Nicolas Tang's Blog

Thriving bear sees many more US bank failures
Reuters in New York
Apr 04, 2009

John Jacquemin, a hedge fund manager of Mooring Financial Corp, who predicted the credit crisis and tripled his investors’ money over the past two years, warned that hundreds of United States banks were doomed to fail and that an economic recovery was far away.

Mooring Financial has posted 10 consecutive years of gains snapping up loans at distressed prices, while his two-year-old Intrepid Opportunities Fund generated 222 per cent returns betting against corporate debt and financial stocks.

Beyond a housing glut and slower consumer spending, Mr Jacquemin said he remained bearish because banks and regulators had not confronted the mountains of bad loans still on banks’ books.

While banks needed to mark down bonds to prevailing market prices, “with whole loans, they don’t have to and they haven’t”, he said.

“If they did, there would be literally hundreds and hundreds of insolvent banks,” he said.

Eighteen years ago, Mr Jacquemin was a commercial lender who snapped up loans sold by Resolution Trust and the Federal Deposit Insurance Corp in the wake of the savings and loans crisis.

Mr 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,” Mr Jacquemin said. “The difference between now and the 1990s is the government today is not closing banks down.”

This approach would only prolong the crisis.

“They’re not being aggressive because it would scare the hell out of us,” Mr Jacquemin said. “But we can’t get rid of the problem the way they’re approaching it now … [The government] ought to be closing the weak banks and helping recapitalise the stronger ones.”

Little-known Mooring Financial has generated returns on par with renowned credit market bear John Paulson and his hedge fund firm Paulson.

Mr Jacquemin’s Mooring Capital Fund has never had a losing year and returned 12 per cent a year, on average, for 10 years buying distressed loans and debt.

The excesses of the credit bubble – reckless leverage and frothy property markets – prompted him to launch Intrepid Opportunities in February 2007.

The fund shorted indices that tracked bond and mortgage markets, as well as bet against banks, credit card lenders and other financial companies.

The new fund soared 56 per cent last year, when equities fell 40 per cent and the average hedge fund dropped 18 per cent.

Mr Jacquemin said the firm, which manages US$400 million, was seeking new investors.

While bank shares have rallied in recent weeks, Mr Jacquemin has maintained his negative views on corporate bonds and finance stocks.

He predicts rising commercial property defaults and worries that consumer spending will never rebound to pre-crisis levels.

Mr Jacquemin said housing prices would not improve until the glut of empty units was absorbed – a process that will take at least 18 months and as long as 2-1/2 years.