Soros Says Financial Crisis Marks End of a Free-Market Model

Soros Says Financial Crisis Marks End of a Free-Market Model

Feb. 21 (Bloomberg) -- Billionaire investor George Soros said the current economic crisis has its roots in the financial deregulation of the 1980s and marks the end of a free-market model that has since dominated capitalist countries.

Liberalization of the financial industry begun by the Reagan administration has led to a series of breakdowns forcing government intervention, Soros told economists and bankers last night at a private dinner at Columbia University in New York. The global recession, triggered by the collapse of the U.S. housing market, has “damaged the financial system itself,” he said.

Regulators are in part to blame because they “abrogated” their responsibilities, Soros, 78, said. The philosophy of “market-fundamentalism” was now under question as financial markets have proved to be inefficient and affected by biases rather than driven by all the available information, he said.

“We’re in a crisis I think that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,” Soros said.

Soros, founder of New York-based hedge-fund firm Soros Fund Management LLC, said last month at the World Economic Forum in Davos, Switzerland, that the Obama administration’s plan to buy toxic assets from U.S. banks won’t be enough to get financial institutions to start lending again.

A more effective approach for restarting the economy would be to inject capital directly into the banks and cut minimum capital requirements, Soros, whose firm oversees $21 billion, has said.

Soros’s Quantum Endowment Fund returned 8 percent last year. That compared with an average loss of 18 percent by hedge funds, according to data compiled by Hedge Fund Research Inc. of Chicago.

To contact the reporter on this story: Walid el-Gabry in New York at welgabry@bloomberg.net

http://www.bloomberg.com/apps/news?pid=20601087&sid=ay0FPxGdth_k&refer=home#

Soros sees no bottom for world financial "collapse"

Soros sees no bottom for world financial "collapse"

NEW YORK (Reuters) - Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.

Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.

"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."

His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.

Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.

(Reporting by Pedro Nicolaci da Costa and Juan Lagorio; Editing by Gary Hill)

http://uk.reuters.com/article/businessNews/idUKTRE51K0AV20090221

Rogers Says Geithner Caused Crisis, Must Let Banks Fail

Rogers Says Geithner Caused Crisis, Must Let Banks Fail

Feb. 11 (Bloomberg) -- Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg's Lori Rothman about U.S. Treasury Secretary Timothy Geithner's handling of the financial crisis.

Geithner yesterday pledged government financing for as much as $2 trillion of efforts to spur new lending and address banks' toxic assets. Rogers, speaking from Singapore, also discusses the U.S. banking industry and investment strategy. (Source: Bloomberg)

00:00 Geithner "caused this problem."
00:52 U.S. "making...the same mistake" as Japan
02:06 Plans for toxic assets, bank industry
03:24 Spending more "weakens the whole system."
05:28 Rogers's investment strategy

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBOHy.t3p8HI

12/02/2009
Jim start to short US stock again. IBM GE JP Morgan.

Jim Rogers on Russia

Jim Rogers on Russia

February 5:

Thanks very much for giving us your time, first of all and welcome to Russia. You have made some investments in China because the government is planning big stimulus plan there, what are you making of what Russia`s doing, do you se anything interesting here in Russia that you`re investing in?

In October, November I did buy more Chinese stocks but I am not buying shares in any other country in the world right now, because most of the world is in serious trouble including China, don`t get me wrong, but I not investing anywhere and certainly not investing in Russia.

Certainly not, why?

Well, I am certainly not investing in America either, for that matter and certainly not in the UK but no, the Russians have lots of problems, deep seated problems as far as I am concerned, perhaps there`s a chance Russia will continue to disintegrate in more than one country. There are lots of potencial problems in the former soviet union.

Desintegrate, you mean, into separate countries?

The soviet union broke up into 15 countries, Russia itself has the potential to continue to break up, the Ukraine may break up Kazakisthan could break up, this is still not stable and every empire has disintegrated through out history. The reverberations have gone on for long periods of time. So I am sure there`s goods investment in Russia if you`re on the ground and you can stay with them, but not for me.

What in your opinion is Russia doing right and what is Russia doing wrong in handling this crisis?

Well, what they`re doing wrong is that they are propping up their banks which I find reprehensible I find bad economics and bad morality as well, the way the system is supposed to work is suppose you take the assets from the incompetent and give them to the competent and you start over from a stronger base. Well the rusians are making the same mistakes that the british and the Americans and everybody else is making. But taking the assets from the competent and giving them to the incompetent and know thy can compete with the competent, it weakens the whole system. Putin at least seems to understand that there is a problem with the US dollar, that the world needs to adjust to that problem, he seems to understand some of the problems the world faces better than we do in America, but for the most part the Russians are making mistakes too.

You said the Pound is finished, what is your take on the ruble?

Ahhh, the ruble. That`s a very good question. I am not sure, even is I had an answer I am not sure I would give it to you. No I am not optimistic about the future of the Ruble at all. The Russian at least have natural resources to some extend but I am not optimistic about the continuing stability of Russia. The natural resources, the reserves are declining as you know, because they have been stripping the assets here in Russia for some time. Oil production peaked, production of most things peaked in Russia for the foreseeable future, so I am not buying the ruble either.

The Government announced that it would defend the ruble at 41 against the Euro / Dollar basket. Was that a mistake to announce a target?

It always as been in the past the market has learned in the last few sessions that you can always bet against the central banks and you will make money eventually. S when a central bank says “don`t you worry the pound is going to stay here or the ruble is going to stay here or whatever, ultimately that has always failed if the fi«undamentals are not sound and will fail again, everybody knows what the target is.

What is driving the fall of the ruble? Is it regular people panicking and putting their money into dollars, that one thing we`ve heard from bankers here at this forum, or is speculation?

Its mainly the Russians, in fact whenever a currency fails through out history it has always started internally, the foreigners always get the blame because the politians like to blame all their problems on the foreigners, because they don`t vote and their not there. Right now I think there something like 20 or 25% of deposits in banks in Russia in foreign currencies by Russian and not by foreigners. So its always starts with the local people, because local people always know best what`s going wrong and they start moving out. The speculators, historically always show in later.

So there are russian speculators that may be involved here too, or is this just the average bank depositor moving their money into dollars out of concern?

It seems pretty obvious that its intelligent people making intelligent decisions with their money, they can see there`s going to be problems with the rouble so they, intelligent russians have been moving out of the ruble. The rouble is down 50 or 60% in the last few moths, or in the last year or so.

The Central Bank said today that they won`t have to spill much blood to defend the ruble at 41, do you believe them?

I don`t believe in any central bank no matter what they say. The few times central banks have been right at something, you can count them with one hand. If you get your investment advice from central banks or governments you are going to go broke fast, don`t listen to those people.

Are you short the ruble?

I am not doing anything with the ruble, not right now. But knowing that the central bank drew a line in the sand it makes me stand up and take a little more notice about the ruble. So I will star thinking more about it.

Latest Jim Rogers interview. Jim Rogers went to Russia to participate in the The Russia Forum 2009 and spoke about stock markets around the world, the ruble devaluation, the us dollar and the mistakes Russia is making.

Jim is not optimistic about the future of the Ruble at all.

Jim Rogers expects several currency crisis this year and that will be major opportunities in the currency markets. The next great currency to buy mught be the Brazilian Real or the Malaysian currency. Jim Rogers has been tranding forex markets for several decades and is a voice to be heard on this subject.

http://jimrogers-investments.blogspot.com/2009/02/jim-rogers-russia-forum-2009-full.html

http://jimrogers-investments.blogspot.com/2009/02/jim-rogers-video-interview-russia-forum.html

11/02/2009
tjhinkh: Russia central bankhas drawn a line in the sand and whenever a central bank draw a line, it has never work. This is because the market is larger than the central bank.

Sometime this year or next, there may be serious currency problems as the US and UK has too much debt. Jim is not sure what is the next stable currency. Maybe Brazil Real, maybe Malaysia Ringgit.

Banks Rescue Will 'Make Things Worse': Rogers

Banks Rescue Will 'Make Things Worse': Rogers

10 Feb 2009 | 04:21 AM ET

The new financial rescue plan may not work and could even make things worse because it plunges the US further into debt and it is designed by the same people who failed to forecast the crisis and take measures, legendary investor Jim Rogers told CNBC Tuesday.

Treasury Secretary Timothy Geithner will unveil a long-awaited package of measures to help the financial sector at 11 am New York time.

But Rogers said Geithner, who was president of the New York Federal Reserve Bank, "has been dead wrong about everything for 15 years in a row," and so was President Barack Obama's economic advisor Lawrence Summers, who acted as Treasury Secretary at the turn of the century.

"It is mind-boggling to me," Rogers told "Squawk Box Europe."

"If I were on your show 15 weeks in a row and was wrong, you'd probably never invite me back. These guys have been wrong year after year after year consistently and here they are making the same mistakes again. This is not going to solve the problem, it's going to make it worse."

He said he was not contemplating investing into financials, as bankruptcies were still possible, and banks were still trying to find out how affected they were by the crisis.

"What's happening is they've all panicked, cutting back everything, trying to see what they've got," Rogers said.

Big companies such as AIG or Fannie Mae as well as other US banks don't know how to value their assets, he said.

"Everybody is frozen, trying to figure out ok, what are we worth, what do we do?"

In addition, the recent shifts towards protectionism are harmful, Rogers warned.

"This is very dangerous, that's what caused the great depression in the 1930s. If it happens again, then you'd better sell all the stocks, you'd better sell a lot of everything and bunker down," he said.

"We already have a lot of social unrest developing. If protectionism comes back, you'd better be really, really careful," Rogers added.

© 2009 CNBC.com

URL: http://www.cnbc.com/id/29114947/

11/02/2009
tjhinkh: Central bank all over the world are printing money as fast as they can. This has never happen before in history. Throughout history, we know when local central bank print money, it lead to inflation. So Jim 'knows' (that is his exact word) that there will be serious inflation down the road. Because of this, Jim periodically buy gold.

IMF may sell gold to rescue everybody else. Gold may go down. Jim thinks that this would be the bottom for gold. He hope that that the IMF would do that and when it does not have enough money, it will be dissolved.

May not see new mine open in 10-15 years.
Still holding to USD. He suspect that he will sell them by this year.

The game changer

The game changer

By George Soros

Published: January 28 2009 19:55 | Last updated: January 28 2009 19:55

In the past, whenever the financial system came close to a breakdown, the authorities rode to the rescue and prevented it from going over the brink. That is what I expected in 2008 but that is not what happened. On Monday September 15, Lehman Brothers, the US investment bank, was allowed to go into bankruptcy without proper preparation. It was a game-changing event with catastrophic consequences.

For a start, the price of credit default swaps, a form of insurance against companies defaulting on debt, went through the roof as investors took cover. AIG, the insurance giant, was carrying a large short position in CDS and faced imminent default. By the next day Hank Paulson, then US Treasury secretary, had to reverse himself and come to the rescue of AIG.

But worse was to come. Lehman was one of the main market-makers in commercial paper and a large issuer of these short-term obligations to boot. Reserve Primary, an independent money market fund, held Lehman paper and, since it had no deep pocket to turn to, it had to “break the buck” – stop redeeming its shares at par. That caused panic among depositors: by Thursday a run on money market funds was in full swing.

The panic then spread to the stock market. The financial system suffered cardiac arrest and had to be put on artificial life support.

How could Lehman have been left to go under? The responsibility lies squarely with the financial authorities, notably the Treasury and the Federal Reserve. The claim that they lacked the necessary legal powers is a lame excuse. In an emergency they could and should have done whatever was necessary to prevent the system from collapsing. That is what they have done on other occasions. The fact is, they allowed it to happen.

On a deeper level, too, credit default swaps played a critical role in Lehman’s demise. My explanation is controversial and all three steps of my argument will take the reader to unfamiliar ground.

First, there is an asymmetry in the risk/reward ratio between being long or short in the stock market. (Being long means owning a stock, being short means selling a stock one does not own.) Being long has unlimited potential on the upside but limited exposure on the downside. Being short is the reverse. The asymmetry manifests itself in the following way: losing on a long position reduces one’s risk exposure while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. The asymmetry serves to discourage the short-selling of stocks.

The second step is to understand credit default swaps and to recognise that the CDS market offers a convenient way of shorting bonds. In that market the asymmetry in risk/reward works in the opposite way to stocks. Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks.

The asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. When an adverse development is expected, the negative effect can become overwhelming because CDS tend to be priced as warrants, not as options: people buy them not because they expect an eventual default but because they expect the CDS to appreciate during the lifetime of the contract.

No arbitrage can correct the mispricing. That can be clearly seen in US and UK government bonds, whose actual price is much higher than that implied by CDS. These asymmetries are difficult to reconcile with the efficient market hypothesis, the notion that securities prices accurately reflect all known information.

The third step is to recognise reflexivity – that is to say, the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is dependent on confidence and trust. That means that “bear raids” to drive down the share prices of these institutions can be self-validating. That is in direct contradiction to the efficient market hypothesis.

THE SOROS INVESTMENT YEAR:

Positions I took were too big for ever more volatile markets

Although I positioned myself reasonably well for what was coming last year, one thing I got wrong cost me dearly: there was no decoupling between markets of the developed and developing worlds.

Indian and Chinese stocks were hit even harder than those in the US and Europe. Since we did not reduce our exposure, we lost more money in India than we had made the year before. Our Chinese manager did better by his stock selection; we were also helped by the appreciation of the renminbi.

I had to push very hard in my macro-account to offset both these losses and those incurred by our external managers. This had its own drawback: I overtraded. The positions I took were too large for the increasingly volatile markets and, in order to manage my risk, I could not go against the market in a big way. I had to try to catch minor moves.

That made it difficult to maintain short positions. Although I am an experienced short-seller, I got caught several times and largely missed the biggest down-draught, in October and November.

On the long side, where I stuck to my guns, I lost an enormous amount of money. I was impressed by the potential in the new deep-water oilfield in Brazil and bought a large strategic position in Petrobras, only to see it decline by 75 per cent at one point in time. We also got caught in the developing petrochemical industry in the Gulf.

We did get out of our strategic long position in CVRD, the Brazilian iron ore producer, in time for the end of the commodity bubble and shorted the other big iron ore groups. But we missed an opportunity in the commodities themselves – partly because I knew from experience how difficult it is to trade them.

I was also slow to recognise the reversal of fortune for the dollar and gave back a large portion of our profits. Under the direction of my new chief investment officer, we did make money in the UK, where we bet that short-term interest rates would decline and shorted sterling against the euro. We also made good money by going long on the credit markets after their collapse.

Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. This insight helped me to anticipate the downturn of the dollar at the end of 2008. As a result, we ended the year almost meeting my target of 10 per cent minimum return, after spending most of the year in the red.

Putting these three considerations together leads to the conclusion that Lehman, AIG and other financial institutions were destroyed by bear raids in which the shorting of stocks and buying of CDS amplified and reinforced each other. Unlimited shorting was made possible by the 2007 abolition of the uptick rule (which hindered bear raids by allowing short-selling only when prices were rising). The unlimited selling of bonds was facilitated by the CDS market. Together, the two made a lethal combination.

That is what AIG, one of the most successful insurance companies in the world, failed to understand. Its business was selling insurance and, when it saw a seriously mispriced risk, it went to town insuring it, in the belief that diversifying risk reduces it. It expected to make a fortune in the long run but it was destroyed in short order.

My argument raises some interesting questions. What would have happened if the uptick rule on shorting shares had been kept, in effect, but “naked” short-selling (where the vendor has not borrowed the stock in advance) and speculating in CDS had both been outlawed? The bankruptcy of Lehman might have been avoided but what would have happened to the asset super-bubble? One can only conjecture. My guess is that the bubble would have been deflated more slowly, with less catastrophic results, but that the after-effects would have lingered longer. It would have resembled more the Japanese experience than what is happening now.

What is the proper role of short-selling? Undoubtedly it gives markets greater depth and continuity, making them more resilient, but it is not without dangers. As bear raids can be self-validating, they ought to be kept under control. If the efficient market hypothesis were valid, there would be an a priori reason for imposing no constraints. As it is, both the uptick rule and allowing short-selling only when it is covered by borrowed stock are useful pragmatic measures that seem to work well without any clear-cut theoretical justification.

What about credit default swaps? Here I take a more radical view than most people. The prevailing view is that they ought to be traded on regulated exchanges. I believe they are toxic and should be used only by prescription. They could be used to insure actual bonds but – in light of their asymmetric character – not to speculate against countries or companies.

CDS are not, however, the only synthetic financial instruments that have proved toxic. The same applies to the slicing and dicing of collateralised debt obligations and to the portfolio insurance contracts that caused the stock market crash of 1987, to mention only two that have done a lot of damage. The issuance of stock is closely regulated by authorities such as the Securities and Exchange Commission; why not the issuance of derivatives and other synthetic instruments? The role of reflexivity and the asymmetries identified earlier ought to prompt a rejection of the efficient market hypothesis and a thorough reconsideration of the regulatory regime.

Now that the bankruptcy of Lehman has had the same shock effect on the behaviour of consumers and businesses as the bank failures of the 1930s, the problems facing the administration of President Barack Obama are even greater than those that confronted Franklin D. Roosevelt. Total credit outstanding was 160 per cent of gross domestic product in 1929 and rose to 260 per cent in 1932; we entered the crash of 2008 at 365 per cent and the ratio is bound to rise to 500 per cent. This is without taking into account the pervasive use of derivatives, which was absent in the 1930s but immensely complicates the current situation. On the positive side, we have the experience of the 1930s and the prescriptions of John Maynard Keynes to draw on.

The bursting of bubbles causes credit contraction, the forced liquidation of assets, deflation and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.

It can be done – by creating money to offset the contraction of credit, recapitalising the banking system and writing off or down the accumulated debt in an orderly manner. They require radical and unorthodox policy measures. For best results, the three processes should be combined.

If these measures were successful and credit started to expand, deflationary pressures would be replaced by the spectre of inflation and the authorities would have to drain the excess money supply from the economy almost as fast as they had pumped it in. There is no way to escape from a far-from-equilibrium situation – global deflation and depression – except by first inducing its opposite and then reducing it.

To prevent the US economy from sliding into a depression, Mr Obama must implement a radical and comprehensive set of policies. Alongside the well-advanced fiscal stimulus package, these should include a system-wide and compulsory recapitalisation of the banking system and a thorough overhaul of the mortgage system – reducing the cost of mortgages and foreclosures.

Energy policy could also play an important role in counteracting both depression and deflation. The American consumer can no longer act as the motor of the global economy. Alternative energy and developments that produce energy savings could serve as a new motor, but only if the price of conventional fuels is kept high enough to justify investing in those activities. That would involve putting a floor under the price of fossil fuels by imposing a price on carbon emissions and import duties on oil to keep the domestic price above, say, $70 per barrel.

Paulson and Bernanke
Hank Paulson, former Treasury secretary (left), and Ben Bernanke, Federal Reserve chairman, arrive for their November testimony to Congress

Finally, the international financial system must be reformed. Far from providing a level playing field, the current system favours the countries in control of the international financial institutions, notably the US, to the detriment of nations at the periphery. The periphery countries have been subject to the market discipline dictated by the Washington consensus but the US was exempt from it.

How unfair the system is has been revealed by a crisis that originated in the US yet is doing more damage to the periphery. Assistance is needed to protect the financial systems of periphery countries, including trade finance, something that will require large contingency funds available at little notice for brief periods of time. Periphery governments will also need long-term financing to enable them to engage in counter-cyclical fiscal policies.

In addition, banking regulations need to be internationally co-ordinated. Market regulations should be global as well. National governments also need to co-ordinate their macroeconomic policies in order to avoid wide currency swings and other disruption.

This is a condensed, almost shorthand account of what needs to be done to turn the global economy around. It should give a sense of how difficult a task it is.

The writer is chairman of Soros Fund Management and founder of the Open Society Institute. These are extracts from an e-book update to The New Paradigm for Financial Markets – The credit crisis of 2008 and what it means (Public­Affairs Books, New York)

http://www.ft.com/cms/s/0/49b1654a-ed60-11dd-bd60-0000779fd2ac.html?nclick_check=1

The credit crunch according to Soros

The credit crunch according to Soros

By Chrystia Freeland

Published: January 30 2009 11:38 | Last updated: January 30 2009 11:38

On Friday, August 17 2007, 21 of Wall Street’s most influential investors met for lunch at George Soros’s Southampton estate on the eastern end of Long Island. The first tremors of what would become the global credit crunch had rippled out a week or so earlier, when the French bank BNP Paribas froze withdrawals from three of its funds, and in response, central bankers made a huge injection of liquidity into the money markets in an effort to keep the world’s banks lending to one another.

Although it was a sultry summer Friday, as the group dined on striped bass, fruit salad and cookies, the tone was serious and rather formal. Soros’s guests included Julian Robertson, founder of the Tiger Management hedge fund; Donald Marron, the former chief executive of PaineWebber and now boss of Lightyear Capital; James Chanos, president of Kynikos Associates, a hedge fund that specialised in shorting stocks; and Byron Wien, chief investment strategist at Pequot Capital and the convener of the annual gathering – known to its participants as the Benchmark Lunch.

The discussion focused on a single question: was a recession looming? We all know the answer today, but the consensus that overcast afternoon was different. In a memo written after the lunch, Wien, a longtime friend of Soros’s, wrote: “The conclusion was that we were probably in an economic slowdown and a correction in the market, but we were not about to begin a recession or a bear market.” Only two men dissented. One of those was Soros, who finished the meal convinced that the global financial crisis he had been predicting – prematurely – for years had finally begun.

His conclusion had immediate consequences. Six years earlier, following the departure of Stan Druckenmiller from Quantum Funds, Soros’s hedge fund, Soros converted the operation into a “less aggressively managed vehicle” and renamed it an “endowment fund”, which farmed most of its money out to external managers. Now Soros realised he had to get back into the game. “I did not want to see my accumulated wealth be severely impaired,” he said, during a two-hour conversation this winter in the conference room of his midtown Manhattan offices. “So I came back and set up a macro-account within which I counterbalanced what I thought was the exposure of the firm.”

Soros complained that his years of less active involvement at Quantum meant he didn’t have the kind of “detailed knowledge of particular companies I used to have, so I’m not in a position to pick stocks”. Moreover, “even many of the macro instruments that have been recently invented were unfamiliar to me”. Even so, Quantum achieved a 32 per cent return in 2007, making the then 77-year-old the second-highest paid hedge fund manager in the world, according to Institutional Investor’s Alpha magazine. He ended 2008, a year that saw global destruction of wealth on the most colossal scale since the second world war, with two out of three hedge funds losing money, up almost 10 per cent.

Soros’s main goal was to preserve his fortune. But, as has been the case throughout his career, his timing and financial acumen enhanced his credibility as a thinker, and never more so than in 2008. In May and June, after more than two decades of writing, he hit bestseller lists in the US and in the UK with his ninth book, The New Paradigm for Financial Markets. In October, he received an invitation to testify before Congress about the financial crisis. In November, Barack Obama, whom he had long backed for the presidency, defeated John McCain.

“In the twilight of his life, he’s achieved the recognition he has always wanted,” Wien said. “Everything is going for him. He’s healthy, his candidate won, his business is on a solid footing.”

. . .

Many comparisons have been drawn between 2008 and earlier periods of turmoil, but the historical moment with most personal resonance for Soros is not one of the conventional choices. The parallel he sees is with 1944, when, as a 13-year-old Jewish boy in Nazi-occupied Budapest, he eluded the Holocaust.

Soros credits his beloved father, Tivadar, with teaching him how to respond to “far from equilibrium situations”. Captured by the Russians in the first world war, Tivadar was imprisoned in Siberia. He engineered his own escape and return home through a Russia convulsed by the Bolshevik revolution. That sojourn stripped him of his youthful ambition and left him wanting “nothing more from life than to enjoy it”. Yet on March 19 1944, the day the Germans occupied Hungary, the 50-year-old sprang into action, rescuing his immediate family and many others by arranging false identities for them.

Before the invasion, George was still enough of a child, his father thought, to need a bit of parental coddling. Yet the teenager who spent the war living apart from his parents under a false name found the danger exhilarating. “It was high adventure,” Soros wrote, “like living through Raiders of the Lost Ark.” And as the latest financial crisis gathered momentum, he admitted to the same thrill. “I think the same thing applies again. I feel the same kind of stimulation as I felt then,” he told me.

Part of the stimulation is intellectual. Soros’s experiences in 1944 laid the groundwork for the conceptual framework he would spend the rest of his life elaborating and which, he believes, has found its validation in the events of 2008. His core idea is “reflexivity”, which he defines as a “two-way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them, but on their perception or interpretation of the situation. Their decisions make an impact on the situation and changes in the situation are liable to change their perceptions.”

It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.

The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.

By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.

As an investor and as a thinker, Soros has always thrived in times of upheaval. But he has also remained something of an outsider. He recalls how he “discovered loneliness” when he arrived to study at the London School of Economics in 1947. Later on, as he worked his way up from being a journeyman arbitrage trader in London and then New York, to running one of the world’s most successful hedge funds, Soros remained, in the words of one private equity acquaintance, a bit of “an oddball”, both on Wall Street and in the academic world. He is frequently described as “charming”, yet few see the fit, tanned, twice-divorced billionaire as an emotional confidant. “If I had an idea about India-Pakistan, I would talk to him about it,” Wien said. “If I were having a problem in my marriage, I don’t think I would go and talk to George about it.”

Strobe Talbott, now the president of the Brookings Institute and a former deputy secretary of state, said: “He likes to think of himself as an outsider who can come in from time to time, including to the Oval Office, where I took him on a couple of occasions. But simply hobnobbing with the powerful isn’t important.”

That lack of clubbiness, and the associated trait of iconoclasm, may explain why, for all his worldly success, Soros has had a rather mixed public reputation. His speculative plays, which have often targeted currencies, have earned him the wrath of political leaders around the world. The ambitious, global reach of his richly funded Open Society foundation has prompted some critics to accuse him of suffering from a Messiah complex. He was so effectively demonised by the US right earlier this decade that he kept fairly quiet about his support of Obama, lest the association hurt his candidate. Probably most painfully, his forays into economics and philosophy often have met with considerable scepticism, especially from academia.

The one time and place where he instantly became a highly regarded insider was in the former Soviet Union and its satellites, at the moment the Berlin Wall came down. More completely and more swiftly than any other foreigner, Soros grasped and embraced the systemic transformation that was unfolding, and was rewarded with influence and respect. The question for Soros today is whether, as the west undergoes its own once-in-a-century systemic shock, this arch-outsider will finally find himself in the mainstream in the society which has been his main home for more than half a century.

. . .

Soros’s most famous – or infamous – speculative play as an investor was his bet against sterling in 1992, a wager which won him more than $1bn and earned him the epithet from the British press of “the man who broke the Bank of England”. That bet also turns out to be a perfect illustration of the specific talent which his past and present fund managers agree has been central to his investing success.

Soros’s best-known investment was not, in actual fact, his own idea. According to both Soros and Druckenmiller, who was managing Quantum at the time, it was Druckenmiller who came up with the plan to short the pound. But when Druckenmiller went through his rationale with Soros, in one of their twice- or thrice-daily conversations, Soros told his protégé to be bolder: “I said, ‘Go for the jugular!’.” Druckenmiller duly raised their stake – Quantum and several related funds wagered nearly $10bn, according to interviews Soros gave afterwards – and Soros earned both a fortune and an international reputation.

Druckenmiller, who spent 12 years at Quantum, says that conversation exemplifies Soros’s singular financial gift: “He’s extremely good at using the balance sheet – probably the best ever. He is able to use leverage when he likes it, but he is also able to walk away. He has no emotional attachment to a position. I think that is an unusual characteristic in our industry.”

Chanos agrees: “One thing that I’ve both wrestled with and admired, that [Soros] conquered many years ago, is the ability to go from long to short, the ability to turn on a dime when confronted with the evidence. Emotionally, that is really hard.”

Soros denies any great degree of emotional self-control. “That’s not true, that’s not true,” he told me, shaking his head and smiling. “I am very emotional. I am as moody as the market, so I’m basically a manic depressive personality.” (His market-linked moodiness extends to psychosomatic ailments, especially backaches, which he treats as valuable investment tips.)

Instead, Soros attributes his effectiveness as an investor to his philosophical views about the contingent nature of human knowledge: “I think that my conceptual framework, which basically emphasises the importance of misconceptions, makes me extremely critical of my own decisions … I know that I am bound to be wrong, and therefore am more likely to correct my own mistakes.”

Soros’s radar for revolution is the second key to his investing style. He looks for “game-changing moments, not incremental ones”, according to Sebastian Mallaby, the Washington Post columnist and author who is writing a history of hedge funds. As examples, Mallaby cites Quantum’s shorting of the pound and Soros’s 1985 “Plaza Accord” bet that the dollar would fall against the yen – his two most famous currency trades – as well as a lesser-known 1973 bet that, as a consequence of the Arab-Israeli war, defence stocks would soar. “It’s not that reflexivity tells you what to do, but it tells you to be on the look-out for turn-around situations,” Mallaby said. “It’s an attitude of mind.”

Some Soros-watchers intimate that his vast network of international contacts might be an important source of his market prescience. But it was in the one part of the world where Soros really did have an inside track – the former Soviet bloc – that he made his most disastrous deal. In Russia, as in much of the former Soviet Union, he was intensely engaged with the country’s political and economic transformation. In June 1997, as the Kremlin struggled to pay overdue wages, Soros extended a bridge loan to the Russian government, acting as a one-man International Monetary Fund.

He came to believe in Russia’s commitment to reforms, and to see himself as an insider – two convictions that were his financial undoing. He invested $980m with a consortium of oligarchs who acquired a 25 per cent stake in Svyazinvest, the national telecoms company, deciding to participate because “I thought that this is the transition from robber capitalism to legitimate capitalism”. But instead, the Svyazinvest privatisation turned out to be the moment when the oligarchs redirected their energies from fleecing the state to fleecing one another. Soros, as an outsider, was an obvious casualty. “Never have I been screwed so much since Russia. For them, they get a satisfaction out of doing it.

“It was the biggest mistake of my investment career. I was deceived by my own hope.” In his most recent book he dismisses Russia with a single sentence, further diminished by parenthesis: “(I don’t discuss Russia, because I don’t want to invest there.)”

. . .

On a chilly Monday night in December, Soros took the hour-long drive from Manhattan to the Bruce Museum in Greenwich, Connecticut. He was due to speak at a benefit for the Scholar Rescue Fund, a programme he has partly financed and which, since 2002, has provided safe havens for 266 persecuted academics from 40 countries. After his talk (on the global financial crisis, of course), Soros filed out of the auditorium chatting with Stanley Bergman, a founding partner of the law firm that had sponsored the evening.

“You like the game?” Soros asked his host with a smile.

“Yes,” the white-haired Bergman replied.

Then, in a flash of the competitive spirit that makes Soros an avid skier and player of tennis and chess, Soros asked: “And how old are you?”

“75.”

“I’m 78,” Soros replied. “But what’s the use of good health if it doesn’t buy you money?” The vigorous septuagenarians flashed each other a complicit smile.

According to Wien, Soros likes the game, too: “George loves to be able to show from time to time that he can do it.” But while he loves to play, he is disdainful of a life lived purely to accumulate more chips. His epiphany came in 1981, when he had to scramble to raise money to pay for an investment in bonds. “I thought I would have a heart attack,” he told me. “And then I realised that to die just for the sake of getting rich, I would be a loser.”

For Soros, the solution was philanthropy. “To do something really that would make a significant difference to the world, that would be worth dying for,” he said. “The Foundation enabled me to get out of myself and to somehow be concerned with other people than myself.” Soros’s fortune has given his causes enormous firepower: according to Aryeh Neier, the human rights activist who has been running the Open Society Foundation since 1993, its budget was $550m in 2008 and will increase to $600m this year. By his own calculation, Soros has donated a total of more than $5bn to his causes, primarily directing his giving through his foundation.

“No philanthropist in the second half of the 20th century has done better in deploying resources strategically to change the world,” Larry Summers, the newly appointed head of Barack Obama’s National Economic Council, told me in a conversation early last autumn. Talbott compares Soros’s impact to that of a sovereign nation. In the 1990s, says Talbott, “when I got word that George Soros wanted to talk, I would drop everything and treat him pretty much like a visiting head of state. He was literally putting more money into some of the former colonies of the former Soviet empire than the US government, so that merited treating him as someone with a very high impact.”

Soros’s philanthropic lieutenants report an approach remarkably similar to the investing style observed by his fund managers: he knows how to make big, original bets, and he isn’t afraid to cut his losses when a project isn’t working out. Anders Aslund, an economist who has studied Russia and Ukraine and who has worked with Soros on various projects, believes his philanthropic style “is very much formed by the money markets, which are always changing. He assumes any idea he has now will be wrong in a few years. He is always asking himself, when he has a wonderful project going, ‘When should I stop this project?’.”

Soros’s war chest, and his determination to deploy it beyond the usual blue-chip charities of hospitals, universities, museums or even poverty in Africa, had long made him an occasionally controversial figure outside the US. He was among the western culprits accused by the Kremlin of inciting Ukraine’s 2004 Orange Revolution; his foundation’s offices have been raided in Russia and he was forced to close them down in authoritarian Uzbekistan.

America, it turns out, can also be sensitive to plutocrats using their wealth to address socially contentious subjects. In recent years, his foundation became more active in the US, taking on issues including drug policy. His engagement became more intense during the George W. Bush presidency, when Soros decided that the open society he had worked to foster in repressive regimes abroad was imperilled in his adopted home.

Some admired his chutzpah. The famously independent-minded Paul Volcker, who was appointed to lead the Fed by Jimmy Carter and reappointed by Ronald Reagan, said: “The drug thing is a perfect example that he doesn’t adopt a conventional view. I think drug policy needs a new look and he’s been one of the people who say that.”

Soros’s money has been crucial in enabling him to voice maverick views: “That’s what led me to oppose Bush very publicly, because I was in a position that I could afford to do it,” he said. But he also believes his fortune and the automatic credibility it gives him in America has drawn the fire of conservative pundits such as Fox’s Bill O’Reilly and extremist pamphleteer Lyndon LaRouche. “Given the excessive esteem in which people who make money are held in America, I had to be demonised,” he said.

Their attacks worked. So much so that last year, as the Obama bandwagon gained speed and American financiers, along with much of the rest of the country, clamoured to jump on, his earliest heavyweight Wall Street backer kept a low profile. “Obama seeks to be a unifier,” Soros said. “And I have been a divisive figure because I’ve been demonised by the right. I thought my vocal support for him would not necessarily benefit him.”

. . .

At around 1.00am on November 5 2008, Soros sat on a peach-coloured sofa in his elegant Fifth Avenue apartment, with Queen Noor of Jordan to his left and Steve Clemons, of the New America think-tank, perched on the edge of a chair to his right. Around them milled a crowd of eclectic and jubilant guests, many still teary-eyed from Obama’s Grant Park victory speech, which had been broadcast on four flat-screen television sets in the apartment. Like most Soros soirées, the gathering included more artists and statesmen than Masters of the Universe: Michèle Pierre-Louis, the prime minister of Haiti and former head of her country’s Soros foundation; former World Bank chief James Wolfensohn; Volcker; and twentysomething Kwasi Asare, a hip-hop music promoter, were among the visitors.

Soros drank an espresso and, a few minutes later, a final champagne toast with the last of his guests. Alexander, his 23-year-old son, perched on the arm of his chair and ruffled his father’s hair in farewell. Everyone else took that as a signal to depart, too. Soros was in a mellow, triumphant mood that night – and with good reason. He had spotted Obama early on. His ubiquitous political consigliere, Michael Vachon, still has among his papers a rumpled itinerary from a trip he and Soros took to Chicago in February 2004. In the upper right-hand corner of the page, Vachon had scrawled, “Barack guy”. The Senate candidate had been keen to meet Soros and called the pair repeatedly during their visit. But it was a packed schedule and Soros could only offer a 7.30am breakfast slot at the Four Seasons.

Soros left that meal “very impressed”, a view that was confirmed when he read Obama’s autobiography and deemed him “a real person of substance”. A few months later, on June 7, Soros hosted a packed fundraiser for Obama’s Senate campaign at his upper east side home. Soros and his family contributed roughly $80,000, then the legal maximum.

Obama was impressing a lot of people at that time. But once it became clear that Hillary Clinton would be in the presidential race, nearly all of the established New York Democrats, particularly the older Wall Street crowd, lined up behind their local Senator and her machine, driven by a combination of loyalty and calculation. Dominique Strauss-Kahn, now the head of the IMF and then a possible French presidential candidate, said Soros told him in 2006 he was supporting “this young guy, Barack Obama. He was the first one to tell me this and he was right.” On January 16 2007, the day Obama formed a presidential exploratory committee, Soros contributed to his campaign and officially offered his backing. Before doing so, Soros called Hillary Clinton to let her know. “I look forward to your support in the general election,” she told him.

His decision to back Obama was consistent with his life-long affinity for moments of radical change. “I felt that America had gone so far off base that there was a need for discontinuity,” he said. As in the markets, Soros’s political bet on systemic transformation – his support for Obama, but also his early opposition to the war in Iraq and the “war on terror” – has come good.

For Soros, one happy consequence of now being in tune with the zeitgeist is that he is being taken seriously as a thinker on American public policy issues, particularly to do with the financial crisis. When he, along with the other four highest-earning hedge fund managers, testified before Congress in November, he was treated with respect and even deference – not the prevailing attitude towards billionaire financiers at the moment. Before Soros had even taken his coat off, he was greeted in the corridors by Democratic New York Congresswoman Carolyn Maloney. “Give him a nice office,” she told a staffer who was looking for a place where Soros could wait before his testimony. “He creates a lot of jobs in my district and supports a lot of good people.” After the hearing, a lawmaker and a staffer both approached Soros and asked him to autograph their copies of his book.

. . .

Being listened to on Capitol Hill, and by global policymakers more generally, is important to Soros. But what matters to him most of all – more than money, more than the political and social accomplishments of his foundation – is leaving an enduring intellectual legacy. He describes reflexivity as “my main interest”. Even as Soros met with increasing financial and public success through his fund and his foundation, he was deeply frustrated by his failure to be accepted as a serious thinker. He titled one chapter in his latest book “Autobiography of a Failed Philosopher”, and once delivered a lecture at the University of Vienna called “A Failed Philosopher Tries Again”. As a young man, he wanted to become an academic, but “my grades were not good enough”.

He writes that his first book, The Alchemy of Finance, was “dismissed by many critics as the self-indulgence of a successful speculator”. That reaction still prevails in some circles. Paul Krugman, the Nobel prize-winning economist, devotes half a chapter to Soros in his latest book, characterising him as “perhaps the most famous speculator of all times”. He also raises an eyebrow at Soros’s intellectual “ambitions”, tartly observing that he “would like the world to take his philosophical pronouncements as seriously as it takes his financial acumen”.

Another barrier to academic respectability is Soros’s self-confessed “phobia” of formal mathematics: “I understand mathematical concepts but I’m afraid of mathematical symbols, because you can easily get lost in them.” That fear proved no impediment to success in the quantitative world of finance, but it has hurt Soros’s street cred in economics departments. “Among academics, he suffers from the additional liability of not expressing it in the language of mathematics that has become fashionable,” Joe Stiglitz, another Nobel prize-winning economist, said. But Stiglitz believes his friend’s writing has become more current, partly thanks to the financial crisis: “By those economists interested in ideas, I think his work is taken seriously as an idea that informs their thinking.”

In the view of Larry Summers: “Reflexivity as an idea is right and important and closely related to various streams of existing thought in the social sciences. But no one has deployed a philosophical concept as effectively as George has, first to make money and then to change the world.”

Paul Volcker delivered a similar verdict: “I think he has a valid insight which is not always expressed as clearly by him as I might like.” Overall, he said, Soros is “an imaginative and provocative thinker … he’s got some brilliant ideas about how markets function or dysfunction.”

This is as close to mainstream intellectual acceptance as Soros has come in his two decades of writing and more than five decades since he gave up on academia. It feels like a breakthrough. When I asked him if he would still describe himself as a failed philosopher, he said no: “I think that I am actually succeeding as a philosopher.” For him, that is “obviously” the most important human accomplishment.

“I think it has to do with the human condition,” he said. “The fact that we are mortal and we would like to be immortal. The closest thing you can come to that is by creating something that lives beyond you. Wealth could be one of those things, but evidence shows that it doesn’t survive too many generations. However, if you can have an artistic or philosophical or scientific creation that withstands the test of time, then you have come as close to it as possible.”

Chrystia Freeland is the FT’s US managing editor

http://www.ft.com/cms/s/2/9553cce2-eb65-11dd-8838-0000779fd2ac.html