Another banking crisis looms, warns a hedge fund manager who’s shorting some of Europe's largest financial institutions and believes the U.S. housing market still poses the greatest threat to the global financial recovery.
Noster Capital CEO Pedro Noronha says he thinks many people still don’t understand the extent of the problems facing many banks and are "complacent" about the risks the industry faces.
"Two months ago everybody was in a panic about the sovereign debt crisis, and now it's like everybody is going on holiday and everything is fine," Noronha told the U.K. Telegraph.
"The point of a stress test is that you stress something until it breaks,” Noronha said about the stress tests recently applied to European banks.
“These tests included a ridiculous definition of Tier 1 capital and allowed some banks with... 1.7 percent to show levels above 6 percent.”
Noster is shorting Italy's Intesa Sanpaolo, which Noronha says is suffering from Italy’s slow recovery, and UBI, which faces significant dangers from exposure to Eastern Europe’s financial problems.
Still, Noronha says the biggest danger is still the U.S. housing market, which could easily provide additional financial shocks as there was the potential for a new shock as more Americans default on low-quality "Alt-A" and "Option ARM" mortgages coming up for refinancing.
Moody's Investors Service downgraded its ratings on $1.2 billion in securities backed by alternative-A mortgages because of the rapidly deteriorating performance of those loans, The Wall Street Journal reports.
The downgrades affect 69 tranches from 10 residential mortgage-backed securities transactions issued by Nomura Asset Acceptance Corp. Alternative Loan Trust.
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