Michael Platt, founder of the $30 billion hedge fund BlueCrest Capital, spoke to Bloomberg Television's Erik Schatzker and Stephanie Ruhle in his first-ever live TV interview.
Platt said that most of the banks in Europe are insolvent and the situation in the region is "completely unstable." On investing in illiquid assets, Platt said he "would not touch them with a barge pole" and that "the major opportunities will come post-blowout."
Platt on Europe's sovereign debt crisis:
"The level of concern of what we have about what is going on in Europe is absolutely huge. When you evidence all over the markets that they are pricing for the potential of the eurozone break up, it is contrary to what everything is set by policy makers and by central bankers. We distill it down essential fact that we continue to focus on at BlueCrest Capital Management - if you look at the debt of Italy at 120% of GDP, which is increasing at a real rate of 5%, and if you look at the GDP, which now is forecast next year to be declining, arithmetically their debt is going to blow up. And we don't see anything happening at the policy level that gives us any indication that there's anything that's going to convert this situation from where it is now to a much more substantial and real crisis in the future."
On whether a blow up of Italy will force a breakup of the Eurozone:
"We need much more radical measures to prevent this from happening. If Italy and Spain are forced to roll their debt over, if they have to pay rates between 5 and 7% for this, then the situation in Europe is unsustainable. We're not going to have any euro bonds, we're not going to have a full political and fiscal union where the transfers will take place. It seems what we're going to have is an attempt to control the European situation through continued austerity, which is pro-cyclical. As the economy slows down, we end up with more austerity which creates more slowdown. We also have a requirement for banks to increase capital, therefore we're looking at a 3 trillion euro takedown in European balance sheets. There's basically nowhere I can see where we can get any growth from."
On whether cultural and political divides between nations in Europe have played a role in the crisis:
"Absolutely, it's about the cultural and political divide. The reality is that there is no willingness within the Eurozone to share wealth. In the United States, if California is having a really difficult time, the rest of the United States will send money to California. This is not the case in Europe. There is no willingness to transfer money across boundaries in a long-term and sustainable way."
"The market prices the probability of a euro breakup to be distinctly non-zero, despite what the politicians say. I believe that the eventuality of a European breakup is so awful, that more and more drastic measures will take place as time goes by. The ECB is probably the only institution that can tackle this problem, but it doesn't have a mandate to do so...As time goes by, my view of what's required is a radical change of policy from the ECB to tackle this problem."
More on Europe's problems:
"The probability that the market is putting on a Eurozone breakup, in my opinion from evidence I'm seeing from option pricing across the different markets, is steadily rising...We're going into 2012, and in our opinion, it's only going to get worse."
"There is a sensible argument you should not price and the whole loan in response to where the government trades because the government has the ability to remove assets and put them on their own balance sheets."
"The problem with Europe is that almost every part of it has gone wrong now. The banks are undercapitalized...If banks were hedge funds, and you mark them to market properly, I would say that probably most of them are insolvent. [Most of the banks in Europe are insolvent right now] if they were marked like I am at a hedge fund, yes."
On whether BlueCrest's relationship with banks has changed:
"I do not take any exposure to banks at all if I can avoid it. All the money at BlueCrest Capital Management is in Two-Year U.S. government debt, Two-Year German debt, we have segregated accounts with all of our counterparties. We are absolutely concerned about the credit quality of the counterparties."
On whether he's afraid of taking risk right now:
"Absolutely. The main thing that's driving our decision about where to lend money or where to place our funds under management, the vast majority is dollars which we keep in two-year notes. We have a chunk of euros, which we keep in German two-year paper. We're not interested in taking any peripheral debt risk at all and we're not interested in taking any bank credit risk right now."
On the United States and Germany:
"I think they're the best of the bunch. I feel pretty good about the United States. I don't really have an issue because I think the complete control that the authorities have, particularly the Fed and its bond buying program, we do not have issues about having money in Two-Year securities in the United States. In Europe, you've got to put your euros somewhere. It is a much more difficult place to make a decision. Two-year German notes seem like a reasonably safe bet right now, certainly compared to anything else."
On making money in a crisis:
"The most important thing to remember about crises is you do not make your money going into the crisis. When you go into a crisis such as 2008, markets trade against positions. People have positions on and people need to get risk off. All the things that people thought were a good idea start going into reverse. The big money you make in trading is more in the aftermath of the crisis. In 2009 we made 60% with no down months on our master fund."
On whether BlueCrest is looking at illiquid investments:
"I would not touch an illiquid product with a barge pole, to be honest. We're going into an environment where banks need to delever. Illiquid assets will be coming on to the streets everywhere. The price of liquidity in my opinion will go up. I don't want to own any illiquid assets whatsoever. The strategy at BlueCrest is to be in super liquid products, things that can be turned around in a day."
"It would have been the end of my business in 2008 had I done such a thing. Anyone who had an illiquid position within their hedge funds, there were runs on those hedge funds because people wanted to get the cash out and not be side pocketed with the illiquids. In 2008 I paid out $9.5 billion to the street because I was the only hedge fund that was up a lot and completely liquid.
On whether we'll see a repeat of the 2008 credit crunch and whether those that hold illiquid assets will get crushed:
"That's what I think, yes. I think so. In my opinion, what's going on now is significantly worse than 2008...The European debt situation is fundamentally completely unstable. The process of refinancing your debt with a real rate of 5 when you have negative GDP growth, and we are heading into a recession in Europe, arithmetically can turn all of the countries in Europe, given enough time, into Greece."
On how closely tied America's futures and the potential for investment are to Europe's debt crisis:
"Clearly it would be a huge drag on the U.S. economy. We're talking about in Europe is a situation of instability driven by pro cyclical policy, removing the ability of banks to invest in sovereign debt. We're talking about pro-cyclical policy of governments not being able to deficit spend by law. We're talking about existing deficits that need to be closed. We're talking about an increase in the amounts that governments will have to find when they're Forced to refinance their rolling over paper this year at real rates of interest, which are way beyond anything they will ever be able to achieve in terms of growth."
On how BlueCrest continues to make money through the slowdown:
"Because we are traders and do not take any credit risk and we're super liquid. In the time that BlueCrest has been around, we have made $17 billion of trading profits for our investors...so in an environment like this where we are a very secure trading strategy, taking no credit risk, not buying anything illiquid, that is the kind of thing investors frankly really want to hear from someone like me."
On where he's seeing investment opportunities:
"I think the major opportunities will come post the blow up. I think for the time being you want to keep it quite simple. You do not want to take any credit risk. I think volatility in certain markets is very underpriced compared to what's potentially about to happen. I think if we go into a crisis scenario, things like German bunds could be more expensive than they are right now. And I think as the crisis intensifies through the process of governments refinancing and deficits becoming more unstable and growth deteriorating in particular, I think those kinds of trades will play out in the market and be profitable."
On moving BlueCrest from London to Geneva:
"I did not really want to be exposed to the Eurozone. I don't want to be exposed to regulation coming out of the Eurozone. Most of my clients come from the United States. I am not really marketing to the Eurozone anyway. So it didn't make much sense for me to be in the Eurozone as a business."
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