City Eye: Out of the wreckage will come a winner we love to hate

The credit crunch – a snappy PR title if ever there were one – is not over, far from it. And as it lurches into its next phase, a few verities emerge. Along with them, I'll bet, we commentators will soon have a new celebrity love-hate figure on whom to peg our prejudices.

Let's start with the verities. The first is that, just as publicity is the oxygen of the terrorist, so credit is the life force of equity capital markets.

The history of this episode is traced by many commentators to early last month. That was when banks stopped lending to each other and deal flow was affected too – most obviously in the inability of the market-leading private equity house KKR to lay off its debt exposure on the acquisition of Boots. Bear in mind, this is Boots we're talking about – a business generating plenty of cash. If deals like that don't get done, everyone becomes nervous and shares slide.

Recently we have had unexpectedly good UK inflation figures and a government calling for old-fashioned banking values. That's impossible in a principle-driven regulatory environment, but it does mean that the Bank of England, made notionally independent by Gordon Brown in 1997, will come under huge political pressure to cut rates.

Verity number two is that personal indebtedness matters. Britain's debt levels have grown sharply – faster than our economic output. The National Institute of Economic and Social Research has released figures showing that the ratio of household debt to personal income is 1.62 in the UK – against 1.09 in Germany and 1.42 in the US.

Personal debt really matters when it's lumped together in a security and sold. One of the big winners in the past few weeks – yes, there have been plenty of winners – is Paulson & Co, a US hedge fund with $11bn (£5.5bn) in its coffers. Paulson was getting cross with the activities of the US investment bank Bear Stearns, complaining to the Federal Reserve and the Commodity Futures Trading Commission that Bear Stearns was allowing homeowners struggling with sub-prime mortgages to renegotiate the loans. The Paulson view was that this was done to help the value of Bear Stearns' loan book and, according to senior partner John Paulson, "to artificially inflate the value of derivative securities".

There is no space here to dwell on the substance of the dispute. But it does demonstrate how things inter-connect. These are big players, trading in large, international markets.

Marxists would love this; the theory has it that the capitalist model will eventually run out of consumers and perish. Now it seems that to avoid just this, the masters of the financial universe are going to have to find a way to keep the sub-prime trailer trash solvent. Turn off the credit tap to them and you turn off the credit tap to KKR, and we all know what happens next.

And so to Soros, Mark II. George Soros made £1bn in a day betting against sterling and in effect pocketing the Bank's currency reserves. At the time, no one knew. The story broke several days later.

Goldman Sachs, because it is quoted, has had to announce $1.7bn of losses due to a deteriorating loan book. But analysts say it has already recouped much of that by making clever bets in the volatile short-term mortgage market. The new Soros, though, is lurking in unquoted territory. I believe Mr Paulson has played this mortgage market like it's a trout and benefited hugely from the panicky half-point rate cut in the US and the general U-turn on liquidity. He, or one of the other hedge fund managers who have made gazillions, will soon emerge as a massive winner – the investor we love to hate.

martin@martinfdbaker.com