NEW YORK (Reuters) - A hedge fund manager who predicted the credit crisis and tripled his investors’ money over the past two years, warns that hundreds of U.S. banks are doomed to fail and that an economic recovery is far away.
John Jacquemin’s Mooring Financial Corp has posted 10 consecutive years of gains snapping up loans at distressed prices, while his two-year-old Intrepid Opportunities Fund generated 222 percent returns betting against corporate debt and financial stocks.
Beyond a housing glut and slower consumer spending, the Virginia-based manager said he remains bearish because banks and regulators have not confronted the mountains of bad loans still on banks’ books.
While banks need to mark down bonds to prevailing market prices, “with whole loans, they don’t have to and they haven’t,” Jacquemin said. “If they did, there would be literally hundreds and hundreds of insolvent banks.”
Eighteen years ago, Jacquemin was a commercial lender who snapped up loans sold by the Resolution Trust Co and the FDIC in the wake of the savings & loan crisis. Jacquemin said government agencies were aggressive in closing failed banks, selling branches and deposits to the highest bidders.
Today, he contends, officials have been more tentative, allowing weak banks to hobble along.
“If the banks sold these loans for what they could get, they would be insolvent,” Jacquemin said. “The difference between now and the ‘90s is the government today is not closing banks down.”
This approach, he said, will only prolong the crisis.
“They’re not being aggressive because it would scare the hell out of us,” he said. “But we can’t get rid of the problem the way they’re approaching it now ... They ought to be closing the weak banks and helping recapitalize the stronger ones.”
Though little known, Mooring has generated returns on par with renowned credit market bear John Paulson and his Paulson & Co.
Jacquemin’s Mooring Capital Fund has never had a losing year and returned 12 percent a year, on average, for a decade buying distressed loans and debt.
The excesses of the credit bubble — reckless leverage and frothy real estate markets — prompted him to launch Intrepid Opportunities in February 2007. The fund shorted indexes that tracked bond and mortgage markets, as well as bet against banks, credit card lenders and other financial companies.
The new fund soared 56 percent last year, when equities fell 40 percent and the average hedge fund dropped 18 percent. Jacquemin said the firm, which manages $400 million, is seeking new investors.
While bank shares have rallied in recent weeks, Jacquemin has maintained his negative views on corporate bonds and financial stocks.
Jacquemin predicts rising commercial real estate defaults and worries that consumer spending will never rebound to pre-crisis levels. Housing prices, he said. will not improve until the glut of empty units is absorbed — a process will take at least 18 months and as long as two-and-a-half years.
The Treasury Department’s public-private investment partnership program may clear out inventories of bonds, he said, but it does not fully resolve the piles of loans that face steep losses when finally exposed to market pricing.
“The regulators are looking at the banks, and then they look away,” he said. “It is so ugly that they are not prepared to deal with it because it would lead to the failure of hundreds and hundreds of banks.
Editing by Jeffrey Benkoe