U.S. hedge fund takes HSBC short, repeats HBOS ploy
Tue Mar 10, 2009 5:41am EDT
LONDON, March 10 (Reuters) - U.S. hedge fund Harbinger Capital is the first company to declare a short position in HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz) following the bank's record rights issue, after making millions from a similar tactic with UK bank HBOS last year.
Harbinger said in a regulatory filing it has taken a 0.26 percent short position in HSBC's London shares, worth about 110 million pounds ($157 million). By 0910 GMT the shares were up 2.5 percent at 356 pence.
Harbinger has also unveiled a series of short positions in Spanish banks in recent weeks, including a short position of 1 percent in BBVA (BBVA.MC: Quote, Profile, Research, Stock Buzz) and 0.4 percent in Santander (SAN.MC: Quote, Profile, Research, Stock Buzz).
It has also been declaring almost on a daily basis short positions in other Spanish lenders, particularly in Banco Popular (POP.MC: Quote, Profile, Research, Stock Buzz) and Sabadell (SABE.MC: Quote, Profile, Research, Stock Buzz).
The hedge fund -- run by Philip Falcone, who was one of five hedge fund managers quizzed by U.S. lawmakers last November -- took a 3.3 percent short position in HBOS during last summers's rights issue.
It bet 345 million pounds ($490.7 million) on the stake, and HBOS shares fell sharply in the subsequent months as the rights issue flopped. A takeover by Lloyds offered only brief respite, and the stake is now worth about 35 million pounds in Lloyds (LLOY.L: Quote, Profile, Research, Stock Buzz) shares.
Harbinger never disclosed if or when it bought the shares back. It could not immediately be reached for comment.
Former Harvard hockey star Falcone's shrewd housing market bets at Harbinger netted him a $1.7 billion payout in 2007, according to Alpha Magazine. [ID:nN16372761]
Harbinger's parent group Harbert Management Corp, based in Alabama, manages about $9 billion in assets, according to its website.
One fund focuses on distressed, undervalued or special situation assets, and the other focuses on longer-term investments including special equity situations.
It sells short securities when a company's deterioration or industry fundamentals are not reflected in its current price, the website said. ($1=.7030 pounds) (Reporting by Steve Slater in London and Judith MacInnes in Madrid; Editing by Greg Mahlich)
http://www.reuters.com/articlePrint?articleId=USLA16109520090310
23/03/2009
tjhinkh: Falcone short HSBC on 10th March 2009
01/04/2009
tjhinkh: He has reduced his HSBC short.
Monday, March 23, 2009
The long and the short
The long and the short
Mar 12th 2009
From The Economist print edition
John Paulson made a fortune betting against mortgages. Now he spies opportunities in the wreckage
IN TODAY’S gut-wrenching markets, winners are as rare as a house that sells for the asking price. Even Warren Buffett is looking less than sagacious after his holding company posted its worst year ever. But one investor who continues to win plaudits is John Paulson. His hedge funds have had a superb crisis. They clocked up triple-digit returns in 2007 betting against subprime mortgages, netting him $3.7 billion personally—a sum that made George Soros’s winnings from currency bets in the early 1990s look modest. Mr Paulson’s funds continued to do well last year, rising by 7.9-37.6% even as those run by other hedge-fund titans, such as SAC’s Steve Cohen and Citadel’s Ken Griffin, suffered miserably. His funds were all up again in the first two months of 2009, and they now hold $30 billion—a war chest that Mr Paulson is now starting to use to gobble up the very securities that made him rich when they collapsed in value.
He cut his teeth in risk arbitrage, which involves punting on actual or potential merger targets. This remains an important strategy for him, and he had reason to celebrate this week when Dow Chemical agreed (under legal pressure) to complete its $15.3 billion acquisition of Rohm & Haas, another chemicals firm, in which Mr Paulson’s funds own a big stake. But he is best known for his canny bets against mortgage-backed bonds and financial shares. The firms in which he was “short” (ie, betting on a fall) last year lost, on average, 90% of their value.
Success has not bred arrogance. On the contrary, Mr Paulson is a fitting icon for the post-boom age: mild-mannered, bordering on weedy and so soft-spoken that when testifying before Congress in November he had to be asked to speak up. His first taste of business was to buy sweets in bulk and sell them to classmates at a hefty mark-up, but it is hard to imagine him having had the guts for such a scheme. He has never charged more than 1½% of assets and 20% of profits, a reasonably modest fee for a hedge-fund superstar. His job is, he says, more about preserving clients’ principal than gambling for outsized returns.
Accordingly, his funds generally eschew leverage, or making bets with borrowed money. He insists that his fruitful subprime trade, far from being stunningly clever, was a no-brainer for anyone who bothered to analyse the complex securities’ underlying collateral. “It was obvious that a lot of the stuff…was practically worthless at the time of issuance,” he says. He finds it “perplexing” that the banks holding the higher-rated tranches could not see this danger, and that so few others were prepared to believe that Wall Street’s finest could have miscalculated so badly.
Another motivating factor for Mr Paulson was the alluring asymmetry of shorting credit. The most you can lose is the spread over some benchmark rate. Yet if the bond defaults, the gains can be mouth-watering. He targeted BBB-rated tranches, the lowest in subprime securities. With credit spreads so low because of a liquidity glut, his possible upside as a buyer of protection using credit-default swaps (CDSs) was as much as hundred times the potential downside. One $22m trade is said to have netted him $1 billion when Lehman Brothers went bust. Though the CDS market has been good to him, he believes it “blew out of control” and needs to be regulated and moved onto exchanges, with margin requirements to limit excessive speculation. He also advocates tighter oversight of hedge funds.
He is, however, robust in his defence of short-selling, which has been vilified for its perceived role in driving down banks’ share prices. He sees it as a “valuable” tool, used not least by banks themselves to hedge their various exposures. More importantly, he argues, it is too small a part of stockmarket activity to move prices. His shorting “made absolutely no difference to the performance of any mortgages, securities or banks.” The blame lies with reckless lending, not with those who capitalise on the resulting mispricing of securities. There is, therefore, no “moral dimension”—though he allows that some of the “more vocal” shorts may have hurt banks’ prospects of raising fresh capital.
Still, his vast profits make him a target in a world where high finance is held in low esteem. Portfolio, a business magazine, dubbed him “The man who made too much”. He retorts that the bulk of the profits went to his investors, which include foundations, endowments and pension funds. They are not the only ones with reason to thank him: a $15m donation is helping families facing foreclosure to keep their homes, by paying for lawyers to exploit the sloppy documentation that accompanied the often-hurried pooling of subprime mortgages into securities. Mr Paulson says he has many other philanthropic arrows in his quiver, but to publicise them would “take away the altruism”.
Distress call
Just as markets used to hang on Mr Soros’s every move, they are now keen followers of Mr Paulson. He does not see the economy reaching bottom this year and is still a net short-seller of financial firms. More encouragingly, he has started buying up bombed-out mortgage securities. The number-crunching that told him subprime-linked paper was overvalued now suggests that some previously AAA-rated tranches are a bargain. He talks of distressed debt—mortgages, leveraged loans and the debt of bankrupt firms—as a $10 trillion opportunity.
At some point, his “number-one focus” will be to provide equity to recapitalise sick but viable banks. He is already dipping his toe in: his latest vehicle, the Recovery Fund, recently took a 25% stake in IndyMac, a Californian bank that the government seized last July. But the timing of any bigger push is uncertain. Mr Paulson is acutely aware of the costs of moving too early: those who have bought into financial firms since the start of the crisis have lost, on average, 80% of their investment. Still, in these dire times it is comforting to know that such a smart investor believes there will be something worth saving.
http://www.economist.com/people/displaystory.cfm?story_id=13277415
Mar 12th 2009
From The Economist print edition
John Paulson made a fortune betting against mortgages. Now he spies opportunities in the wreckage
IN TODAY’S gut-wrenching markets, winners are as rare as a house that sells for the asking price. Even Warren Buffett is looking less than sagacious after his holding company posted its worst year ever. But one investor who continues to win plaudits is John Paulson. His hedge funds have had a superb crisis. They clocked up triple-digit returns in 2007 betting against subprime mortgages, netting him $3.7 billion personally—a sum that made George Soros’s winnings from currency bets in the early 1990s look modest. Mr Paulson’s funds continued to do well last year, rising by 7.9-37.6% even as those run by other hedge-fund titans, such as SAC’s Steve Cohen and Citadel’s Ken Griffin, suffered miserably. His funds were all up again in the first two months of 2009, and they now hold $30 billion—a war chest that Mr Paulson is now starting to use to gobble up the very securities that made him rich when they collapsed in value.
He cut his teeth in risk arbitrage, which involves punting on actual or potential merger targets. This remains an important strategy for him, and he had reason to celebrate this week when Dow Chemical agreed (under legal pressure) to complete its $15.3 billion acquisition of Rohm & Haas, another chemicals firm, in which Mr Paulson’s funds own a big stake. But he is best known for his canny bets against mortgage-backed bonds and financial shares. The firms in which he was “short” (ie, betting on a fall) last year lost, on average, 90% of their value.
Success has not bred arrogance. On the contrary, Mr Paulson is a fitting icon for the post-boom age: mild-mannered, bordering on weedy and so soft-spoken that when testifying before Congress in November he had to be asked to speak up. His first taste of business was to buy sweets in bulk and sell them to classmates at a hefty mark-up, but it is hard to imagine him having had the guts for such a scheme. He has never charged more than 1½% of assets and 20% of profits, a reasonably modest fee for a hedge-fund superstar. His job is, he says, more about preserving clients’ principal than gambling for outsized returns.
Accordingly, his funds generally eschew leverage, or making bets with borrowed money. He insists that his fruitful subprime trade, far from being stunningly clever, was a no-brainer for anyone who bothered to analyse the complex securities’ underlying collateral. “It was obvious that a lot of the stuff…was practically worthless at the time of issuance,” he says. He finds it “perplexing” that the banks holding the higher-rated tranches could not see this danger, and that so few others were prepared to believe that Wall Street’s finest could have miscalculated so badly.
Another motivating factor for Mr Paulson was the alluring asymmetry of shorting credit. The most you can lose is the spread over some benchmark rate. Yet if the bond defaults, the gains can be mouth-watering. He targeted BBB-rated tranches, the lowest in subprime securities. With credit spreads so low because of a liquidity glut, his possible upside as a buyer of protection using credit-default swaps (CDSs) was as much as hundred times the potential downside. One $22m trade is said to have netted him $1 billion when Lehman Brothers went bust. Though the CDS market has been good to him, he believes it “blew out of control” and needs to be regulated and moved onto exchanges, with margin requirements to limit excessive speculation. He also advocates tighter oversight of hedge funds.
He is, however, robust in his defence of short-selling, which has been vilified for its perceived role in driving down banks’ share prices. He sees it as a “valuable” tool, used not least by banks themselves to hedge their various exposures. More importantly, he argues, it is too small a part of stockmarket activity to move prices. His shorting “made absolutely no difference to the performance of any mortgages, securities or banks.” The blame lies with reckless lending, not with those who capitalise on the resulting mispricing of securities. There is, therefore, no “moral dimension”—though he allows that some of the “more vocal” shorts may have hurt banks’ prospects of raising fresh capital.
Still, his vast profits make him a target in a world where high finance is held in low esteem. Portfolio, a business magazine, dubbed him “The man who made too much”. He retorts that the bulk of the profits went to his investors, which include foundations, endowments and pension funds. They are not the only ones with reason to thank him: a $15m donation is helping families facing foreclosure to keep their homes, by paying for lawyers to exploit the sloppy documentation that accompanied the often-hurried pooling of subprime mortgages into securities. Mr Paulson says he has many other philanthropic arrows in his quiver, but to publicise them would “take away the altruism”.
Distress call
Just as markets used to hang on Mr Soros’s every move, they are now keen followers of Mr Paulson. He does not see the economy reaching bottom this year and is still a net short-seller of financial firms. More encouragingly, he has started buying up bombed-out mortgage securities. The number-crunching that told him subprime-linked paper was overvalued now suggests that some previously AAA-rated tranches are a bargain. He talks of distressed debt—mortgages, leveraged loans and the debt of bankrupt firms—as a $10 trillion opportunity.
At some point, his “number-one focus” will be to provide equity to recapitalise sick but viable banks. He is already dipping his toe in: his latest vehicle, the Recovery Fund, recently took a 25% stake in IndyMac, a Californian bank that the government seized last July. But the timing of any bigger push is uncertain. Mr Paulson is acutely aware of the costs of moving too early: those who have bought into financial firms since the start of the crisis have lost, on average, 80% of their investment. Still, in these dire times it is comforting to know that such a smart investor believes there will be something worth saving.
http://www.economist.com/people/displaystory.cfm?story_id=13277415
George Soros interview: A very good crisis
George Soros interview: A very good crisis
EXCLUSIVE: Peter Wilson | March 19, 2009
George Soros is having a very good crisis. Other investors are wilting, political power structures are being upended and market economists are scrambling to fashion new theories, but the world's most famous speculator is having a belated heyday.
George Soros: A very good crisis
George Soros is now recognised as one of the most effective philanthropists, finding a new sense of purpose by spending billions to promote civil society in new democracies.
"It is, in a way, the culminating point of my life’s work," the 78-year-old says in his heavy Hungarian accent during an interview at his London mansion.
If Soros had retired from the money markets at 48 to become a philosopher – which was his life plan when he set up his own Wall Street hedge fund at the age of 43 – the world is unlikely to have heard of him, as either an ideas man or a money man. Even if he had ended his career 20 years later, he would have been remembered as little more than the big-stakes gambler who "broke the Bank of England" with his 1992 bet against the pound that earned him $US1.1 billion.
At 68 Soros had just predicted a global financial collapse which did not happen, just as he had done a decade earlier; his pet theory of market behaviour, which he calls "reflexivity", had been largely ignored; and his political donations had bought him little sway in Washington. Yet today, he says, all those strands seem to have come together – "the American election, the financial crisis, the theory of reflexivity, so it is actually a very stimulating period".
For one thing Soros is now recognised as one of the most effective philanthropists, finding a new sense of purpose by spending billions to promote civil society in new democracies.
Having twice cried wolf, he finally got it right by being one of the very few people to anticipate the 2007 credit crunch and current economic collapse. In the process he has gained enough respect for his ideas on market behaviour to help his ninth book, The New Paradigm for Financial Markets, win the sales and positive reviews that had eluded him.
And foreseeing the biggest economic crisis since the Great Depression has certainly paid off financially. In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even.
His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage. That same year, in which Hedge Fund Research estimates the hedge fund industry lost a record 18.3 per cent, Soros was up another 9 per cent. He now believes he can step back from a hands-on role at Quantum.
"I think that I have done what I can to preserve capital," he says with some understatement, "and going forward I need to be less engaged. Also, I now have a chief financial officer who can take over. I am sort of handing over to him again and I am more engaged in policy issues than ever before."
INTERVIEW TRANSCRIPT, PART ONE: how Soros stays informed, why the crisis is stimulating, and how he helped Henry Paulson change his mind.
That new engagement on the policy front coincides with a remarkable improvement in the political environment for Soros, who spent $US25 million in a failed effort to help Democrat John Kerry defeat George W. Bush in 2004.
Some Wall Street donors jumped onto Barack Obama’s bandwagon just before last November’s election, when he was comfortably leading John McCain in the opinion polls. Others can boast that they backed Obama before he stitched up the Democratic nomination in May and there are a few who can even say that they were on board before he won the Iowa Democratic caucuses in January.
Soros held a fundraiser for Obama at his New York home and donated the maximum legal amount in June – June 2004, that is, before Obama had even been elected to the US Senate. Two years later he urged Obama to run for president, and when he did become a candidate Soros organised a meeting with other financiers in Soros’s own Wall Street office.
The result is that after being a political outcast under the Bush administration and having little infl uence under Bill Clinton, Soros is confi dent that “at least I will get a hearing” in Washington. And he will use it to advocate radical regulatory and financial reform to rein in financiers like himself.
After decades exploiting any weakness he could find in the regulatory system, Soros certainly knows where the flaws are, and he warns that past US policies have been based on the “ideological excess (of) market fundamentalism” – the assumption that markets can correct themselves with little need for government intervention in financial affairs.
If regulators and major governments stick to that approach in the current fi nancial crisis, rather than making radical changes, then “all hell will break loose”, Soros says. “For instance, having put the fi nancial system on artificial life support after the Lehman breakdown, that artificial life
support then created problems for the periphery countries that were not able to give the same kind of credible guarantees” as the US and other wealthy nations, he says.
“You now face the situation where a lot of loans are going to come due that cannot be rolled over, so unless the authorities get their act together and do something to prevent it, there will be tremendous problems ... in all the emerging markets. I am talking 2009, I am talking about right now.”
Self-interest would lead many financiers to oppose tighter government regulations but Soros says that speculators and investors like himself need to be pulled tightly into line, along with banks and other financial players.
He concedes that many of his proposals – such as loosening Washington’s grip on the International Monetary Fund; co-ordinating macroeconomic policies between national governments; and bringing in new international regulatory regimes for banking and markets to oversee some of the wilder financial instruments and derivative products – will be extremely difficult to sell politically. But he claims there is reason for at least some hope because of the growing awareness of the depth of the crisis.
“I am actually fairly optimistic because the problems are recognised and certainly the new team in America understands things pretty well the same way as I do. And I think Gordon Brown does and he is providing leadership. He is working on the G20 meeting in April as the sort of culminating point of some actions, so I think action will be taken. But there will always be slippage, so they may continue to lag behind events.
“It is in the nature of this situation that (things continue) to deteriorate, and if you only respond to problems and don’t foresee them and take preventive action, then the problem always gets larger, and measures that would have worked are inadequate by that time. So actually the problem I see is that some of the policymakers understand what needs to be done but ... what they are afraid of
actually has to happen before action can be taken. And that is why we are liable to have still a number of crises.”
Several governments are considering the creation of so-called “bad banks” to hold the toxic assets of crippled commercial banks. But Soros says more dramatic steps are needed, because even banks relieved of their worst assets will spend years restoring their balance sheets before they offer the sort of lending needed to stimulate economic recovery. For that reason Soros advocates a partial nationalisation scheme, through the creation of a “good bank” as well as a “bad bank”, even though diverting solid assets from existing commercial banks into such a “good bank” would erode shareholder wealth.
Too much has already been done for the banks and their shareholders rather than for the ordinary households and businesses that would benefit from new lending, he says. Governments should keep existing capital with bad assets and move good assets into a new bank, which would then be recapitalised so it could provide new lending.
“I think the Obama administration is moving towards a good bank/bad bank solution, but it is not the right kind of good bank/bad bank solution. What they propose currently is creating this aggregator bank which will take the toxic assets out of the banking system, out of the banks, so it really injects government money into the bad banks, and I am saying that they ought to be injecting money into the good banks. I think it is difficult to generate the political will (for that) ... and this is my main worry right now, that they may get it wrong.
“They (are) in a difficult situation because they have two obstacles. One is that the hole has become too big – you need something like a trillion and a half of new money in addition to the (initial) $US700 billion because the hole has grown.”
The second obstacle to be overcome is that the clumsy way in which the Bush Administration handled the Troubled Asset Relief Program has “poisoned the well”, making it more difficult to get future funding packages through Congress.
Soros advocates much greater restrictions on the sort of short-selling of stocks that has been a mainstay of the hedge fund industry and says the creation of new credit instruments will have to be regulated in the future.
While many are now calling for regulation of credit default swaps, Soros takes a harder line, saying they are toxic and should be used only by prescription. They could be used to insure actual bonds, he says, but not to speculate against nations or businesses. Derivatives and synthetic
instruments, such as the slicing and dicing of collateralised debt obligations, should also be tightly
regulated and monitored.
The limits on credit and leverage will have to be set substantially lower than those tolerated in the past, he says, a move which would make the financial industry less profi table than in recent years and make some highly leveraged business models untenable.
Alongside recapitalisation of the banks, there should be an overhaul of the US mortgage system to cut the cost of mortgages and foreclosures. Governments should also create money, both domestically and globally, through a massive expansion of the IMF’s Special Drawing Rights scheme, running into trillions of dollars. The only way to avoid global deflation and depression, according to Soros, is to first induce its opposite, inflation, and then carefully reduce it.
One potential engine for new growth is the development of alternative energies and a greener economy, Soros says, but he worries that the fall in the price of oil has eliminated a grand
opportunity by reducing the incentive to invest in better options.
“It would have been a perfect fit. You could have introduced effectively a carbon tax and put a floor under (the price of) oil, and stopped it from falling, but now that it has fallen you would have to impose an import duty to raise it.”
That is politically untenable, but at current prices “you have to use less simple instruments to foster alternative energy development, like subsidies and so on – it will be messier”.
The entire world, but especially the West, should now brace for slower economic growth, he warns, and it will be at least a decade before the US sees robust growth.
One important effect will be a new wariness in China about the US economic model, Soros says. “The Chinese used to look up to the West and try to imitate the West and they have now discovered that it may not be the right thing to imitate. They now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.
“For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the past year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing.”
In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus
is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”
Soros sees Australia’s medium-term economic prospects as largely a function of China’s growth and the state of commodity markets. In 2008 he sold a large stake in the Brazilian iron ore producer CVRD before the crash in commodity prices and then profi tably shorted BHP’s stock.
However, he says he did not act decisively enough to take advantage of the fall in other commodities such as oil.
Soros’s enthusiasm for sharing his views on the crisis and its possible solutions is driven by a fierce desire to be seen as more than the archetypal money market man. When the economic historian Niall Ferguson described the early hedge fund managers in The Ascent of Money, he
called Soros “the acknowledged capo dei capi of the new economic hitmen”. But Soros yearns to be respected for his ideas rather than his market clout.
He arrived in Britain as a teenager in 1947 after his Jewish family survived the Nazi occupation of Hungary. He studied philosophy at the London School of Economics under Karl Popper before going into finance and moving to New York in 1956. He was deeply influenced by Popper’s
views on fallibilism – the need to question the information underpinning one’s own assumptions and to be open to the possibility that those assumptions may be wrong.
One of his great strengths as an investor, Soros says, has been his willingness to change positions as soon as he realises that he has made a mistake, rather than clinging on in the
hope that his initial judgements will be vindicated. There is pleasure, he says, “in recognising that you are wrong – because actually the pleasure (comes) from not losing money”.
His view of the markets was also shaped by the sociological concept of reflexivity, the awareness that the simple act of observing a subject can affect that subject and distort the observations.
Soros applied the idea to the markets, rejecting the notion that prices are the efficient outcome of “perfect” knowledge, instead insisting that they are shaped by the biases and ignorance of market players, and that those biases can be self-fulfilling.
During the American housing bubble, for instance, the relentless series of double-digit rises in house prices changed the behaviour and perceptions of market players, who loosened lending practices and allowed the market to move further and further from equilibrium.
Soros says his 1992 attack on the British pound, which forced then Chancellor of the Exchequer Norman Lamont to accelerate Britain’s withdrawal from the European Exchange Rate Mechanism, is an example of his constant search for the opportunities created by imperfect markets overshooting and under-shooting in that way.
“The authorities lagged, you see. There is this reflexive cat-and-mouse game going on between markets and the authorities all the time and I am more aware of it than perhaps most others, therefore I acted more decisively.
“So just like traditional economists predicted seven of the last three recessions, in the same way I anticipated seven of the last three bubbles,” he says with a throaty chuckle.
“What has happened now is that the efficient market hypothesis has been discredited, the evidence is just too overwhelming ... but instead of accepting reflexivity, the
(economics) profession is veering towards behavioural economics and what is called the adaptive systems hypothesis (or) adaptive markets hypothesis.
“And I am worried about that because I think that this will perpetuate the mistake. Because basically the adaptive markets hypothesis says that anything goes that helps the survival of the fittest in terms of systems. And therefore this validates any system that prevails. My contention is that actually systems can be maladaptive, as witnessed by the fact that they can collapse the way they have collapsed.”
Jon Danielsson, a reader in international finance at the LSE, argues that Soros overstates the originality of his theories. “A lot of market participants have focused on finding inefficiencies in the market,” he says. “Soros is just very good at putting that into practice.”
Larry Summers, the director of Obama’s National Economic Council, has a kinder view, telling the Financial Times recently that Soros’s theories deserve attention and have been incorporated not only into the financier’s money-making strategies but also into his philanthropic efforts to promote what Soros describes as “open societies”.
“No philanthropist in the second half of the 20th century has done better in deploying resources strategically to change the world,” Summers said.
Soros is “very proud” of his large donations against Bush in 2004, even though Bush was re-elected. “When you invest, you do it in order to make a profit. When you take a political stance, you do it for the principle and not for the outcome. One of the people I admire is a Russian human rights activist named Sergei. He said to me: ‘All my life I fought losing battles.’ And I think if you keep on fighting losing battles, you actually win the war.”
http://www.theaustralian.news.com.au/business/story/0,28124,25211027-5018057,00.html
EXCLUSIVE: Peter Wilson | March 19, 2009
George Soros is having a very good crisis. Other investors are wilting, political power structures are being upended and market economists are scrambling to fashion new theories, but the world's most famous speculator is having a belated heyday.
George Soros: A very good crisis
George Soros is now recognised as one of the most effective philanthropists, finding a new sense of purpose by spending billions to promote civil society in new democracies.
"It is, in a way, the culminating point of my life’s work," the 78-year-old says in his heavy Hungarian accent during an interview at his London mansion.
If Soros had retired from the money markets at 48 to become a philosopher – which was his life plan when he set up his own Wall Street hedge fund at the age of 43 – the world is unlikely to have heard of him, as either an ideas man or a money man. Even if he had ended his career 20 years later, he would have been remembered as little more than the big-stakes gambler who "broke the Bank of England" with his 1992 bet against the pound that earned him $US1.1 billion.
At 68 Soros had just predicted a global financial collapse which did not happen, just as he had done a decade earlier; his pet theory of market behaviour, which he calls "reflexivity", had been largely ignored; and his political donations had bought him little sway in Washington. Yet today, he says, all those strands seem to have come together – "the American election, the financial crisis, the theory of reflexivity, so it is actually a very stimulating period".
For one thing Soros is now recognised as one of the most effective philanthropists, finding a new sense of purpose by spending billions to promote civil society in new democracies.
Having twice cried wolf, he finally got it right by being one of the very few people to anticipate the 2007 credit crunch and current economic collapse. In the process he has gained enough respect for his ideas on market behaviour to help his ninth book, The New Paradigm for Financial Markets, win the sales and positive reviews that had eluded him.
And foreseeing the biggest economic crisis since the Great Depression has certainly paid off financially. In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even.
His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage. That same year, in which Hedge Fund Research estimates the hedge fund industry lost a record 18.3 per cent, Soros was up another 9 per cent. He now believes he can step back from a hands-on role at Quantum.
"I think that I have done what I can to preserve capital," he says with some understatement, "and going forward I need to be less engaged. Also, I now have a chief financial officer who can take over. I am sort of handing over to him again and I am more engaged in policy issues than ever before."
INTERVIEW TRANSCRIPT, PART ONE: how Soros stays informed, why the crisis is stimulating, and how he helped Henry Paulson change his mind.
That new engagement on the policy front coincides with a remarkable improvement in the political environment for Soros, who spent $US25 million in a failed effort to help Democrat John Kerry defeat George W. Bush in 2004.
Some Wall Street donors jumped onto Barack Obama’s bandwagon just before last November’s election, when he was comfortably leading John McCain in the opinion polls. Others can boast that they backed Obama before he stitched up the Democratic nomination in May and there are a few who can even say that they were on board before he won the Iowa Democratic caucuses in January.
Soros held a fundraiser for Obama at his New York home and donated the maximum legal amount in June – June 2004, that is, before Obama had even been elected to the US Senate. Two years later he urged Obama to run for president, and when he did become a candidate Soros organised a meeting with other financiers in Soros’s own Wall Street office.
The result is that after being a political outcast under the Bush administration and having little infl uence under Bill Clinton, Soros is confi dent that “at least I will get a hearing” in Washington. And he will use it to advocate radical regulatory and financial reform to rein in financiers like himself.
After decades exploiting any weakness he could find in the regulatory system, Soros certainly knows where the flaws are, and he warns that past US policies have been based on the “ideological excess (of) market fundamentalism” – the assumption that markets can correct themselves with little need for government intervention in financial affairs.
If regulators and major governments stick to that approach in the current fi nancial crisis, rather than making radical changes, then “all hell will break loose”, Soros says. “For instance, having put the fi nancial system on artificial life support after the Lehman breakdown, that artificial life
support then created problems for the periphery countries that were not able to give the same kind of credible guarantees” as the US and other wealthy nations, he says.
“You now face the situation where a lot of loans are going to come due that cannot be rolled over, so unless the authorities get their act together and do something to prevent it, there will be tremendous problems ... in all the emerging markets. I am talking 2009, I am talking about right now.”
Self-interest would lead many financiers to oppose tighter government regulations but Soros says that speculators and investors like himself need to be pulled tightly into line, along with banks and other financial players.
He concedes that many of his proposals – such as loosening Washington’s grip on the International Monetary Fund; co-ordinating macroeconomic policies between national governments; and bringing in new international regulatory regimes for banking and markets to oversee some of the wilder financial instruments and derivative products – will be extremely difficult to sell politically. But he claims there is reason for at least some hope because of the growing awareness of the depth of the crisis.
“I am actually fairly optimistic because the problems are recognised and certainly the new team in America understands things pretty well the same way as I do. And I think Gordon Brown does and he is providing leadership. He is working on the G20 meeting in April as the sort of culminating point of some actions, so I think action will be taken. But there will always be slippage, so they may continue to lag behind events.
“It is in the nature of this situation that (things continue) to deteriorate, and if you only respond to problems and don’t foresee them and take preventive action, then the problem always gets larger, and measures that would have worked are inadequate by that time. So actually the problem I see is that some of the policymakers understand what needs to be done but ... what they are afraid of
actually has to happen before action can be taken. And that is why we are liable to have still a number of crises.”
Several governments are considering the creation of so-called “bad banks” to hold the toxic assets of crippled commercial banks. But Soros says more dramatic steps are needed, because even banks relieved of their worst assets will spend years restoring their balance sheets before they offer the sort of lending needed to stimulate economic recovery. For that reason Soros advocates a partial nationalisation scheme, through the creation of a “good bank” as well as a “bad bank”, even though diverting solid assets from existing commercial banks into such a “good bank” would erode shareholder wealth.
Too much has already been done for the banks and their shareholders rather than for the ordinary households and businesses that would benefit from new lending, he says. Governments should keep existing capital with bad assets and move good assets into a new bank, which would then be recapitalised so it could provide new lending.
“I think the Obama administration is moving towards a good bank/bad bank solution, but it is not the right kind of good bank/bad bank solution. What they propose currently is creating this aggregator bank which will take the toxic assets out of the banking system, out of the banks, so it really injects government money into the bad banks, and I am saying that they ought to be injecting money into the good banks. I think it is difficult to generate the political will (for that) ... and this is my main worry right now, that they may get it wrong.
“They (are) in a difficult situation because they have two obstacles. One is that the hole has become too big – you need something like a trillion and a half of new money in addition to the (initial) $US700 billion because the hole has grown.”
The second obstacle to be overcome is that the clumsy way in which the Bush Administration handled the Troubled Asset Relief Program has “poisoned the well”, making it more difficult to get future funding packages through Congress.
Soros advocates much greater restrictions on the sort of short-selling of stocks that has been a mainstay of the hedge fund industry and says the creation of new credit instruments will have to be regulated in the future.
While many are now calling for regulation of credit default swaps, Soros takes a harder line, saying they are toxic and should be used only by prescription. They could be used to insure actual bonds, he says, but not to speculate against nations or businesses. Derivatives and synthetic
instruments, such as the slicing and dicing of collateralised debt obligations, should also be tightly
regulated and monitored.
The limits on credit and leverage will have to be set substantially lower than those tolerated in the past, he says, a move which would make the financial industry less profi table than in recent years and make some highly leveraged business models untenable.
Alongside recapitalisation of the banks, there should be an overhaul of the US mortgage system to cut the cost of mortgages and foreclosures. Governments should also create money, both domestically and globally, through a massive expansion of the IMF’s Special Drawing Rights scheme, running into trillions of dollars. The only way to avoid global deflation and depression, according to Soros, is to first induce its opposite, inflation, and then carefully reduce it.
One potential engine for new growth is the development of alternative energies and a greener economy, Soros says, but he worries that the fall in the price of oil has eliminated a grand
opportunity by reducing the incentive to invest in better options.
“It would have been a perfect fit. You could have introduced effectively a carbon tax and put a floor under (the price of) oil, and stopped it from falling, but now that it has fallen you would have to impose an import duty to raise it.”
That is politically untenable, but at current prices “you have to use less simple instruments to foster alternative energy development, like subsidies and so on – it will be messier”.
The entire world, but especially the West, should now brace for slower economic growth, he warns, and it will be at least a decade before the US sees robust growth.
One important effect will be a new wariness in China about the US economic model, Soros says. “The Chinese used to look up to the West and try to imitate the West and they have now discovered that it may not be the right thing to imitate. They now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.
“For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the past year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing.”
In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus
is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”
Soros sees Australia’s medium-term economic prospects as largely a function of China’s growth and the state of commodity markets. In 2008 he sold a large stake in the Brazilian iron ore producer CVRD before the crash in commodity prices and then profi tably shorted BHP’s stock.
However, he says he did not act decisively enough to take advantage of the fall in other commodities such as oil.
Soros’s enthusiasm for sharing his views on the crisis and its possible solutions is driven by a fierce desire to be seen as more than the archetypal money market man. When the economic historian Niall Ferguson described the early hedge fund managers in The Ascent of Money, he
called Soros “the acknowledged capo dei capi of the new economic hitmen”. But Soros yearns to be respected for his ideas rather than his market clout.
He arrived in Britain as a teenager in 1947 after his Jewish family survived the Nazi occupation of Hungary. He studied philosophy at the London School of Economics under Karl Popper before going into finance and moving to New York in 1956. He was deeply influenced by Popper’s
views on fallibilism – the need to question the information underpinning one’s own assumptions and to be open to the possibility that those assumptions may be wrong.
One of his great strengths as an investor, Soros says, has been his willingness to change positions as soon as he realises that he has made a mistake, rather than clinging on in the
hope that his initial judgements will be vindicated. There is pleasure, he says, “in recognising that you are wrong – because actually the pleasure (comes) from not losing money”.
His view of the markets was also shaped by the sociological concept of reflexivity, the awareness that the simple act of observing a subject can affect that subject and distort the observations.
Soros applied the idea to the markets, rejecting the notion that prices are the efficient outcome of “perfect” knowledge, instead insisting that they are shaped by the biases and ignorance of market players, and that those biases can be self-fulfilling.
During the American housing bubble, for instance, the relentless series of double-digit rises in house prices changed the behaviour and perceptions of market players, who loosened lending practices and allowed the market to move further and further from equilibrium.
Soros says his 1992 attack on the British pound, which forced then Chancellor of the Exchequer Norman Lamont to accelerate Britain’s withdrawal from the European Exchange Rate Mechanism, is an example of his constant search for the opportunities created by imperfect markets overshooting and under-shooting in that way.
“The authorities lagged, you see. There is this reflexive cat-and-mouse game going on between markets and the authorities all the time and I am more aware of it than perhaps most others, therefore I acted more decisively.
“So just like traditional economists predicted seven of the last three recessions, in the same way I anticipated seven of the last three bubbles,” he says with a throaty chuckle.
“What has happened now is that the efficient market hypothesis has been discredited, the evidence is just too overwhelming ... but instead of accepting reflexivity, the
(economics) profession is veering towards behavioural economics and what is called the adaptive systems hypothesis (or) adaptive markets hypothesis.
“And I am worried about that because I think that this will perpetuate the mistake. Because basically the adaptive markets hypothesis says that anything goes that helps the survival of the fittest in terms of systems. And therefore this validates any system that prevails. My contention is that actually systems can be maladaptive, as witnessed by the fact that they can collapse the way they have collapsed.”
Jon Danielsson, a reader in international finance at the LSE, argues that Soros overstates the originality of his theories. “A lot of market participants have focused on finding inefficiencies in the market,” he says. “Soros is just very good at putting that into practice.”
Larry Summers, the director of Obama’s National Economic Council, has a kinder view, telling the Financial Times recently that Soros’s theories deserve attention and have been incorporated not only into the financier’s money-making strategies but also into his philanthropic efforts to promote what Soros describes as “open societies”.
“No philanthropist in the second half of the 20th century has done better in deploying resources strategically to change the world,” Summers said.
Soros is “very proud” of his large donations against Bush in 2004, even though Bush was re-elected. “When you invest, you do it in order to make a profit. When you take a political stance, you do it for the principle and not for the outcome. One of the people I admire is a Russian human rights activist named Sergei. He said to me: ‘All my life I fought losing battles.’ And I think if you keep on fighting losing battles, you actually win the war.”
http://www.theaustralian.news.com.au/business/story/0,28124,25211027-5018057,00.html
Monday, March 16, 2009
Rogers Says `Plenty of Reasons' to Bet Against JPMorgan
Rogers Says `Plenty of Reasons' to Bet Against JPMorgan
March 13 (Bloomberg) -- Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg's Ken Prewitt about the outlook for JPMorgan Chase & Co. and his investment strategy.
Rogers, speaking from Singapore, also discusses agricultural commodities, U.S. Treasuries and this weekend's meeting of the finance ministers and central bankers from the Group of 20 nations. (Source: Bloomberg)
00:00 Sees stocks in bear market rally, stimulus
01:35 Wen's comments and concerns about U.S. debt
02:04 Dollar, yen in "artificial rallies"; strategy
03:11 Commodities, gold, silver strategy, IMF sale
04:51 Sees interest rates "going through the roof"
05:23 U.S. banks, shorting JPMorgan; insurance
07:03 G-20 meeting "not going to change anything"
07:44 Favors agricultural commodities, inventories
Running time 08:47
Last Updated: March 13, 2009 06:56 EDT
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2zGfB0HYwSc
16/02/2009
Jim is shorting JP Morgan. He said: "Their off-balance-sheet derivative positions are among the top three in the world, if not the largest. The bank’s credit-card loans also are a disaster waiting to happen." Stock may rally as it has gone down so much. But it is a bear rally, which is the conventional wisdom today.
March 13 (Bloomberg) -- Jim Rogers, chairman of Rogers Holdings, talks with Bloomberg's Ken Prewitt about the outlook for JPMorgan Chase & Co. and his investment strategy.
Rogers, speaking from Singapore, also discusses agricultural commodities, U.S. Treasuries and this weekend's meeting of the finance ministers and central bankers from the Group of 20 nations. (Source: Bloomberg)
00:00 Sees stocks in bear market rally, stimulus
01:35 Wen's comments and concerns about U.S. debt
02:04 Dollar, yen in "artificial rallies"; strategy
03:11 Commodities, gold, silver strategy, IMF sale
04:51 Sees interest rates "going through the roof"
05:23 U.S. banks, shorting JPMorgan; insurance
07:03 G-20 meeting "not going to change anything"
07:44 Favors agricultural commodities, inventories
Running time 08:47
Last Updated: March 13, 2009 06:56 EDT
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2zGfB0HYwSc
16/02/2009
Jim is shorting JP Morgan. He said: "Their off-balance-sheet derivative positions are among the top three in the world, if not the largest. The bank’s credit-card loans also are a disaster waiting to happen." Stock may rally as it has gone down so much. But it is a bear rally, which is the conventional wisdom today.
Thursday, March 5, 2009
Rescue plan 'ludicrous and insane'
Rescue plan 'ludicrous and insane'
Last Modified: 03 Mar 2009
By: Faisal Islam
Jim Rogers, the co-founder of the hedge fund, the Quantum Fund, talks to Faisal Islam about the world economic downturn.
Rescue plan 'ludicrous and insane'
Speaking exclusively to Channel 4 News, Jim Rogers says politicians could be leading us into another Great Depression.
One of the world's leading financiers has called the economic rescue plans being put forward by Gordon Brown and President Obama, ludicrous and insane.
He has been called a Wall Street legend for his investment nous. Now he sees a fundamental shift of power from the west to east. Our economics correspondent Faisal Islam reports.
http://www.channel4.com/news/articles/business_money/interview+jim+rogers/3009962
Last Modified: 03 Mar 2009
By: Faisal Islam
Jim Rogers, the co-founder of the hedge fund, the Quantum Fund, talks to Faisal Islam about the world economic downturn.
Rescue plan 'ludicrous and insane'
Speaking exclusively to Channel 4 News, Jim Rogers says politicians could be leading us into another Great Depression.
One of the world's leading financiers has called the economic rescue plans being put forward by Gordon Brown and President Obama, ludicrous and insane.
He has been called a Wall Street legend for his investment nous. Now he sees a fundamental shift of power from the west to east. Our economics correspondent Faisal Islam reports.
http://www.channel4.com/news/articles/business_money/interview+jim+rogers/3009962
Jim Rogers: U.S. stocks have yet to hit bottom
Jim Rogers: U.S. stocks have yet to hit bottom
Tue Mar 3, 2009 4:16pm EST
By Herbert Lash
NEW YORK (Reuters) - Jim Rogers, the investor who had co-founded the Quantum Fund with George Soros, on Tuesday said U.S. stocks have yet to hit their bottom in this bear market, saying there could be no lasting rally until the economy recovers.
Rogers said he is unsure where to invest, although he likely will sell the U.S. dollar -- which he called "terribly flawed" -- and buy commodities. He was one of the earliest investors to predict the boom in commodities in recent years,
He told Reuters that efforts to pull the economy out of a steep downturn will not drive a lasting recovery because the government is propping up failing businesses and not allowing them to go bankrupt.
"None of which does much for the economy down the road. It's trying to postpone some pain we're going to have to take," he said in an interview from Singapore, where he lives.
Rogers said Japan tried fiscal stimulus to no avail, while countries that bit the bullet --such as Mexico after the peso crisis and Sweden after its bank crisis, both in the 1990s -- bounced back and did not prolong an economic morass.
U.S. stocks may rally because of the enormous amount of money the government is pumping into the U.S. economy, but "it's not going to last," Rogers said.
"I don't think the bottom is here, maybe 'a' bottom, but not 'the' bottom. The economy is going to get worse. You can't have a good stock market without a good economy," he said.
Rogers, who has railed at U.S. government efforts to stabilize the financial sector, said there will be a currency crisis in 2009 or 2010 that will "cause all sorts of turmoil and opportunities and losses."
"I want to get out of the U.S. dollar sometime this year, at least I plan to, because it's a terribly flawed currency," he said.
Meanwhile, Rogers is pondering his next investment decision.
"I don't know where I'm going to wind up putting my money. But at the moment I'm doing nothing but watching," he said. "I may just have to wind up putting it all in commodities because commodities are the only thing (whose) fundamentals are being enhanced."
Rogers rose to fame after co-founding the now-closed Quantum Fund in 1970. The fund returned 4,200 percent over that decade, compared with a 50 percent gain in the S&P 500 index.
http://www.reuters.com/article/ousivMolt/idUSTRE5226B120090303
05/03/2009 tjhinkh:
"I don't think the bottom is here, maybe 'a' bottom, but not 'the' bottom.
You can't have a good stock market without a good economy
Currency crisis in 2009 or 2010. Plan to get out of USD. Not sure to where maybe all commodities
Tue Mar 3, 2009 4:16pm EST
By Herbert Lash
NEW YORK (Reuters) - Jim Rogers, the investor who had co-founded the Quantum Fund with George Soros, on Tuesday said U.S. stocks have yet to hit their bottom in this bear market, saying there could be no lasting rally until the economy recovers.
Rogers said he is unsure where to invest, although he likely will sell the U.S. dollar -- which he called "terribly flawed" -- and buy commodities. He was one of the earliest investors to predict the boom in commodities in recent years,
He told Reuters that efforts to pull the economy out of a steep downturn will not drive a lasting recovery because the government is propping up failing businesses and not allowing them to go bankrupt.
"None of which does much for the economy down the road. It's trying to postpone some pain we're going to have to take," he said in an interview from Singapore, where he lives.
Rogers said Japan tried fiscal stimulus to no avail, while countries that bit the bullet --such as Mexico after the peso crisis and Sweden after its bank crisis, both in the 1990s -- bounced back and did not prolong an economic morass.
U.S. stocks may rally because of the enormous amount of money the government is pumping into the U.S. economy, but "it's not going to last," Rogers said.
"I don't think the bottom is here, maybe 'a' bottom, but not 'the' bottom. The economy is going to get worse. You can't have a good stock market without a good economy," he said.
Rogers, who has railed at U.S. government efforts to stabilize the financial sector, said there will be a currency crisis in 2009 or 2010 that will "cause all sorts of turmoil and opportunities and losses."
"I want to get out of the U.S. dollar sometime this year, at least I plan to, because it's a terribly flawed currency," he said.
Meanwhile, Rogers is pondering his next investment decision.
"I don't know where I'm going to wind up putting my money. But at the moment I'm doing nothing but watching," he said. "I may just have to wind up putting it all in commodities because commodities are the only thing (whose) fundamentals are being enhanced."
Rogers rose to fame after co-founding the now-closed Quantum Fund in 1970. The fund returned 4,200 percent over that decade, compared with a 50 percent gain in the S&P 500 index.
http://www.reuters.com/article/ousivMolt/idUSTRE5226B120090303
05/03/2009 tjhinkh:
"I don't think the bottom is here, maybe 'a' bottom, but not 'the' bottom.
You can't have a good stock market without a good economy
Currency crisis in 2009 or 2010. Plan to get out of USD. Not sure to where maybe all commodities
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