Lánsfjárkreppan er rétt að byrja

Hedge Fund Managers in Monaco Say Credit Crisis to Worsen

By Tom Cahill

June 20 (Bloomberg) -- The credit market contagion that led to record losses at some of the world's largest financial institutions may be far from over, according to hedge fund managers gathered in Monaco this week.

``These times will get worse before they get better,'' said Christophe Aurand, head of European operations for York Capital Management LLC, a $13 billion fund manager preparing to invest in distressed debt. He spoke at the GAIM International conference, Europe's largest annual hedge fund gathering.

More than 80 percent of the fund managers, investors and hedge fund service providers at the event said they expect the credit crisis will continue, a survey found. Almost a quarter said they expect the situation ``will deteriorate significantly.''

Banks worldwide have reported $397 billion of writedowns since the start of the U.S. subprime crisis last year. John Paulson, the founder of $33 billion hedge fund Paulson & Co. who made billions betting on a drop in the value of subprime loans last year, estimated banks are only about a third of the way through $1.3 trillion in writedowns and losses.

Zurich-based UBS AG, Switzerland's biggest bank, took more than $38 billion in writedowns, more than any other European bank. Citigroup Inc. Chief Financial Officer Gary Crittenden yesterday forecast ``substantial additional'' writedowns at the New York- based bank this quarter.

Worst Since Depression

``It's all bad news on the horizon,'' said Maria Boyazny, who oversees a $3 billion fund that invests in other hedge funds for Siguler Guff & Co. in New York. ``This correction is going to be a long one. It's a recipe for disaster for credit markets.''

Edward Altman, a professor at New York University's Stern School of Business who has tracked defaulted debt for nearly 40 years, said an impending wave of defaults could be the worst on record in the U.S., at 16 percent of corporate debt.

``It may be the worst recession since the Great Depression, that's not impossible,'' said Altman, who estimates default rates on U.S. corporate debt have tripled so far this year from record lows last year. ``There's a lot of negatives out there.''

The U.S. recession will be deeper and longer than the previous one because of the drop in home values, said Max Holmes, founder of Plainfield Asset Management, a $4.8 billion hedge fund in Greenwich, Connecticut. He bought distressed assets in the previous three U.S. recessions and lived in Houston during the region's real-estate bust in the 1980s.

``This is a major, major event, it's going to take a while to resolve itself,'' said Holmes, who reckons the U.S. slipped into recession in December. ``In the last recession the banking industry was healthy, this time it's very, very sick.''

$600 Billion

Even after banks have written off almost $400 billion in debt from the collapse of the U.S. subprime market, more markdowns probably are in store, the fund managers said.

``We have a lot more wood to chop,'' said Alberto Musalem Borrero, head of research for Tudor Investment Corp., the $18 billion hedge fund manager founded by Paul Tudor Jones. ``I wouldn't be surprised to see another $600 billion in losses.''

Bear Stearns Cos., which was listed as the host for a John Paulson address in early versions of the Monaco conference's program, was replaced by JPMorgan Chase & Co., which bought the fifth-largest Wall Street securities firm in a rescue facilitated by the U.S. Federal Reserve.

After the hedge fund industry had its worst start in nearly two decades, some managers said they are eager to load up on discounted debt and bonds. Altman reckons more than 200 funds have raised as much as $400 billion for distressed investing in the U.S., with a similar amount raised outside of the U.S.

``There's a Chinese proverb, where there's disaster there's an opportunity,'' said Boyazny of Siguler Guff.

To contact the reporter on this story: Tom Cahill in Monaco through London at [e-mail].

Last Updated: June 20, 2008 09:23 EDT