-party exposure to ABK? What happens to all the supposedly AAA rated (wrapped) toxic garbage pawned by the banks at the Fed window? And finally, how much money will Angelo Mozilo make in the ensuing turmoil?

    Points to ponder about!

  2. DSH

    I’m with anonymous. Time for a bounce, esp in financials. The 80% betting against financials don’t get to go home with the cash. That’s just not the way the market works.

    I think we are going to see an unwinding of oil prices very soon and probably very abruptly. There are too many people on that train and all this talk of continuing weakness will undercut the price of oil … peak oil and growing non-US demand notwithstanding.

    USO weekly chart is very overbought, and daily chart is littered with gaps … including one at 71 that would represent the kind of correction that would really kick start a strong bear rally (today’s close 111).

    Inflation falls, inflation expectations fall, rates fall, bonds and stocks rally, consumers start spending … for a while …

    Then the next, worse, wave down, but that is a topic for another day.

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