Carson Block, the young, famous short-seller, founder  and research director of Muddy Waters Research confirmed that he is shorting the debt of Standard Chartered PLC (LON:STAN) (LON:STAC) citing that the quality of loans it made were “deteriorating.”

Carson Block

During the SkyBridge Alternatives Conference in Las Vegas on Friday, Block said that he is betting against the British bank’s debt by purchasing five-year credit default swaps.

According to him, Standard Chartered PLC (LON:STAN) (LON:STAC) is one of the tightest financial institutions and the bank is cheaper than compared with other institutions that are considered too big to fail. He believed that the market misunderstood the amount of existing risk in the bank’s loan book, and he emphasized his willingness to gamble 85 basis points.

“I’m willing to bet, I’m certainly willing to bet 85 basis points, that when China unwinds, the correlation in [Standard Chartered’s] loan books…is very high,” said Block.

He noted that the British bank increased its mining loan book by around 22 percent last year compared with the 6 percent growth of its total wholesale book. He pointed out that Standard Chartered PLC (LON:STAN) (LON:STAC) would suffer  “considerable stress” even if it has diversified business across the different emerging markets. According to him, the correlation in the British bank’s loan book would be very high when the economy of China slows down.

Block also considered the loans provided by Standard Chartered Bank worth $1 billion to Samin Tan, chairman of Bumi Plc, a leading thermal coal company and the loans given to Far East Energy Corp (OTCMKTS:FEEC) as a “red flag.” Bumi owns a stake in the largest coal producer in Indonesia and it is currently in the middle of a disagreement between co-founders Nathaniel Rotchschild and Indonesia’s Bakrie family regarding the control of its mining assets in the Southeast Asian country.

According to Block, he cannot comprehend the decision of Standard Chartered PLC (LON:STAN) (LON:STAC) in lending $1 billion to Tan. He emphasized that Bumi is under a “very messy situation.” The thermal coal company faced an investigation in London for “alleged financial irregularities.” Bumi’s stock price plummeted by 69 percent last year because of the probe.

Block said, “Who knows what the truth really is, but I do think that’s a real red flag.”  He also said that the $30 million loan given by Standard Chartered PLC (LON:STAN) (LON:STAC) to Far East Energy Corp (OTCMKTS:FEEC) seemed off because of the fact that the company has only $42 million market capitalization.

Block also reiterated his conviction that Qihoo 360 Technology Co Ltd (NYSE:QIHU) is a “fraud.” His opinion regarding the Chinese internet company is different from John Burbank of Passport Capital Llc, who said that his firm likes Qihoo. Despite his negative opinion about the company, Block said he is not shorting its stock.

Meanwhile, UK based hedge fund Marshall Wace have a huge number of short positions in European stocks particularly in the banking industry such as Commerzbank AG OTCMKTS:CRZBD) (ETR:CBK) (FRA:CBK), Aareal Bank AG (OTCMKTS:AAALY) (ETR:ARL) (FRA:ARL), Banca Monte dei Paschi di Siena SpA (BIT:BMPS), Unione di Banche Italiane Scpa, and Banco de Sabadell SA (MCE:SAB).

Steve Cohen of SAC Capital also bet against Commerzbank AG OTCMKTS:CRZBD) (ETR:CBK) (FRA:CBK).

A  list of short positions by hedge fund in European equities is available here.