Carson Block, the short seller who runs Muddy Waters LLC, said he’s betting against the debt of Standard Chartered Bank Plc, the U.K. bank that earns most of its profit in Asia, because of the “deteriorating” quality of the loans it has made.
“We think the market misunderstands the amount of risk that’s presently in the book,” Block said at the SkyBridge Alternatives Conference in Las Vegas today.
Block said the bank’s $1 billion loan to Samin Tan, chairman of Bumi Plc, the coal company at the center of a dispute between co-founders Nathaniel Rothschild and Indonesia’s Bakrie family, and loans to Far East Energy Corp. were “red flags.”
Standard Chartered last year increased its mining loan book by about 22 percent, compared with 6 percent growth in its total wholesale book, he said. Block said that while Standard Chartered’s business is diversified across varying emerging markets, when China’s economy slows down the correlation in the London-based bank’s loan books will be very high, causing the lender to come under “considerable stress.”
China’s economic output is expected to grow 8 percent this year and next, according to data compiled by Bloomberg.
“We think this is a very nice way to play the eventuality of the China unwind,” he said.
Julie Gibson, a spokeswoman for Standard Chartered in New York, declined to comment.
Block said he didn’t understand why Standard Chartered lent Tan $1 billion, in what looks like a “very messy situation.” Bumi shares plunged 69 percent last year in London amid an investigation that started in September into “alleged financial irregularities.”
“Who knows what the truth really is, but I do think that’s a real red flag,” Block said.
Block said Standard Chartered’s loan of $30 million to Far Eastern Energy Corp., which has a market capitalization of about $42 million, “seems off.”
He reiterated that he thinks Chinese Internet company Qihoo 360 Technology Co. Ltd. is a “fraud,” though he said he wasn’t currently betting against the stock. John Burbank, founder of $3.8 billion San Francisco-based hedge-fund firm Passport Capital LLC, said yesterday at the Las Vegas conference that his firm likes Qihoo.
Block said he has a “small position” on Vipshop Holdings Ltd., which he said “isn’t a fraud but we think it has a fairly terminal business model in the medium to long term.”
U.S.-traded shares of the Guangzhou, China-based company fell 5.9 percent to $31.77 in New York.
In a short sale, a trader sells borrowed securities to bet on a price decline.