Soros says U.S. faces "lasting slowdown"
Mon Apr 6, 2009 6:31pm EDT
By Jennifer Ablan and Daniel Burns
NEW YORK (Reuters) - The U.S. economy is in for a "lasting slowdown" and could face a Japanese-style period of relatively low growth with the added problem of high inflation, billionaire investor George Soros said on Monday.
Soros told Reuters Financial Television that rescuing U.S. banks could turn them into "zombies" that suck the lifeblood of the economy, prolonging the economic slowdown.
"I don't expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown," Soros said, adding that in 2010 there might be "something" in terms of U.S. growth.
Most economists expect the U.S. economy to stop contracting in the third quarter and resume growing in the fourth quarter, according to a latest monthly poll of forecasts by Reuters.
The recovery will look like "an inverted square root sign," Soros said: "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down -- step down."
In the fourth quarter, the U.S. economy contracted at a 6.3 percent annualized rate, and economists think the first quarter's slide will be at least as severe, if not worse.
Healing the banking system, which is "basically insolvent," and housing markets is crucial to recovery, Soros said.
The public-private investment funds -- unveiled by the Treasury last month to get bad debts off bank balance sheets -- are going to work but won't be enough to recapitalize the banks so they are able to or willing to provide credit, he said.
Even a steep yield curve won't generate enough profits to keep the banks out of their vulnerable situation.
"What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.
"Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."
Soros, whose latest book, "The Crash of 2008 and What it Means," has made prescient calls during the credit crisis.
A year ago, he told Reuters that global losses were likely to top $1 trillion. U.S. and European banks have recorded more than $700 billion in losses and write-downs, as of February 5, 2009, according to Reuters data.
DOLLAR IS VULNERABLE
Soros said the "stress tests" of banks being conducted by Treasury, to determine their financial resilience, could be a precursor to a more successful recapitalization of the banks.
He also said the U.S. dollar is under selling pressure and one day could be replaced as a world reserve currency, possibly by the International Monetary Fund's Special Drawing Rights, a currency basket comprising dollars, euros, yen and sterling.
"I think the dollar is now under question and I think the system will need to be reformed, so that the United States will be subject to the same discipline as is imposed on other countries," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.
"Being the main issuer of international currency, we have been exempt and we have abused that because we have effectively consumed 6.5 percent more than we have produced. That is now coming to an end."
Soros said there was a risk of a "tipping point" for the dollar which would see it slump, triggering higher interest rates and choking growth.
"This leads you to what used to be stagflation -- stop, go. And I think that is what's probably in store, rather than... hyperinflation."
China recently proposed greater use of SDRs, possibly as an eventual global reserve currency.
"In the long run, having an international accounting unit rather than the dollar may, in fact, be to our advantage so we can't splurge -- you know, it felt very good for 25 years but now we are paying a very heavy price," Soros said.
U.S. consumer spending has to fall to 60 percent of gross domestic product, compared two-thirds now, he continued.
China will emerge first from recession, probably this year, and will lead global growth in 2010, Soros added.
World policymakers are "actually beginning to catch up" with the crisis and efforts to fix structural problems in the financial system, he said referring to last week's meeting of leaders of G20 countries.
Turning to Europe, the euro has been "a tremendous advantage" to countries that use it, adding there's "no question of a weaker country dropping out," Soros said.
More funds for the IMF will help it stabilize struggling Eastern Europe but the Baltic states still face "serious problems" and Ukraine is not far from default, he warned.
Widespread use of credit default swaps has worsened the risks for Europe, he said, though he added that Germany, the euro zone's biggest economy, is becoming more open to offering help. "Germany, which has been the most reserved about being the deep pocket of the rest of Europe, has recognized that it too has a responsibility toward the new member states."
Germany has been one of the most reluctant major economies to meet U.S. calls for more fiscal stimulus spending to boost the global economy and fight the financial crisis.
http://www.reuters.com/article/newsOne/idUSTRE53537D20090406
Thursday, April 16, 2009
Wednesday, April 8, 2009
Soros Says Gain in U.S. Stocks Is ‘Bear-Market Rally
Soros Says Gain in U.S. Stocks Is ‘Bear-Market Rally
By Saijel Kishan and Kathleen Hays
April 7 (Bloomberg) -- George Soros, the billionaire hedge- fund manager who made money last year while most peers suffered losses, said the four-week rally in U.S. stocks isn’t the start of a bull market because the economy is still shrinking.
“It’s a bear-market rally because we have not yet turned the economy around,” Soros, 78, said in an interview yesterday with Bloomberg Television, referring to the recent rebound in stock prices. “This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”
The Standard & Poor’s 500 Index of largest U.S. companies has climbed 21 percent since March 9 on optimism the worst of the 16-month U.S. recession is over. The economy continues to contract, and there’s a risk the U.S. falls into a depression, Soros said.
“As long as we deal with this in a multilateral and more or less coordinated way, I think we’ll get through,” said Soros, whose Quantum Endowment Fund rose 8 percent last year, compared with the average 19 percent decline of hedge funds tracked by Chicago-based Hedge Fund Research Inc.
Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom and Doom Report, said in a separate Bloomberg TV interview today that the S&P 500 may drop as much as 10 percent before resuming gains.
Views on Obama
Soros gave a mostly positive review of the President Barack Obama’s administration.
“He’s done very well in every area, except in dealing with the recapitalization of the banks and the restructuring of the mortgage market,” said Soros, who has published an updated paperback version of his book “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means” (Scribe Publications, 2009). “Unfortunately, there’s just a little bit too much continuity with the previous administration.”
Soros said the U.S. housing market hasn’t bottomed, even as transactions in states such as California have increased.
“There are some signs of hitting bottom, but we are not there yet,” he said. “A lot has been done to forestall foreclosures.”
U.S. stocks declined for the first time in five days yesterday on concern that government measures to shore up banks may not help as much as estimated by analysts and loan losses will exceed levels from the Great Depression. The S&P 500 today fell 2.4 percent to 815.55, adding to yesterday’s 0.83 percent drop.
‘Zombie’ Banks
Soros said the banking system is “seriously under water” with banks on “life support.”
“They are weighed down by a lot of bad assets, which are still declining in value,” he said in the interview in his New York office. “The amount is difficult to estimate, but I think it’s in the region of maybe a trillion-and-a-half dollars.”
Soros said the change to fair-value accounting rules will keep troubled banks in business, stalling a U.S. recovery.
“This is part of the muddling-through scenario where we are going to keep zombie banks alive,” Soros said. “It’s going to sap the energies of the economy.”
The Financial Accounting Standards Board relaxed so-called mark-to-market rules last week, allowing banks to use “significant” judgment in gauging prices of some investments on their books. While analysts said the measure may reduce writedowns and boost net income, investor advocates and accounting-industry groups said it will help financial institutions hide their true health.
Bank Nationalization
The “bugaboo of nationalizing banks,” which the Obama administration wants to avoid, means “we are nationalizing only one side of the balance sheet,” Soros said. “We gradually take over the deficits on the balance sheet. But we aren’t actually going to benefit from the banks recovering.”
Money being injected into banks under government rescue programs should be used to finance new lending, according to Soros. He said he participated in HSBC Holdings Plc’s rights offer, which raised about $19.1 billion.
Soros’s firm oversees $21 billion. Its Quantum Endowment Fund rose 5.2 percent this year through February, data compiled by Bloomberg show. Soros ranked last year as the industry’s fourth-highest paid hedge fund manager, earning about $1.1 billion, according to Institutional Investor’s Alpha magazine.
Hedge funds should be regulated like other financial firms, Soros said. It would be appropriate for authorities to monitor positions to see whether managers have “excessive exposure,” he said.
Hedge-Fund Regulation
The Group of 20 leaders said last week they would extend oversight to all financial institutions deemed vital to global financial stability, including “systemically important” hedge funds. U.S. Treasury Secretary Timothy Geithner said last month he wants to bring hedge funds, private-equity firms and derivatives markets under federal supervision for the first time.
“The hedge funds that have used excessive leverage have actually failed or are on the way out, so I don’t think this is going to do any damage or hurt the hedge funds except for the fact that they have to fill out more forms,” Soros said.
“Recognizing that markets are inherently unstable does require a different kind of regulation than we had in the past,” he said.
Soros Fund Management LLC was fined 489 million forint ($2.2 million) last month for attempting to manipulate the share price of OTP Bank Nyrt., Hungary’s largest bank, the country’s financial regulator said.
Hungarian Ruling
The Soros fund attempted on Oct. 9 to “send out false or misleading signals about a security’s supply and demand or its share price” and short sold OTP shares, the regulator, known as PSZAF, said in a statement late yesterday. The short selling caused the shares to drop 14 percent in the final 30 minutes of trade, the regulator said. Soros apologized for the trade and said the fund had started an internal investigation.
Hungarian-born Soros gained fame in the 1990s when he broke the Bank of England’s defense of the pound and drove the currency from Europe’s system of linked exchange rates. He also successfully bet that Germany’s mark would appreciate after the collapse of the Berlin Wall in 1989 and Japanese stocks would start to fall in the same year.
Soros said China’s economic growth will accelerate before the end of the year.
“They have a pretty big stimulus package,” he said. “They are going to use more, because not being a democracy, the leadership knows that their very survival, the avoidance of social unrest, requires them to generate growth.”
Brazil to China
China’s economy grew 6.8 percent in the fourth quarter from the same period a year earlier, lagging the 9 percent expansion in all of 2008 and 13 percent in 2007. Industrial output growth slowed, forcing thousands of factories to close and leaving about 20 million migrant workers jobless.
Brazil’s economy will resume growth “relatively soon,” helped by Chinese demand for iron ore and soybeans, Soros said.
“I think Brazil actually, together with China, will be among the recovering countries,” he said. “The outlook for Brazil is better than for most other countries.”
To contact the reporter on this story: Kathleen Hays in New York at khays4@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNR3f9WE2L9s
mms://media2.bloomberg.com/cache/vrNyQYkxiMmg.asf
08/04/2009 tjhinkh
China will come out of recession at the end of the year.
Instead of giving credit to America, China will now give credit to Africa and Latin America.
Already China signed a credit swap agreement with Argentina.
America will have less deficit and save more as China is not funding US deficit anymore.
When world economy recover, oil will rise to USD70. Cost to develop oil is around USD70.
Brazil will develop deep sea oil drilling and oil in the Artic will be developed.
Brazil will come out of recession relatively soon.
By Saijel Kishan and Kathleen Hays
April 7 (Bloomberg) -- George Soros, the billionaire hedge- fund manager who made money last year while most peers suffered losses, said the four-week rally in U.S. stocks isn’t the start of a bull market because the economy is still shrinking.
“It’s a bear-market rally because we have not yet turned the economy around,” Soros, 78, said in an interview yesterday with Bloomberg Television, referring to the recent rebound in stock prices. “This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”
The Standard & Poor’s 500 Index of largest U.S. companies has climbed 21 percent since March 9 on optimism the worst of the 16-month U.S. recession is over. The economy continues to contract, and there’s a risk the U.S. falls into a depression, Soros said.
“As long as we deal with this in a multilateral and more or less coordinated way, I think we’ll get through,” said Soros, whose Quantum Endowment Fund rose 8 percent last year, compared with the average 19 percent decline of hedge funds tracked by Chicago-based Hedge Fund Research Inc.
Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom and Doom Report, said in a separate Bloomberg TV interview today that the S&P 500 may drop as much as 10 percent before resuming gains.
Views on Obama
Soros gave a mostly positive review of the President Barack Obama’s administration.
“He’s done very well in every area, except in dealing with the recapitalization of the banks and the restructuring of the mortgage market,” said Soros, who has published an updated paperback version of his book “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means” (Scribe Publications, 2009). “Unfortunately, there’s just a little bit too much continuity with the previous administration.”
Soros said the U.S. housing market hasn’t bottomed, even as transactions in states such as California have increased.
“There are some signs of hitting bottom, but we are not there yet,” he said. “A lot has been done to forestall foreclosures.”
U.S. stocks declined for the first time in five days yesterday on concern that government measures to shore up banks may not help as much as estimated by analysts and loan losses will exceed levels from the Great Depression. The S&P 500 today fell 2.4 percent to 815.55, adding to yesterday’s 0.83 percent drop.
‘Zombie’ Banks
Soros said the banking system is “seriously under water” with banks on “life support.”
“They are weighed down by a lot of bad assets, which are still declining in value,” he said in the interview in his New York office. “The amount is difficult to estimate, but I think it’s in the region of maybe a trillion-and-a-half dollars.”
Soros said the change to fair-value accounting rules will keep troubled banks in business, stalling a U.S. recovery.
“This is part of the muddling-through scenario where we are going to keep zombie banks alive,” Soros said. “It’s going to sap the energies of the economy.”
The Financial Accounting Standards Board relaxed so-called mark-to-market rules last week, allowing banks to use “significant” judgment in gauging prices of some investments on their books. While analysts said the measure may reduce writedowns and boost net income, investor advocates and accounting-industry groups said it will help financial institutions hide their true health.
Bank Nationalization
The “bugaboo of nationalizing banks,” which the Obama administration wants to avoid, means “we are nationalizing only one side of the balance sheet,” Soros said. “We gradually take over the deficits on the balance sheet. But we aren’t actually going to benefit from the banks recovering.”
Money being injected into banks under government rescue programs should be used to finance new lending, according to Soros. He said he participated in HSBC Holdings Plc’s rights offer, which raised about $19.1 billion.
Soros’s firm oversees $21 billion. Its Quantum Endowment Fund rose 5.2 percent this year through February, data compiled by Bloomberg show. Soros ranked last year as the industry’s fourth-highest paid hedge fund manager, earning about $1.1 billion, according to Institutional Investor’s Alpha magazine.
Hedge funds should be regulated like other financial firms, Soros said. It would be appropriate for authorities to monitor positions to see whether managers have “excessive exposure,” he said.
Hedge-Fund Regulation
The Group of 20 leaders said last week they would extend oversight to all financial institutions deemed vital to global financial stability, including “systemically important” hedge funds. U.S. Treasury Secretary Timothy Geithner said last month he wants to bring hedge funds, private-equity firms and derivatives markets under federal supervision for the first time.
“The hedge funds that have used excessive leverage have actually failed or are on the way out, so I don’t think this is going to do any damage or hurt the hedge funds except for the fact that they have to fill out more forms,” Soros said.
“Recognizing that markets are inherently unstable does require a different kind of regulation than we had in the past,” he said.
Soros Fund Management LLC was fined 489 million forint ($2.2 million) last month for attempting to manipulate the share price of OTP Bank Nyrt., Hungary’s largest bank, the country’s financial regulator said.
Hungarian Ruling
The Soros fund attempted on Oct. 9 to “send out false or misleading signals about a security’s supply and demand or its share price” and short sold OTP shares, the regulator, known as PSZAF, said in a statement late yesterday. The short selling caused the shares to drop 14 percent in the final 30 minutes of trade, the regulator said. Soros apologized for the trade and said the fund had started an internal investigation.
Hungarian-born Soros gained fame in the 1990s when he broke the Bank of England’s defense of the pound and drove the currency from Europe’s system of linked exchange rates. He also successfully bet that Germany’s mark would appreciate after the collapse of the Berlin Wall in 1989 and Japanese stocks would start to fall in the same year.
Soros said China’s economic growth will accelerate before the end of the year.
“They have a pretty big stimulus package,” he said. “They are going to use more, because not being a democracy, the leadership knows that their very survival, the avoidance of social unrest, requires them to generate growth.”
Brazil to China
China’s economy grew 6.8 percent in the fourth quarter from the same period a year earlier, lagging the 9 percent expansion in all of 2008 and 13 percent in 2007. Industrial output growth slowed, forcing thousands of factories to close and leaving about 20 million migrant workers jobless.
Brazil’s economy will resume growth “relatively soon,” helped by Chinese demand for iron ore and soybeans, Soros said.
“I think Brazil actually, together with China, will be among the recovering countries,” he said. “The outlook for Brazil is better than for most other countries.”
To contact the reporter on this story: Kathleen Hays in New York at khays4@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNR3f9WE2L9s
mms://media2.bloomberg.com/cache/vrNyQYkxiMmg.asf
08/04/2009 tjhinkh
China will come out of recession at the end of the year.
Instead of giving credit to America, China will now give credit to Africa and Latin America.
Already China signed a credit swap agreement with Argentina.
America will have less deficit and save more as China is not funding US deficit anymore.
When world economy recover, oil will rise to USD70. Cost to develop oil is around USD70.
Brazil will develop deep sea oil drilling and oil in the Artic will be developed.
Brazil will come out of recession relatively soon.
Monday, April 6, 2009
Soros calls G20 deal "a turning point"
Soros calls G20 deal "a turning point"
Fri Apr 3, 2009 12:11am BST
LONDON (Reuters) - Billionaire investor George Soros on Thursday said G20 leaders had taken decisive action to combat the worst economic crisis since the Great Depression of the 1930s was a success.
"This could well be a turning point because the authorities got together and they have taken the steps," Soros said in an interview on BBC television.
The investor, who said last week that the G20 meeting in London would be a "make or break event" for global markets, added: "I think it has definitely made it."
World leaders clinched a $1.1 trillion (747 billion pound) deal to boost the global economy and said financial rules would be tightened to prevent a repeat of the crisis.
Hungarian-born Soros said the leaders had "anticipated there is a very serious problem facing the developing world."
"If it hadn't been addressed today, we would have another very serious deterioration in what I call the periphery countries, including Eastern Europe. They have definitely prevented it by the measures they have taken," he said.
http://uk.reuters.com/article/UKNews1/idUKTRE53188N20090402
http://news.bbc.co.uk/1/hi/programmes/newsnight/7981506.stm
http://www.youtube.com/watch?v=h2zLNZyqFAc
http://www.cnbc.com/id/30024970
Fri Apr 3, 2009 12:11am BST
LONDON (Reuters) - Billionaire investor George Soros on Thursday said G20 leaders had taken decisive action to combat the worst economic crisis since the Great Depression of the 1930s was a success.
"This could well be a turning point because the authorities got together and they have taken the steps," Soros said in an interview on BBC television.
The investor, who said last week that the G20 meeting in London would be a "make or break event" for global markets, added: "I think it has definitely made it."
World leaders clinched a $1.1 trillion (747 billion pound) deal to boost the global economy and said financial rules would be tightened to prevent a repeat of the crisis.
Hungarian-born Soros said the leaders had "anticipated there is a very serious problem facing the developing world."
"If it hadn't been addressed today, we would have another very serious deterioration in what I call the periphery countries, including Eastern Europe. They have definitely prevented it by the measures they have taken," he said.
http://uk.reuters.com/article/UKNews1/idUKTRE53188N20090402
http://news.bbc.co.uk/1/hi/programmes/newsnight/7981506.stm
http://www.youtube.com/watch?v=h2zLNZyqFAc
http://www.cnbc.com/id/30024970
Wednesday, April 1, 2009
George Soros: Britain may have to seek IMF rescue
George Soros: Britain may have to seek IMF rescue
March 28, 2009
Alice Thomson, Rachel Sylvester and Philip Webster
Britain may have to go to the IMF for a huge financial bailout, the influential investor George Soros warns today.
The man who made $1 billion on Black Wednesday in 1992 told The Times that Britain was particularly vulnerable to the economic crisis.
Mr Soros – speaking days after an auction of government bonds failed for the first time in 14 years, ringing alarm bells about Britain’s ability to fund its growing debts – said that Gordon Brown might have to go begging for billions of pounds in international aid. He also warned that next week’s G20 summit in London was the last chance to avert a full-scale depression that could prove worse than that in the 1930s.
“You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt,” he said. Asked about the chances of Britain having to seek help from the International Monetary Fund, he said that if the banking system continued to collapse, it was “a possibility”. At this stage, he added, it was “not a likelihood”.
He was not optimistic about the G20 meeting, saying the odds were that it would fail because there were so many differences of opinion. The price could be years of economic devastation worse than the Great Depression. “It is really a make-or-break occasion.”
It would be a disaster if the meeting were allowed to turn into a talking shop, he said. “It’s not enough to state general principles. You’ve got to come up with practical measures that are going to provide protection to the developing world, periphery countries, against a storm that originated from the centre, against a calamity that is not of their own making.”
He spoke amid more gloom over the British economy after official figures showed that output shrank by a worse-than-expected 1.6 per cent in the final three months of 2008. It was the biggest fall since April-June 1980.
Mr Soros refused to blame Mr Brown for failing to prevent the crisis. “He underestimated the severity of the problem but so did most people. Part of the perceived role of a leader is to cheerlead so you can’t really blame him for that.”
Britain has not sought IMF help since 1976 when, with inflation approaching 27 per cent, Denis Healey, then the Chancellor, applied for a loan, shredding confidence in the Labour Government
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5989746.ece
March 28, 2009
Alice Thomson, Rachel Sylvester and Philip Webster
Britain may have to go to the IMF for a huge financial bailout, the influential investor George Soros warns today.
The man who made $1 billion on Black Wednesday in 1992 told The Times that Britain was particularly vulnerable to the economic crisis.
Mr Soros – speaking days after an auction of government bonds failed for the first time in 14 years, ringing alarm bells about Britain’s ability to fund its growing debts – said that Gordon Brown might have to go begging for billions of pounds in international aid. He also warned that next week’s G20 summit in London was the last chance to avert a full-scale depression that could prove worse than that in the 1930s.
“You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt,” he said. Asked about the chances of Britain having to seek help from the International Monetary Fund, he said that if the banking system continued to collapse, it was “a possibility”. At this stage, he added, it was “not a likelihood”.
He was not optimistic about the G20 meeting, saying the odds were that it would fail because there were so many differences of opinion. The price could be years of economic devastation worse than the Great Depression. “It is really a make-or-break occasion.”
It would be a disaster if the meeting were allowed to turn into a talking shop, he said. “It’s not enough to state general principles. You’ve got to come up with practical measures that are going to provide protection to the developing world, periphery countries, against a storm that originated from the centre, against a calamity that is not of their own making.”
He spoke amid more gloom over the British economy after official figures showed that output shrank by a worse-than-expected 1.6 per cent in the final three months of 2008. It was the biggest fall since April-June 1980.
Mr Soros refused to blame Mr Brown for failing to prevent the crisis. “He underestimated the severity of the problem but so did most people. Part of the perceived role of a leader is to cheerlead so you can’t really blame him for that.”
Britain has not sought IMF help since 1976 when, with inflation approaching 27 per cent, Denis Healey, then the Chancellor, applied for a loan, shredding confidence in the Labour Government
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5989746.ece
One Way to Stop Bear Raids
One Way to Stop Bear Raids
Credit default swaps need much stricter regulation.
By GEORGE SOROS
In all the uproar over AIG, the most important lesson has been ignored. AIG failed because it sold large amounts of credit default swaps (CDS) without properly offsetting or covering their positions. What we must take away from this is that CDS are toxic instruments whose use ought to be strictly regulated: Only those who own the underlying bonds ought to be allowed to buy them. Instituting this rule would tame a destructive force and cut the price of the swaps. It would also save the U.S. Treasury a lot of money by reducing the loss on AIG's outstanding positions without abrogating any contracts.
CDS came into existence as a way of providing insurance on bonds against default. Since they are tradable instruments, they became bear-market warrants for speculating on deteriorating conditions in a company or country. What makes them toxic is that such speculation can be self-validating.
Up until the crash of 2008, the prevailing view -- called the efficient market hypothesis -- was that the prices of financial instruments accurately reflect all the available information (i.e. the underlying reality). But this is not true. Financial markets don't deal with the current reality, but with the future -- a matter of anticipation, not knowledge. Thus, we must understand financial markets through a new paradigm which recognizes that they always provide a biased view of the future, and that the distortion of prices in financial markets may affect the underlying reality that those prices are supposed to reflect. (I call this feedback mechanism "reflexivity.")
With the help of this new paradigm, the poisonous nature of CDS can be demonstrated in a three-step argument. The first step is to acknowledge that being long and selling short in the stock market has an asymmetric risk/reward profile. 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. This asymmetry discourages short-selling.
The second step is to recognize that the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way. Going short on bonds by buying a CDS contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in. People buy them not because they expect an eventual default, but because they expect the CDS to appreciate in response to adverse developments.
AIG thought it was selling insurance on bonds, and as such, they considered CDS outrageously overpriced. In fact, it was selling bear-market warrants and it severely underestimated the risk.
The third step is to recognize reflexivity, which means that 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 so dependent on trust. A decline in their share and bond prices can increase their financing costs. That means that bear raids on financial institutions can be self-validating.
Taking these three considerations together, it's clear that AIG, Bear Stearns, Lehman Brothers and others were destroyed by bear raids in which the shorting of stocks and buying CDS mutually amplified and reinforced each other. The unlimited shorting of stocks was made possible by the abolition of the uptick rule, which would have hindered bear raids by allowing short selling only when prices were rising. The unlimited shorting of bonds was facilitated by the CDS market. The two made a lethal combination. And AIG failed to understand this.
Many argue now that CDS ought to be traded on regulated exchanges. I believe that they are toxic and should only be allowed to be used by those who own the bonds, not by others who want to speculate against countries or companies. Under this rule -- which would require international agreement and federal legislation -- the buying pressure on CDS would greatly diminish, and all outstanding CDS would drop in price. As a collateral benefit, the U.S. Treasury would save a great deal of money on its exposure to AIG.
http://online.wsj.com/article/SB123785310594719693.html
Credit default swaps need much stricter regulation.
By GEORGE SOROS
In all the uproar over AIG, the most important lesson has been ignored. AIG failed because it sold large amounts of credit default swaps (CDS) without properly offsetting or covering their positions. What we must take away from this is that CDS are toxic instruments whose use ought to be strictly regulated: Only those who own the underlying bonds ought to be allowed to buy them. Instituting this rule would tame a destructive force and cut the price of the swaps. It would also save the U.S. Treasury a lot of money by reducing the loss on AIG's outstanding positions without abrogating any contracts.
CDS came into existence as a way of providing insurance on bonds against default. Since they are tradable instruments, they became bear-market warrants for speculating on deteriorating conditions in a company or country. What makes them toxic is that such speculation can be self-validating.
Up until the crash of 2008, the prevailing view -- called the efficient market hypothesis -- was that the prices of financial instruments accurately reflect all the available information (i.e. the underlying reality). But this is not true. Financial markets don't deal with the current reality, but with the future -- a matter of anticipation, not knowledge. Thus, we must understand financial markets through a new paradigm which recognizes that they always provide a biased view of the future, and that the distortion of prices in financial markets may affect the underlying reality that those prices are supposed to reflect. (I call this feedback mechanism "reflexivity.")
With the help of this new paradigm, the poisonous nature of CDS can be demonstrated in a three-step argument. The first step is to acknowledge that being long and selling short in the stock market has an asymmetric risk/reward profile. 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. This asymmetry discourages short-selling.
The second step is to recognize that the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way. Going short on bonds by buying a CDS contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in. People buy them not because they expect an eventual default, but because they expect the CDS to appreciate in response to adverse developments.
AIG thought it was selling insurance on bonds, and as such, they considered CDS outrageously overpriced. In fact, it was selling bear-market warrants and it severely underestimated the risk.
The third step is to recognize reflexivity, which means that 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 so dependent on trust. A decline in their share and bond prices can increase their financing costs. That means that bear raids on financial institutions can be self-validating.
Taking these three considerations together, it's clear that AIG, Bear Stearns, Lehman Brothers and others were destroyed by bear raids in which the shorting of stocks and buying CDS mutually amplified and reinforced each other. The unlimited shorting of stocks was made possible by the abolition of the uptick rule, which would have hindered bear raids by allowing short selling only when prices were rising. The unlimited shorting of bonds was facilitated by the CDS market. The two made a lethal combination. And AIG failed to understand this.
Many argue now that CDS ought to be traded on regulated exchanges. I believe that they are toxic and should only be allowed to be used by those who own the bonds, not by others who want to speculate against countries or companies. Under this rule -- which would require international agreement and federal legislation -- the buying pressure on CDS would greatly diminish, and all outstanding CDS would drop in price. As a collateral benefit, the U.S. Treasury would save a great deal of money on its exposure to AIG.
http://online.wsj.com/article/SB123785310594719693.html
Eastern Europe 'prime candidate' for IMF help-Soros
Eastern Europe 'prime candidate' for IMF help-Soros
Tue Mar 31, 2009 9:47am EDT
LONDON, March 31 (Reuters) - Billionaire investor George Soros said on Tuesday Eastern Europe was a "prime candidate" for International Monetary Fund (IMF) support.
Speaking at the London School of Economic ahead of the G20 summit, Soros said: "G20 should not just provide pious words but should take steps to stabilise periphery countries."
Last week Soros told the Times that it was "conceivable" for Britain to seek help from the IMF
http://www.reuters.com/article/rbssInvestmentServices/idUSWLA113020090331
Tue Mar 31, 2009 9:47am EDT
LONDON, March 31 (Reuters) - Billionaire investor George Soros said on Tuesday Eastern Europe was a "prime candidate" for International Monetary Fund (IMF) support.
Speaking at the London School of Economic ahead of the G20 summit, Soros said: "G20 should not just provide pious words but should take steps to stabilise periphery countries."
Last week Soros told the Times that it was "conceivable" for Britain to seek help from the IMF
http://www.reuters.com/article/rbssInvestmentServices/idUSWLA113020090331
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