Paulson & Co. Says Writedowns May Reach $1.3 Trillion (Update2)

By Tom Cahill and Poppy Trowbridge

June 18 (Bloomberg) -- John Paulson, founder of hedge fund Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate.

``We're only about a third of the way through the writedowns,'' 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 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 fund focused on subprime debt 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 continues into 2009. Signs of stress are ``accelerating'' in the housing market, he said. Paulson said he's betting on falling securities prices.

``I don't consider myself a bull or a bear,'' he told the audience at Monaco's Grimaldi Forum. ``I'm a realist.''

A Royal Bank of Scotland Group Plc strategist agrees that stock and credit markets still face the worst in a slump that started almost eight months ago.

`Most Bearish Period'

``Mid-July through to October is likely to be the most bearish period we will experience in the bear market that began in the fourth quarter of last year,'' Bob Janjuah, a credit strategist at the bank in London, wrote in a report dated June 11.

The MSCI World Index has lost 13 percent since a reaching a record in October. The index is down 4.1 percent this month after the Federal Reserve and the European Central Bank policy makers indicated interest rates may need to increase as the threat of inflation intensifies.

The economic slowdown and inflation have put central bankers ``into a dangerous corner'' where the chance of a ``major policy error has just super-spiked,'' Janjuah wrote.

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

`Deteriorate Significantly'

The housing and credit-market slump pushed Ambac to three straight quarterly losses after more than a decade of profit. It has written down $5.2 billion since the collapse of the U.S. subprime mortgage market last year.

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's speech was the biggest draw at the event, which comes as the hedge fund industry endures some of its worst performance in nearly two decades, rising just 0.13 percent through May, according to Chicago-based Hedge Fund Research Inc.

``John Paulson has of course been very successful by making the right trade last year,'' said Manuel Echeverria, chief investment officer of Optimal Investment Services SA, a Geneva based investor with about $10 billion under management. ``We'll have to see what he's going to do now that the trade has run out of juice.''

-- With reporting by Alexis Xydias Editor: Mike Anderson, Ben Vickers.

To contact the reporter for this story: Poppy Trowbridge in London at ptrowbridge@bloomberg.net
Last Updated: June 18, 2008 10:13 EDT

Put your $$$$$ in a tin can and hide it in a stone wall.

That would depend SusanT.  If your bank shuts down because it runs out of money, that means you are out of luck.  "Federally Insured" means didilley when the feds are out of cash.  This is what happened in 1929.  However, you are probably fine for quite awhile.  The Feds will just keep printing more money so you won't be the wiser. 

Annie, I have been saying the same thing to everyone. Get out of debt and pay off your home.

Susie Orman says the same thing. I know it is hard but if you do not try you will never know.

Thanks for the advice Mr. Fed Chairman!

June 9, 2008

Central bank body warns of Great Depression

by Gill Montia

Story link: Central bank body warns of Great Depression

The Bank for International Settlements (BIS), the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future.

It also raises concerns about the Chinese economy and questions whether China may be repeating mistakes made by Japan, with its so called bubble economy of the late 1980s.

EDITORS NOTE: Quite a few comments have been made that there is no direct reference to the Great Depression in this month’s BIS report.

While this is strictly true, BIS warned in June 2007 - just before the Credit Crunch really hit - that the global economy was vulnerable to a major economic set-back because of extraordinary exposure to collateralized credit.

BIS directly made references to the 1930’s as an example of a similarly serious credit bubble, and this month’s BIS report describes the conditions of this being lived out.

So, to be pedantic, the warning “BIS warns of Great Depression” is actually a year old already. What BIS discusses now is the fragility of existing conditions of the fall-out from a massive credit bubble bursting - which has already been made clear across their reports historically can be similarly referenced to the 1930’s, though stated in a typically conservative and non-alarmist language.

Even what optimism BIS had about a weak recovery to the end of May 2008 have been dashed by extreme shorting of financial stocks across the US and UK - Lehman Brothers, HBOS, and property developers such as Barratts, have all taken extreme beatings in June 2008.

So back to the headline - BIS have indeed already warned of repeat of conditions that could be as extreme as the Great Depression, and are now describing that process as we move through it.

In the meantime, unemployment is already on the rise on both sides of the pond, and the analogy some people have concerns about I’m afraid is still salient.

- Brian Turner, Editor, Banking Times.