Hedge funds expect soaring subprime defaults, lender insolvencies

Harbinger Capital Partners and Paulson & Co., two hedge-fund managers who profited when subprime- mortgage defaults surged, told investors that delinquent loans will soar and more lenders will disappear, Bloomberg reported.”We believe we are in the early stage of a correction in this market and that the market will eventually implode,'’ Paulson & Co., which manages $11 billion, said in a letter to investors last week. Paulson said bad loans held by the riskiest borrowers will “skyrocket'’ and “most, if not all, of the independent originators will go bankrupt.'’

Banks “will shut down their origination platforms,'’ and the business of pooling subprime loans into packages of securities “will all but disappear,'’ Paulson’s letter continued. “While the bonds have fallen significantly, we think they have much further to fall.'’

Harbinger, whose $6bn distressed debt fund returned 8.1 per cent last month, also said it will continue to bet on rising loan defaults.

“We believe that the market will continue to be tested in the weeks and months ahead, as the subprime situation unfolds amid a choppier market backdrop,'’ Philip Falcone, Harbinger’s founder and senior managing director, said in his letter to investors.

If hedge funds are calling it…