The top hedge fund earning manger in 2007, said on Wednesday that 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,'' John Paulson told a hedge funds conference in Monaco.
"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.''
Writedowns related to the subprime crisis so far amount to $380 billion, which suggests that shares of big financial institutions could fall further.
“The housing market shows no signs of stabilising and the problems will spread to other areas, including non-residential construction and consumer spending,” Paulson said at Monaco's Grimaldi Forum. ``I don't consider myself a bull or a bear,'' he added. ``I'm a realist.''
John Paulson, the top earning US hedge fund manager in 2007, earned a record $3.7 billion in 2007 to top Alpha Magazine's annual ranking of the 50 most highly paid hedge fund managers. The Paulson & Co. head overtook George Soros and James Simons, who ranked second and third, at $2.9 billion and $2.8 billion, respectively. The top 25 on the list earned an average $892 million, up from $532 million in 2006.
The magazine said that Paulson rocketed to No. 1 in Alpha's seventh annual survey by shorting the subprime mortgage market - making his money as the market spun downward.
"I don't think we are through the credit crisis. There are lots of problems out there, and I think we will continue to experience problems for the remainder of the year," Paulson said.
New York-based Paulson & Company manages $33bn. Last year it bet subprime mortgage debt would fall because it was at "bubble-like" prices. Paulson's main fund focused on subprime debt, rocketing 591% last year by shorting it.
"I believe we're going to go into recession, I think the second half will be worse than the first half, and the recession will last into 2009. The primary factor leading to recession will be a decline in consumer spending, and I believe that will be more pronounced in the coming months," Paulson said.
Paulson 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 is also pessimistic about the prospects for US credit insurers such as Ambac and MBIA and about US Federal -sponsored housing guarantee 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.
Paulson said he believes the Federal Reserve and other central banks will prevent leading financial companies from failing, but 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.
The Financial Times says today that global banks are to hold a potentially crucial meeting next month with US, European and Asian regulators in Basel to discuss the best way for financial institutions to manage their liquidity risks in the aftermath of the credit turmoil.
Regulators plan to press the banks to adopt tough new guidelines on how to handle their businesses so that they can weather liquidity shocks. It will include a demand that banks ensure they always have a large buffer of liquid assets on their books.
The regulators hope to turn these ideas into a binding set of recommendations by the end of this year or possibly sooner. But it is far from clear whether investment banks would accept the new principles without complaint, not least because for some of them the cost of doing business could rise sharply if they are forced to maintain large liquidity buffers.
The discussions about the way banks handle their funding and liquidity needs have emerged as part of a long-running debate about the architecture of the global banking system that is being organised by the Basel Committee on Banking Supervision.