[*Subprime seer gloomy about prospects for UK property market * (https://www.ft.com/cms/s/0/bf4fa42e-3da7-11dd-bbb5-0000779fd2ac.html)
By Henny Sender in Monaco
Published: June 19 2008 03:00 | Last updated: June 19 2008 03:00
John Paulson, the US hedge fund manager who made a fortune for his investors by anticipating the debacle in subprime mortgages, said yesterday it was too early to look for bargains in the financial sector and predicted the worst was yet to come for the UK housing market.
Mr Paulson, who founded Paulson & Co 14 years ago and has $33bn in funds under management, said he was “preparing to switch” to long positions on distressed mortgages and banks, but added that such a change could be months - or even a couple of years - away.
He said financial companies could wind up losing as much as $1,300bn in the credit crisis.
This is far more than the $945bn in losses predicted by the International Monetary Fund or the $380bn in write-downs already reported by banks.
“The housing market shows no signs of stabilising and the problems will spread to other areas, including non-residential construction and consumer spending,” Mr Paulson said.
He said he was particularly worried about the UK housing market, which he believes was more overvalued at the peak than the US market.
“For the last four months prices have been depreciating and the decline is accelerating,” he said.
He was also pessimistic about the prospects for credit insurers such as Ambac and MBIA and about US government-sponsored housing financiers such as Fannie Mae and Freddie Mac.
“Ninety per cent of the mortgage market is supported by two private companies losing vast sums of money operating with no equity,” he said of Fannie and Freddie.
Mr Paulson said he believed the Federal Reserve and other central banks would prevent leading financial companies from failing, but added that these efforts would only protect holders of debt, not investors in shares. He estimated that investors had suffered losses on 95 per cent of the money put into rescue financing packagers for financial companies.
As of early June, Paulson’s credit funds are up between 10 per cent and 15 per cent for the year. Mr Paulson put on short positions - betting on a decline - in the mortgage market in 2006.
In the five previous years, following several years of easy money, housing prices began to appreciate at about five times their historical gain of 1.4 per cent a year. Mr Paulson anticipated a major correction once longer-term interest rates began to move higher.
One of the reasons Mr Paulson is so closely heeded is because he achieved high returns - up almost 600 per cent last year on his best performing credit fund - with little borrowing. His most levered fund has leverage of only 1.5 times.
Mr Paulson also never sells protection in the credit default swap market and hardly ever uses borrowed money when he is going long - that is, betting on appreciation.