Debt of European banks will offer investment opportunities as new rules about resolving troubled lenders are written, said James E. “Jes” Staley, a managing partner at hedge-fund firm BlueMountain Capital Management LLC.
“As those rules get clarified, so you can force a recapitalization of the banking industry without going to the sovereign, there’s going to be tremendous mispricing between the different levels of the capital structure in these banks,” Staley said today at a Bloomberg Link conference in New York.
The European Central Bank has advocated a single mechanism and centralized funds to wind down failing banks as soon as next year, when it assumes responsibility for supervising the region’s lenders. That will lead to a more “clearly defined capital structure,” said Staley, 56.
Staley, who was head of JPMorgan Chase & Co. (JPM)’s investment bank until last year, was joined on the panel by Victor Khosla, founder and chief investment officer of Strategic Value Partners LLC. Khosla, 54, said “bloated” European banks with tens of trillions of dollars in combined assets offer a wide range of opportunities for hedge funds between the lenders’ own debt and equity and as they sell assets and exit businesses.
“I’m hard-pressed to think of any other opportunity today globally where there is a $50 trillion balance sheet and where there is this much tumult and this much change going on,” Khosla said. “With the number of players who are not ready for this and with relatively few people in here who are really qualified to do this stuff, I said, ‘My God, this is El Dorado,’” a reference to the mythical lost city of gold that eluded treasure-hungry Spanish conquistadors.
Reza Ali, founder and chief investment officer of Prosiris Capital Management, offered the example of Dutch lender SNS Reaal NV as a cautionary tale of betting on European banks right now. The Dutch government’s expropriation of SNS Reaal’s bonds this year exposed investors to losses, fueling concern that credit-default swaps offered inadequate protection.
That helped prompt the International Swaps & Derivatives Association to propose changing rules governing swaps so the contracts explicitly insure against debt writedowns, exchanges or conversions into equity.
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