Soros Sure Greece Won't Be Allowed to Default
Reuters| 10 Dec 2009 | 06:18 AM ET
Billionaire investor and philanthropist George Soros said on Thursday he was sure the Greek government would not be allowed to default on its debts despite growing budgetary difficulties and market concerns.
"There has to be pressure on Greece to put its house in order but I'm sure that Greece will not be allowed to default. The same applies to the United Kingdom," Soros told Sky News television.
Soros said there were heightened market concerns about sovereign defaults around the world following the recent debt restructuring proposal for Dubai's leading companies.
But he said the chances of such a default were remote.
"There are concerns about sovereign defaults but it is a rather remote one. Dubai shook the world for a day because it raised the spectre of sovereign defaults," Soros said, adding the Dubai problem was an issue of Abu Dhabi seeking a more independent financial position from the Dubai emirate.
Fitch Ratings cut Greece's debt rating to BBB+ on Tuesday with a negative outlook — the first time in 10 years a major ratings agency has put Greece below an A grade — citing fiscal deterioration in the euro zone's weakest member.
The move hit bank shares, bonds and the euro.
http://www.cnbc.com/id/34359834
Showing posts with label George Soros. Show all posts
Showing posts with label George Soros. Show all posts
Monday, December 14, 2009
Monday, December 7, 2009
Reality check
Reality check
By John Authers
Published: December 3 2009 19:10 | Last updated: December 3 2009 19:10
Is this recovery real? And if not, would it make any difference?
George SorosThe trade of financial economics has taken a bruising after the many surprises of the past two years, but a more ancient discipline is coming back into focus: philosophy. In the vanguard is George Soros, one of history’s most successful hedge fund managers – and someone who prefers to judge himself as a failed philosopher.
Philosophers have long wrestled with the concept of perception: how the “real” world corresponds to our perceptions of it, or whether it even makes sense to say there is something “real” out there.
Most of us tend to dismiss such questions as sophistry. Soros, on the other hand, has wrestled with the problem since he was a student. And he may have the last laugh, because he appears to have turned the philosophy of reality into a way to make money.
Soros’s guiding principle, as outlined in his book*, concerns “reflexivity”: how our perceptions of the world, as expressed through buying and selling, change the world itself. When markets become “reflexive”, they reflect flawed perceptions rather than a prior “reality” – but the market’s version of “reality” is no less real because of that.
Soros’s key principles are first that “market prices always distort the underlying reality which they are supposed to reflect”; and second, that “instead of playing a purely passive role in reflecting an underlying reality … markets also have an active role: they can affect the so-called fundamen-tals they are supposed to reflect”.
Reflexive markets can turn into bubbles. And bubbles can turn into opportunities to make money for those like Soros, who have the self-discipline to invest in an incipient bubble and get out before it bursts.
Armed with Soros’s insight, the question of whether we should believe in the current market rebound looks different. Last year’s collapse rested on confidence. Oil prices, for instance, grew so high that they put pressure on the economy and forced companies to change their output decisions.
However, this year, numerous market factors have reinforced an impression of a recovery. That, in turn, has made it easier to do business and precipitate an “actual” recovery.
Markets had sold off so much that only a slight change in perception moved them dramatically. To make money this year was to understand the market “reality” that investors’ perceptions would create, rather than focus on an apparently separate “fundamental” reality, which followed macroeconomic rules that still saw evidence of high unemployment and lingering bad debt.
Once oil prices and Chinese shares moved upwards, this was evidence the “real” world was recovering. Once credit markets recovered, it became cheaper for companies to raise finance, and that in turn gave good reason to buy equities – and to buy other credit, as it could now be seen there were buyers out there prepared to buy debt. In this way, perceptions of reality led to a different reality.
If this really is an incipient bubble – and the fact it relies on artificially cheap money from the government certainly reinforces that impression – how will we know when it has become a true bubble and when will it end?
Again, Soros has a theory. “Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend,” he says. A boom and an eventual bust are set off “when a trend and a misconception positively reinforce each other”.
Eventually, “market expectations become so far removed from reality that people are forced to recognise that a misconception is involved”. As doubts set in, “a point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction”.
World stock markets peaked in 2007 after a sudden sell-off in the bond market. Bond investors decided the rosy assumptions in other markets simply could not happen without higher inflation, and reacted accordingly. The trend was reversed. A long bear market turned into a savage sell-off once the commodity market went into reverse, again collapsing under its contradictions, and then the bankruptcy of Lehman Brothers, the US investment bank, administered a nasty dose of reality.
Some geopolitical event, or a corporate incident like Lehmans’, could bring this rally to an end. Otherwise, it is best to look at the bond and foreign exchange (forex) markets. If forex traders revolt against the huge volume of extra bonds being issued to fund the deficit, that could push up interest rates and end the rally. Or, similarly, if the run on the dollar gets to the point where many countries feel their own currencies are overvalued, and therefore take action, this rally could come to an end.
http://www.ft.com/cms/s/0/c6b6e9ce-d965-11de-b2d5-00144feabdc0.html?nclick_check=1
By John Authers
Published: December 3 2009 19:10 | Last updated: December 3 2009 19:10
Is this recovery real? And if not, would it make any difference?
George SorosThe trade of financial economics has taken a bruising after the many surprises of the past two years, but a more ancient discipline is coming back into focus: philosophy. In the vanguard is George Soros, one of history’s most successful hedge fund managers – and someone who prefers to judge himself as a failed philosopher.
Philosophers have long wrestled with the concept of perception: how the “real” world corresponds to our perceptions of it, or whether it even makes sense to say there is something “real” out there.
Most of us tend to dismiss such questions as sophistry. Soros, on the other hand, has wrestled with the problem since he was a student. And he may have the last laugh, because he appears to have turned the philosophy of reality into a way to make money.
Soros’s guiding principle, as outlined in his book*, concerns “reflexivity”: how our perceptions of the world, as expressed through buying and selling, change the world itself. When markets become “reflexive”, they reflect flawed perceptions rather than a prior “reality” – but the market’s version of “reality” is no less real because of that.
Soros’s key principles are first that “market prices always distort the underlying reality which they are supposed to reflect”; and second, that “instead of playing a purely passive role in reflecting an underlying reality … markets also have an active role: they can affect the so-called fundamen-tals they are supposed to reflect”.
Reflexive markets can turn into bubbles. And bubbles can turn into opportunities to make money for those like Soros, who have the self-discipline to invest in an incipient bubble and get out before it bursts.
Armed with Soros’s insight, the question of whether we should believe in the current market rebound looks different. Last year’s collapse rested on confidence. Oil prices, for instance, grew so high that they put pressure on the economy and forced companies to change their output decisions.
However, this year, numerous market factors have reinforced an impression of a recovery. That, in turn, has made it easier to do business and precipitate an “actual” recovery.
Markets had sold off so much that only a slight change in perception moved them dramatically. To make money this year was to understand the market “reality” that investors’ perceptions would create, rather than focus on an apparently separate “fundamental” reality, which followed macroeconomic rules that still saw evidence of high unemployment and lingering bad debt.
Once oil prices and Chinese shares moved upwards, this was evidence the “real” world was recovering. Once credit markets recovered, it became cheaper for companies to raise finance, and that in turn gave good reason to buy equities – and to buy other credit, as it could now be seen there were buyers out there prepared to buy debt. In this way, perceptions of reality led to a different reality.
If this really is an incipient bubble – and the fact it relies on artificially cheap money from the government certainly reinforces that impression – how will we know when it has become a true bubble and when will it end?
Again, Soros has a theory. “Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend,” he says. A boom and an eventual bust are set off “when a trend and a misconception positively reinforce each other”.
Eventually, “market expectations become so far removed from reality that people are forced to recognise that a misconception is involved”. As doubts set in, “a point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction”.
World stock markets peaked in 2007 after a sudden sell-off in the bond market. Bond investors decided the rosy assumptions in other markets simply could not happen without higher inflation, and reacted accordingly. The trend was reversed. A long bear market turned into a savage sell-off once the commodity market went into reverse, again collapsing under its contradictions, and then the bankruptcy of Lehman Brothers, the US investment bank, administered a nasty dose of reality.
Some geopolitical event, or a corporate incident like Lehmans’, could bring this rally to an end. Otherwise, it is best to look at the bond and foreign exchange (forex) markets. If forex traders revolt against the huge volume of extra bonds being issued to fund the deficit, that could push up interest rates and end the rally. Or, similarly, if the run on the dollar gets to the point where many countries feel their own currencies are overvalued, and therefore take action, this rally could come to an end.
http://www.ft.com/cms/s/0/c6b6e9ce-d965-11de-b2d5-00144feabdc0.html?nclick_check=1
Wednesday, May 13, 2009
Soros says economic downward trend easing
Soros says economic downward trend easing
Mon May 11, 2009 3:10am EDT
BERLIN, May 11 (Reuters) - The downward trend in the financial crisis is easing and national economic stimulus packages are starting to work, billionaire investor George Soros was quoted as saying by a German newspaper on Monday.
Soros also told the Frankfurter Allgemeine Zeitung daily that Asia would be the first region to pull out of the crisis and China was set to overtake the United States as the engine of world growth.
"The economic freefall has been stopped, the collapse of the financial system averted. National economic stimulus programmes are starting to take effect. The downward dynamic is easing," Soros told the newspaper.
"I expect the recovery to make up for around half of the downturn we have had and then to move into stagnation," Soros said. "Asia will be first to find out of the crisis, but America is also currently doing that."
Soros said the U.S. dollar was already weak, adding: "I don't expect the dollar to lose much value against the euro, on the contrary."
Soros said the financial crisis had shown that it was a big advantage for weak countries to be part of the euro system.
"But the crisis should motivate Germany as the strongest country to make proposals for a more efficient euro system. I am missing leadership from the German government on this," Soros said.
http://www.reuters.com/article/marketsNews/idUSLB65783520090511
Mon May 11, 2009 3:10am EDT
BERLIN, May 11 (Reuters) - The downward trend in the financial crisis is easing and national economic stimulus packages are starting to work, billionaire investor George Soros was quoted as saying by a German newspaper on Monday.
Soros also told the Frankfurter Allgemeine Zeitung daily that Asia would be the first region to pull out of the crisis and China was set to overtake the United States as the engine of world growth.
"The economic freefall has been stopped, the collapse of the financial system averted. National economic stimulus programmes are starting to take effect. The downward dynamic is easing," Soros told the newspaper.
"I expect the recovery to make up for around half of the downturn we have had and then to move into stagnation," Soros said. "Asia will be first to find out of the crisis, but America is also currently doing that."
Soros said the U.S. dollar was already weak, adding: "I don't expect the dollar to lose much value against the euro, on the contrary."
Soros said the financial crisis had shown that it was a big advantage for weak countries to be part of the euro system.
"But the crisis should motivate Germany as the strongest country to make proposals for a more efficient euro system. I am missing leadership from the German government on this," Soros said.
http://www.reuters.com/article/marketsNews/idUSLB65783520090511
Thursday, April 16, 2009
Soros says U.S. faces "lasting slowdown"
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
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
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
Monday, March 23, 2009
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, February 23, 2009
Soros Says Financial Crisis Marks End of a Free-Market Model
Soros Says Financial Crisis Marks End of a Free-Market Model
Feb. 21 (Bloomberg) -- Billionaire investor George Soros said the current economic crisis has its roots in the financial deregulation of the 1980s and marks the end of a free-market model that has since dominated capitalist countries.
Liberalization of the financial industry begun by the Reagan administration has led to a series of breakdowns forcing government intervention, Soros told economists and bankers last night at a private dinner at Columbia University in New York. The global recession, triggered by the collapse of the U.S. housing market, has “damaged the financial system itself,” he said.
Regulators are in part to blame because they “abrogated” their responsibilities, Soros, 78, said. The philosophy of “market-fundamentalism” was now under question as financial markets have proved to be inefficient and affected by biases rather than driven by all the available information, he said.
“We’re in a crisis I think that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,” Soros said.
Soros, founder of New York-based hedge-fund firm Soros Fund Management LLC, said last month at the World Economic Forum in Davos, Switzerland, that the Obama administration’s plan to buy toxic assets from U.S. banks won’t be enough to get financial institutions to start lending again.
A more effective approach for restarting the economy would be to inject capital directly into the banks and cut minimum capital requirements, Soros, whose firm oversees $21 billion, has said.
Soros’s Quantum Endowment Fund returned 8 percent last year. That compared with an average loss of 18 percent by hedge funds, according to data compiled by Hedge Fund Research Inc. of Chicago.
To contact the reporter on this story: Walid el-Gabry in New York at welgabry@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601087&sid=ay0FPxGdth_k&refer=home#
Feb. 21 (Bloomberg) -- Billionaire investor George Soros said the current economic crisis has its roots in the financial deregulation of the 1980s and marks the end of a free-market model that has since dominated capitalist countries.
Liberalization of the financial industry begun by the Reagan administration has led to a series of breakdowns forcing government intervention, Soros told economists and bankers last night at a private dinner at Columbia University in New York. The global recession, triggered by the collapse of the U.S. housing market, has “damaged the financial system itself,” he said.
Regulators are in part to blame because they “abrogated” their responsibilities, Soros, 78, said. The philosophy of “market-fundamentalism” was now under question as financial markets have proved to be inefficient and affected by biases rather than driven by all the available information, he said.
“We’re in a crisis I think that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,” Soros said.
Soros, founder of New York-based hedge-fund firm Soros Fund Management LLC, said last month at the World Economic Forum in Davos, Switzerland, that the Obama administration’s plan to buy toxic assets from U.S. banks won’t be enough to get financial institutions to start lending again.
A more effective approach for restarting the economy would be to inject capital directly into the banks and cut minimum capital requirements, Soros, whose firm oversees $21 billion, has said.
Soros’s Quantum Endowment Fund returned 8 percent last year. That compared with an average loss of 18 percent by hedge funds, according to data compiled by Hedge Fund Research Inc. of Chicago.
To contact the reporter on this story: Walid el-Gabry in New York at welgabry@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601087&sid=ay0FPxGdth_k&refer=home#
Soros sees no bottom for world financial "collapse"
Soros sees no bottom for world financial "collapse"
NEW YORK (Reuters) - Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."
His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.
Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.
"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.
(Reporting by Pedro Nicolaci da Costa and Juan Lagorio; Editing by Gary Hill)
http://uk.reuters.com/article/businessNews/idUKTRE51K0AV20090221
NEW YORK (Reuters) - Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."
His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.
Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.
"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.
(Reporting by Pedro Nicolaci da Costa and Juan Lagorio; Editing by Gary Hill)
http://uk.reuters.com/article/businessNews/idUKTRE51K0AV20090221
Monday, February 9, 2009
The game changer
The game changer
By George Soros
Published: January 28 2009 19:55 | Last updated: January 28 2009 19:55
In the past, whenever the financial system came close to a breakdown, the authorities rode to the rescue and prevented it from going over the brink. That is what I expected in 2008 but that is not what happened. On Monday September 15, Lehman Brothers, the US investment bank, was allowed to go into bankruptcy without proper preparation. It was a game-changing event with catastrophic consequences.
For a start, the price of credit default swaps, a form of insurance against companies defaulting on debt, went through the roof as investors took cover. AIG, the insurance giant, was carrying a large short position in CDS and faced imminent default. By the next day Hank Paulson, then US Treasury secretary, had to reverse himself and come to the rescue of AIG.
But worse was to come. Lehman was one of the main market-makers in commercial paper and a large issuer of these short-term obligations to boot. Reserve Primary, an independent money market fund, held Lehman paper and, since it had no deep pocket to turn to, it had to “break the buck” – stop redeeming its shares at par. That caused panic among depositors: by Thursday a run on money market funds was in full swing.
The panic then spread to the stock market. The financial system suffered cardiac arrest and had to be put on artificial life support.
How could Lehman have been left to go under? The responsibility lies squarely with the financial authorities, notably the Treasury and the Federal Reserve. The claim that they lacked the necessary legal powers is a lame excuse. In an emergency they could and should have done whatever was necessary to prevent the system from collapsing. That is what they have done on other occasions. The fact is, they allowed it to happen.
On a deeper level, too, credit default swaps played a critical role in Lehman’s demise. My explanation is controversial and all three steps of my argument will take the reader to unfamiliar ground.
First, there is an asymmetry in the risk/reward ratio between being long or short in the stock market. (Being long means owning a stock, being short means selling a stock one does not own.) Being long has unlimited potential on the upside but limited exposure on the downside. Being short is the reverse. The asymmetry manifests itself in the following way: losing on a long position reduces one’s risk exposure while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. The asymmetry serves to discourage the short-selling of stocks.
The second step is to understand credit default swaps and to recognise that the CDS market offers a convenient way of shorting bonds. In that market the asymmetry in risk/reward works in the opposite way to stocks. Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks.
The asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. When an adverse development is expected, the negative effect can become overwhelming because CDS tend to be priced as warrants, not as options: people buy them not because they expect an eventual default but because they expect the CDS to appreciate during the lifetime of the contract.
No arbitrage can correct the mispricing. That can be clearly seen in US and UK government bonds, whose actual price is much higher than that implied by CDS. These asymmetries are difficult to reconcile with the efficient market hypothesis, the notion that securities prices accurately reflect all known information.
The third step is to recognise reflexivity – that is to say, the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is dependent on confidence and trust. That means that “bear raids” to drive down the share prices of these institutions can be self-validating. That is in direct contradiction to the efficient market hypothesis.
THE SOROS INVESTMENT YEAR:
Positions I took were too big for ever more volatile markets
Although I positioned myself reasonably well for what was coming last year, one thing I got wrong cost me dearly: there was no decoupling between markets of the developed and developing worlds.
Indian and Chinese stocks were hit even harder than those in the US and Europe. Since we did not reduce our exposure, we lost more money in India than we had made the year before. Our Chinese manager did better by his stock selection; we were also helped by the appreciation of the renminbi.
I had to push very hard in my macro-account to offset both these losses and those incurred by our external managers. This had its own drawback: I overtraded. The positions I took were too large for the increasingly volatile markets and, in order to manage my risk, I could not go against the market in a big way. I had to try to catch minor moves.
That made it difficult to maintain short positions. Although I am an experienced short-seller, I got caught several times and largely missed the biggest down-draught, in October and November.
On the long side, where I stuck to my guns, I lost an enormous amount of money. I was impressed by the potential in the new deep-water oilfield in Brazil and bought a large strategic position in Petrobras, only to see it decline by 75 per cent at one point in time. We also got caught in the developing petrochemical industry in the Gulf.
We did get out of our strategic long position in CVRD, the Brazilian iron ore producer, in time for the end of the commodity bubble and shorted the other big iron ore groups. But we missed an opportunity in the commodities themselves – partly because I knew from experience how difficult it is to trade them.
I was also slow to recognise the reversal of fortune for the dollar and gave back a large portion of our profits. Under the direction of my new chief investment officer, we did make money in the UK, where we bet that short-term interest rates would decline and shorted sterling against the euro. We also made good money by going long on the credit markets after their collapse.
Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. This insight helped me to anticipate the downturn of the dollar at the end of 2008. As a result, we ended the year almost meeting my target of 10 per cent minimum return, after spending most of the year in the red.
Putting these three considerations together leads to the conclusion that Lehman, AIG and other financial institutions were destroyed by bear raids in which the shorting of stocks and buying of CDS amplified and reinforced each other. Unlimited shorting was made possible by the 2007 abolition of the uptick rule (which hindered bear raids by allowing short-selling only when prices were rising). The unlimited selling of bonds was facilitated by the CDS market. Together, the two made a lethal combination.
That is what AIG, one of the most successful insurance companies in the world, failed to understand. Its business was selling insurance and, when it saw a seriously mispriced risk, it went to town insuring it, in the belief that diversifying risk reduces it. It expected to make a fortune in the long run but it was destroyed in short order.
My argument raises some interesting questions. What would have happened if the uptick rule on shorting shares had been kept, in effect, but “naked” short-selling (where the vendor has not borrowed the stock in advance) and speculating in CDS had both been outlawed? The bankruptcy of Lehman might have been avoided but what would have happened to the asset super-bubble? One can only conjecture. My guess is that the bubble would have been deflated more slowly, with less catastrophic results, but that the after-effects would have lingered longer. It would have resembled more the Japanese experience than what is happening now.
What is the proper role of short-selling? Undoubtedly it gives markets greater depth and continuity, making them more resilient, but it is not without dangers. As bear raids can be self-validating, they ought to be kept under control. If the efficient market hypothesis were valid, there would be an a priori reason for imposing no constraints. As it is, both the uptick rule and allowing short-selling only when it is covered by borrowed stock are useful pragmatic measures that seem to work well without any clear-cut theoretical justification.
What about credit default swaps? Here I take a more radical view than most people. The prevailing view is that they ought to be traded on regulated exchanges. I believe they are toxic and should be used only by prescription. They could be used to insure actual bonds but – in light of their asymmetric character – not to speculate against countries or companies.
CDS are not, however, the only synthetic financial instruments that have proved toxic. The same applies to the slicing and dicing of collateralised debt obligations and to the portfolio insurance contracts that caused the stock market crash of 1987, to mention only two that have done a lot of damage. The issuance of stock is closely regulated by authorities such as the Securities and Exchange Commission; why not the issuance of derivatives and other synthetic instruments? The role of reflexivity and the asymmetries identified earlier ought to prompt a rejection of the efficient market hypothesis and a thorough reconsideration of the regulatory regime.
Now that the bankruptcy of Lehman has had the same shock effect on the behaviour of consumers and businesses as the bank failures of the 1930s, the problems facing the administration of President Barack Obama are even greater than those that confronted Franklin D. Roosevelt. Total credit outstanding was 160 per cent of gross domestic product in 1929 and rose to 260 per cent in 1932; we entered the crash of 2008 at 365 per cent and the ratio is bound to rise to 500 per cent. This is without taking into account the pervasive use of derivatives, which was absent in the 1930s but immensely complicates the current situation. On the positive side, we have the experience of the 1930s and the prescriptions of John Maynard Keynes to draw on.
The bursting of bubbles causes credit contraction, the forced liquidation of assets, deflation and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.
It can be done – by creating money to offset the contraction of credit, recapitalising the banking system and writing off or down the accumulated debt in an orderly manner. They require radical and unorthodox policy measures. For best results, the three processes should be combined.
If these measures were successful and credit started to expand, deflationary pressures would be replaced by the spectre of inflation and the authorities would have to drain the excess money supply from the economy almost as fast as they had pumped it in. There is no way to escape from a far-from-equilibrium situation – global deflation and depression – except by first inducing its opposite and then reducing it.
To prevent the US economy from sliding into a depression, Mr Obama must implement a radical and comprehensive set of policies. Alongside the well-advanced fiscal stimulus package, these should include a system-wide and compulsory recapitalisation of the banking system and a thorough overhaul of the mortgage system – reducing the cost of mortgages and foreclosures.
Energy policy could also play an important role in counteracting both depression and deflation. The American consumer can no longer act as the motor of the global economy. Alternative energy and developments that produce energy savings could serve as a new motor, but only if the price of conventional fuels is kept high enough to justify investing in those activities. That would involve putting a floor under the price of fossil fuels by imposing a price on carbon emissions and import duties on oil to keep the domestic price above, say, $70 per barrel.
Paulson and Bernanke
Hank Paulson, former Treasury secretary (left), and Ben Bernanke, Federal Reserve chairman, arrive for their November testimony to Congress
Finally, the international financial system must be reformed. Far from providing a level playing field, the current system favours the countries in control of the international financial institutions, notably the US, to the detriment of nations at the periphery. The periphery countries have been subject to the market discipline dictated by the Washington consensus but the US was exempt from it.
How unfair the system is has been revealed by a crisis that originated in the US yet is doing more damage to the periphery. Assistance is needed to protect the financial systems of periphery countries, including trade finance, something that will require large contingency funds available at little notice for brief periods of time. Periphery governments will also need long-term financing to enable them to engage in counter-cyclical fiscal policies.
In addition, banking regulations need to be internationally co-ordinated. Market regulations should be global as well. National governments also need to co-ordinate their macroeconomic policies in order to avoid wide currency swings and other disruption.
This is a condensed, almost shorthand account of what needs to be done to turn the global economy around. It should give a sense of how difficult a task it is.
The writer is chairman of Soros Fund Management and founder of the Open Society Institute. These are extracts from an e-book update to The New Paradigm for Financial Markets – The credit crisis of 2008 and what it means (PublicAffairs Books, New York)
http://www.ft.com/cms/s/0/49b1654a-ed60-11dd-bd60-0000779fd2ac.html?nclick_check=1
By George Soros
Published: January 28 2009 19:55 | Last updated: January 28 2009 19:55
In the past, whenever the financial system came close to a breakdown, the authorities rode to the rescue and prevented it from going over the brink. That is what I expected in 2008 but that is not what happened. On Monday September 15, Lehman Brothers, the US investment bank, was allowed to go into bankruptcy without proper preparation. It was a game-changing event with catastrophic consequences.
For a start, the price of credit default swaps, a form of insurance against companies defaulting on debt, went through the roof as investors took cover. AIG, the insurance giant, was carrying a large short position in CDS and faced imminent default. By the next day Hank Paulson, then US Treasury secretary, had to reverse himself and come to the rescue of AIG.
But worse was to come. Lehman was one of the main market-makers in commercial paper and a large issuer of these short-term obligations to boot. Reserve Primary, an independent money market fund, held Lehman paper and, since it had no deep pocket to turn to, it had to “break the buck” – stop redeeming its shares at par. That caused panic among depositors: by Thursday a run on money market funds was in full swing.
The panic then spread to the stock market. The financial system suffered cardiac arrest and had to be put on artificial life support.
How could Lehman have been left to go under? The responsibility lies squarely with the financial authorities, notably the Treasury and the Federal Reserve. The claim that they lacked the necessary legal powers is a lame excuse. In an emergency they could and should have done whatever was necessary to prevent the system from collapsing. That is what they have done on other occasions. The fact is, they allowed it to happen.
On a deeper level, too, credit default swaps played a critical role in Lehman’s demise. My explanation is controversial and all three steps of my argument will take the reader to unfamiliar ground.
First, there is an asymmetry in the risk/reward ratio between being long or short in the stock market. (Being long means owning a stock, being short means selling a stock one does not own.) Being long has unlimited potential on the upside but limited exposure on the downside. Being short is the reverse. The asymmetry manifests itself in the following way: losing on a long position reduces one’s risk exposure while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. The asymmetry serves to discourage the short-selling of stocks.
The second step is to understand credit default swaps and to recognise that the CDS market offers a convenient way of shorting bonds. In that market the asymmetry in risk/reward works in the opposite way to stocks. Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks.
The asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. When an adverse development is expected, the negative effect can become overwhelming because CDS tend to be priced as warrants, not as options: people buy them not because they expect an eventual default but because they expect the CDS to appreciate during the lifetime of the contract.
No arbitrage can correct the mispricing. That can be clearly seen in US and UK government bonds, whose actual price is much higher than that implied by CDS. These asymmetries are difficult to reconcile with the efficient market hypothesis, the notion that securities prices accurately reflect all known information.
The third step is to recognise reflexivity – that is to say, the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is dependent on confidence and trust. That means that “bear raids” to drive down the share prices of these institutions can be self-validating. That is in direct contradiction to the efficient market hypothesis.
THE SOROS INVESTMENT YEAR:
Positions I took were too big for ever more volatile markets
Although I positioned myself reasonably well for what was coming last year, one thing I got wrong cost me dearly: there was no decoupling between markets of the developed and developing worlds.
Indian and Chinese stocks were hit even harder than those in the US and Europe. Since we did not reduce our exposure, we lost more money in India than we had made the year before. Our Chinese manager did better by his stock selection; we were also helped by the appreciation of the renminbi.
I had to push very hard in my macro-account to offset both these losses and those incurred by our external managers. This had its own drawback: I overtraded. The positions I took were too large for the increasingly volatile markets and, in order to manage my risk, I could not go against the market in a big way. I had to try to catch minor moves.
That made it difficult to maintain short positions. Although I am an experienced short-seller, I got caught several times and largely missed the biggest down-draught, in October and November.
On the long side, where I stuck to my guns, I lost an enormous amount of money. I was impressed by the potential in the new deep-water oilfield in Brazil and bought a large strategic position in Petrobras, only to see it decline by 75 per cent at one point in time. We also got caught in the developing petrochemical industry in the Gulf.
We did get out of our strategic long position in CVRD, the Brazilian iron ore producer, in time for the end of the commodity bubble and shorted the other big iron ore groups. But we missed an opportunity in the commodities themselves – partly because I knew from experience how difficult it is to trade them.
I was also slow to recognise the reversal of fortune for the dollar and gave back a large portion of our profits. Under the direction of my new chief investment officer, we did make money in the UK, where we bet that short-term interest rates would decline and shorted sterling against the euro. We also made good money by going long on the credit markets after their collapse.
Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. This insight helped me to anticipate the downturn of the dollar at the end of 2008. As a result, we ended the year almost meeting my target of 10 per cent minimum return, after spending most of the year in the red.
Putting these three considerations together leads to the conclusion that Lehman, AIG and other financial institutions were destroyed by bear raids in which the shorting of stocks and buying of CDS amplified and reinforced each other. Unlimited shorting was made possible by the 2007 abolition of the uptick rule (which hindered bear raids by allowing short-selling only when prices were rising). The unlimited selling of bonds was facilitated by the CDS market. Together, the two made a lethal combination.
That is what AIG, one of the most successful insurance companies in the world, failed to understand. Its business was selling insurance and, when it saw a seriously mispriced risk, it went to town insuring it, in the belief that diversifying risk reduces it. It expected to make a fortune in the long run but it was destroyed in short order.
My argument raises some interesting questions. What would have happened if the uptick rule on shorting shares had been kept, in effect, but “naked” short-selling (where the vendor has not borrowed the stock in advance) and speculating in CDS had both been outlawed? The bankruptcy of Lehman might have been avoided but what would have happened to the asset super-bubble? One can only conjecture. My guess is that the bubble would have been deflated more slowly, with less catastrophic results, but that the after-effects would have lingered longer. It would have resembled more the Japanese experience than what is happening now.
What is the proper role of short-selling? Undoubtedly it gives markets greater depth and continuity, making them more resilient, but it is not without dangers. As bear raids can be self-validating, they ought to be kept under control. If the efficient market hypothesis were valid, there would be an a priori reason for imposing no constraints. As it is, both the uptick rule and allowing short-selling only when it is covered by borrowed stock are useful pragmatic measures that seem to work well without any clear-cut theoretical justification.
What about credit default swaps? Here I take a more radical view than most people. The prevailing view is that they ought to be traded on regulated exchanges. I believe they are toxic and should be used only by prescription. They could be used to insure actual bonds but – in light of their asymmetric character – not to speculate against countries or companies.
CDS are not, however, the only synthetic financial instruments that have proved toxic. The same applies to the slicing and dicing of collateralised debt obligations and to the portfolio insurance contracts that caused the stock market crash of 1987, to mention only two that have done a lot of damage. The issuance of stock is closely regulated by authorities such as the Securities and Exchange Commission; why not the issuance of derivatives and other synthetic instruments? The role of reflexivity and the asymmetries identified earlier ought to prompt a rejection of the efficient market hypothesis and a thorough reconsideration of the regulatory regime.
Now that the bankruptcy of Lehman has had the same shock effect on the behaviour of consumers and businesses as the bank failures of the 1930s, the problems facing the administration of President Barack Obama are even greater than those that confronted Franklin D. Roosevelt. Total credit outstanding was 160 per cent of gross domestic product in 1929 and rose to 260 per cent in 1932; we entered the crash of 2008 at 365 per cent and the ratio is bound to rise to 500 per cent. This is without taking into account the pervasive use of derivatives, which was absent in the 1930s but immensely complicates the current situation. On the positive side, we have the experience of the 1930s and the prescriptions of John Maynard Keynes to draw on.
The bursting of bubbles causes credit contraction, the forced liquidation of assets, deflation and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.
It can be done – by creating money to offset the contraction of credit, recapitalising the banking system and writing off or down the accumulated debt in an orderly manner. They require radical and unorthodox policy measures. For best results, the three processes should be combined.
If these measures were successful and credit started to expand, deflationary pressures would be replaced by the spectre of inflation and the authorities would have to drain the excess money supply from the economy almost as fast as they had pumped it in. There is no way to escape from a far-from-equilibrium situation – global deflation and depression – except by first inducing its opposite and then reducing it.
To prevent the US economy from sliding into a depression, Mr Obama must implement a radical and comprehensive set of policies. Alongside the well-advanced fiscal stimulus package, these should include a system-wide and compulsory recapitalisation of the banking system and a thorough overhaul of the mortgage system – reducing the cost of mortgages and foreclosures.
Energy policy could also play an important role in counteracting both depression and deflation. The American consumer can no longer act as the motor of the global economy. Alternative energy and developments that produce energy savings could serve as a new motor, but only if the price of conventional fuels is kept high enough to justify investing in those activities. That would involve putting a floor under the price of fossil fuels by imposing a price on carbon emissions and import duties on oil to keep the domestic price above, say, $70 per barrel.
Paulson and Bernanke
Hank Paulson, former Treasury secretary (left), and Ben Bernanke, Federal Reserve chairman, arrive for their November testimony to Congress
Finally, the international financial system must be reformed. Far from providing a level playing field, the current system favours the countries in control of the international financial institutions, notably the US, to the detriment of nations at the periphery. The periphery countries have been subject to the market discipline dictated by the Washington consensus but the US was exempt from it.
How unfair the system is has been revealed by a crisis that originated in the US yet is doing more damage to the periphery. Assistance is needed to protect the financial systems of periphery countries, including trade finance, something that will require large contingency funds available at little notice for brief periods of time. Periphery governments will also need long-term financing to enable them to engage in counter-cyclical fiscal policies.
In addition, banking regulations need to be internationally co-ordinated. Market regulations should be global as well. National governments also need to co-ordinate their macroeconomic policies in order to avoid wide currency swings and other disruption.
This is a condensed, almost shorthand account of what needs to be done to turn the global economy around. It should give a sense of how difficult a task it is.
The writer is chairman of Soros Fund Management and founder of the Open Society Institute. These are extracts from an e-book update to The New Paradigm for Financial Markets – The credit crisis of 2008 and what it means (PublicAffairs Books, New York)
http://www.ft.com/cms/s/0/49b1654a-ed60-11dd-bd60-0000779fd2ac.html?nclick_check=1
The credit crunch according to Soros
The credit crunch according to Soros
By Chrystia Freeland
Published: January 30 2009 11:38 | Last updated: January 30 2009 11:38
On Friday, August 17 2007, 21 of Wall Street’s most influential investors met for lunch at George Soros’s Southampton estate on the eastern end of Long Island. The first tremors of what would become the global credit crunch had rippled out a week or so earlier, when the French bank BNP Paribas froze withdrawals from three of its funds, and in response, central bankers made a huge injection of liquidity into the money markets in an effort to keep the world’s banks lending to one another.
Although it was a sultry summer Friday, as the group dined on striped bass, fruit salad and cookies, the tone was serious and rather formal. Soros’s guests included Julian Robertson, founder of the Tiger Management hedge fund; Donald Marron, the former chief executive of PaineWebber and now boss of Lightyear Capital; James Chanos, president of Kynikos Associates, a hedge fund that specialised in shorting stocks; and Byron Wien, chief investment strategist at Pequot Capital and the convener of the annual gathering – known to its participants as the Benchmark Lunch.
The discussion focused on a single question: was a recession looming? We all know the answer today, but the consensus that overcast afternoon was different. In a memo written after the lunch, Wien, a longtime friend of Soros’s, wrote: “The conclusion was that we were probably in an economic slowdown and a correction in the market, but we were not about to begin a recession or a bear market.” Only two men dissented. One of those was Soros, who finished the meal convinced that the global financial crisis he had been predicting – prematurely – for years had finally begun.
His conclusion had immediate consequences. Six years earlier, following the departure of Stan Druckenmiller from Quantum Funds, Soros’s hedge fund, Soros converted the operation into a “less aggressively managed vehicle” and renamed it an “endowment fund”, which farmed most of its money out to external managers. Now Soros realised he had to get back into the game. “I did not want to see my accumulated wealth be severely impaired,” he said, during a two-hour conversation this winter in the conference room of his midtown Manhattan offices. “So I came back and set up a macro-account within which I counterbalanced what I thought was the exposure of the firm.”
Soros complained that his years of less active involvement at Quantum meant he didn’t have the kind of “detailed knowledge of particular companies I used to have, so I’m not in a position to pick stocks”. Moreover, “even many of the macro instruments that have been recently invented were unfamiliar to me”. Even so, Quantum achieved a 32 per cent return in 2007, making the then 77-year-old the second-highest paid hedge fund manager in the world, according to Institutional Investor’s Alpha magazine. He ended 2008, a year that saw global destruction of wealth on the most colossal scale since the second world war, with two out of three hedge funds losing money, up almost 10 per cent.
Soros’s main goal was to preserve his fortune. But, as has been the case throughout his career, his timing and financial acumen enhanced his credibility as a thinker, and never more so than in 2008. In May and June, after more than two decades of writing, he hit bestseller lists in the US and in the UK with his ninth book, The New Paradigm for Financial Markets. In October, he received an invitation to testify before Congress about the financial crisis. In November, Barack Obama, whom he had long backed for the presidency, defeated John McCain.
“In the twilight of his life, he’s achieved the recognition he has always wanted,” Wien said. “Everything is going for him. He’s healthy, his candidate won, his business is on a solid footing.”
. . .
Many comparisons have been drawn between 2008 and earlier periods of turmoil, but the historical moment with most personal resonance for Soros is not one of the conventional choices. The parallel he sees is with 1944, when, as a 13-year-old Jewish boy in Nazi-occupied Budapest, he eluded the Holocaust.
Soros credits his beloved father, Tivadar, with teaching him how to respond to “far from equilibrium situations”. Captured by the Russians in the first world war, Tivadar was imprisoned in Siberia. He engineered his own escape and return home through a Russia convulsed by the Bolshevik revolution. That sojourn stripped him of his youthful ambition and left him wanting “nothing more from life than to enjoy it”. Yet on March 19 1944, the day the Germans occupied Hungary, the 50-year-old sprang into action, rescuing his immediate family and many others by arranging false identities for them.
Before the invasion, George was still enough of a child, his father thought, to need a bit of parental coddling. Yet the teenager who spent the war living apart from his parents under a false name found the danger exhilarating. “It was high adventure,” Soros wrote, “like living through Raiders of the Lost Ark.” And as the latest financial crisis gathered momentum, he admitted to the same thrill. “I think the same thing applies again. I feel the same kind of stimulation as I felt then,” he told me.
Part of the stimulation is intellectual. Soros’s experiences in 1944 laid the groundwork for the conceptual framework he would spend the rest of his life elaborating and which, he believes, has found its validation in the events of 2008. His core idea is “reflexivity”, which he defines as a “two-way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them, but on their perception or interpretation of the situation. Their decisions make an impact on the situation and changes in the situation are liable to change their perceptions.”
It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.
The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.
As an investor and as a thinker, Soros has always thrived in times of upheaval. But he has also remained something of an outsider. He recalls how he “discovered loneliness” when he arrived to study at the London School of Economics in 1947. Later on, as he worked his way up from being a journeyman arbitrage trader in London and then New York, to running one of the world’s most successful hedge funds, Soros remained, in the words of one private equity acquaintance, a bit of “an oddball”, both on Wall Street and in the academic world. He is frequently described as “charming”, yet few see the fit, tanned, twice-divorced billionaire as an emotional confidant. “If I had an idea about India-Pakistan, I would talk to him about it,” Wien said. “If I were having a problem in my marriage, I don’t think I would go and talk to George about it.”
Strobe Talbott, now the president of the Brookings Institute and a former deputy secretary of state, said: “He likes to think of himself as an outsider who can come in from time to time, including to the Oval Office, where I took him on a couple of occasions. But simply hobnobbing with the powerful isn’t important.”
That lack of clubbiness, and the associated trait of iconoclasm, may explain why, for all his worldly success, Soros has had a rather mixed public reputation. His speculative plays, which have often targeted currencies, have earned him the wrath of political leaders around the world. The ambitious, global reach of his richly funded Open Society foundation has prompted some critics to accuse him of suffering from a Messiah complex. He was so effectively demonised by the US right earlier this decade that he kept fairly quiet about his support of Obama, lest the association hurt his candidate. Probably most painfully, his forays into economics and philosophy often have met with considerable scepticism, especially from academia.
The one time and place where he instantly became a highly regarded insider was in the former Soviet Union and its satellites, at the moment the Berlin Wall came down. More completely and more swiftly than any other foreigner, Soros grasped and embraced the systemic transformation that was unfolding, and was rewarded with influence and respect. The question for Soros today is whether, as the west undergoes its own once-in-a-century systemic shock, this arch-outsider will finally find himself in the mainstream in the society which has been his main home for more than half a century.
. . .
Soros’s most famous – or infamous – speculative play as an investor was his bet against sterling in 1992, a wager which won him more than $1bn and earned him the epithet from the British press of “the man who broke the Bank of England”. That bet also turns out to be a perfect illustration of the specific talent which his past and present fund managers agree has been central to his investing success.
Soros’s best-known investment was not, in actual fact, his own idea. According to both Soros and Druckenmiller, who was managing Quantum at the time, it was Druckenmiller who came up with the plan to short the pound. But when Druckenmiller went through his rationale with Soros, in one of their twice- or thrice-daily conversations, Soros told his protégé to be bolder: “I said, ‘Go for the jugular!’.” Druckenmiller duly raised their stake – Quantum and several related funds wagered nearly $10bn, according to interviews Soros gave afterwards – and Soros earned both a fortune and an international reputation.
Druckenmiller, who spent 12 years at Quantum, says that conversation exemplifies Soros’s singular financial gift: “He’s extremely good at using the balance sheet – probably the best ever. He is able to use leverage when he likes it, but he is also able to walk away. He has no emotional attachment to a position. I think that is an unusual characteristic in our industry.”
Chanos agrees: “One thing that I’ve both wrestled with and admired, that [Soros] conquered many years ago, is the ability to go from long to short, the ability to turn on a dime when confronted with the evidence. Emotionally, that is really hard.”
Soros denies any great degree of emotional self-control. “That’s not true, that’s not true,” he told me, shaking his head and smiling. “I am very emotional. I am as moody as the market, so I’m basically a manic depressive personality.” (His market-linked moodiness extends to psychosomatic ailments, especially backaches, which he treats as valuable investment tips.)
Instead, Soros attributes his effectiveness as an investor to his philosophical views about the contingent nature of human knowledge: “I think that my conceptual framework, which basically emphasises the importance of misconceptions, makes me extremely critical of my own decisions … I know that I am bound to be wrong, and therefore am more likely to correct my own mistakes.”
Soros’s radar for revolution is the second key to his investing style. He looks for “game-changing moments, not incremental ones”, according to Sebastian Mallaby, the Washington Post columnist and author who is writing a history of hedge funds. As examples, Mallaby cites Quantum’s shorting of the pound and Soros’s 1985 “Plaza Accord” bet that the dollar would fall against the yen – his two most famous currency trades – as well as a lesser-known 1973 bet that, as a consequence of the Arab-Israeli war, defence stocks would soar. “It’s not that reflexivity tells you what to do, but it tells you to be on the look-out for turn-around situations,” Mallaby said. “It’s an attitude of mind.”
Some Soros-watchers intimate that his vast network of international contacts might be an important source of his market prescience. But it was in the one part of the world where Soros really did have an inside track – the former Soviet bloc – that he made his most disastrous deal. In Russia, as in much of the former Soviet Union, he was intensely engaged with the country’s political and economic transformation. In June 1997, as the Kremlin struggled to pay overdue wages, Soros extended a bridge loan to the Russian government, acting as a one-man International Monetary Fund.
He came to believe in Russia’s commitment to reforms, and to see himself as an insider – two convictions that were his financial undoing. He invested $980m with a consortium of oligarchs who acquired a 25 per cent stake in Svyazinvest, the national telecoms company, deciding to participate because “I thought that this is the transition from robber capitalism to legitimate capitalism”. But instead, the Svyazinvest privatisation turned out to be the moment when the oligarchs redirected their energies from fleecing the state to fleecing one another. Soros, as an outsider, was an obvious casualty. “Never have I been screwed so much since Russia. For them, they get a satisfaction out of doing it.
“It was the biggest mistake of my investment career. I was deceived by my own hope.” In his most recent book he dismisses Russia with a single sentence, further diminished by parenthesis: “(I don’t discuss Russia, because I don’t want to invest there.)”
. . .
On a chilly Monday night in December, Soros took the hour-long drive from Manhattan to the Bruce Museum in Greenwich, Connecticut. He was due to speak at a benefit for the Scholar Rescue Fund, a programme he has partly financed and which, since 2002, has provided safe havens for 266 persecuted academics from 40 countries. After his talk (on the global financial crisis, of course), Soros filed out of the auditorium chatting with Stanley Bergman, a founding partner of the law firm that had sponsored the evening.
“You like the game?” Soros asked his host with a smile.
“Yes,” the white-haired Bergman replied.
Then, in a flash of the competitive spirit that makes Soros an avid skier and player of tennis and chess, Soros asked: “And how old are you?”
“75.”
“I’m 78,” Soros replied. “But what’s the use of good health if it doesn’t buy you money?” The vigorous septuagenarians flashed each other a complicit smile.
According to Wien, Soros likes the game, too: “George loves to be able to show from time to time that he can do it.” But while he loves to play, he is disdainful of a life lived purely to accumulate more chips. His epiphany came in 1981, when he had to scramble to raise money to pay for an investment in bonds. “I thought I would have a heart attack,” he told me. “And then I realised that to die just for the sake of getting rich, I would be a loser.”
For Soros, the solution was philanthropy. “To do something really that would make a significant difference to the world, that would be worth dying for,” he said. “The Foundation enabled me to get out of myself and to somehow be concerned with other people than myself.” Soros’s fortune has given his causes enormous firepower: according to Aryeh Neier, the human rights activist who has been running the Open Society Foundation since 1993, its budget was $550m in 2008 and will increase to $600m this year. By his own calculation, Soros has donated a total of more than $5bn to his causes, primarily directing his giving through his foundation.
“No philanthropist in the second half of the 20th century has done better in deploying resources strategically to change the world,” Larry Summers, the newly appointed head of Barack Obama’s National Economic Council, told me in a conversation early last autumn. Talbott compares Soros’s impact to that of a sovereign nation. In the 1990s, says Talbott, “when I got word that George Soros wanted to talk, I would drop everything and treat him pretty much like a visiting head of state. He was literally putting more money into some of the former colonies of the former Soviet empire than the US government, so that merited treating him as someone with a very high impact.”
Soros’s philanthropic lieutenants report an approach remarkably similar to the investing style observed by his fund managers: he knows how to make big, original bets, and he isn’t afraid to cut his losses when a project isn’t working out. Anders Aslund, an economist who has studied Russia and Ukraine and who has worked with Soros on various projects, believes his philanthropic style “is very much formed by the money markets, which are always changing. He assumes any idea he has now will be wrong in a few years. He is always asking himself, when he has a wonderful project going, ‘When should I stop this project?’.”
Soros’s war chest, and his determination to deploy it beyond the usual blue-chip charities of hospitals, universities, museums or even poverty in Africa, had long made him an occasionally controversial figure outside the US. He was among the western culprits accused by the Kremlin of inciting Ukraine’s 2004 Orange Revolution; his foundation’s offices have been raided in Russia and he was forced to close them down in authoritarian Uzbekistan.
America, it turns out, can also be sensitive to plutocrats using their wealth to address socially contentious subjects. In recent years, his foundation became more active in the US, taking on issues including drug policy. His engagement became more intense during the George W. Bush presidency, when Soros decided that the open society he had worked to foster in repressive regimes abroad was imperilled in his adopted home.
Some admired his chutzpah. The famously independent-minded Paul Volcker, who was appointed to lead the Fed by Jimmy Carter and reappointed by Ronald Reagan, said: “The drug thing is a perfect example that he doesn’t adopt a conventional view. I think drug policy needs a new look and he’s been one of the people who say that.”
Soros’s money has been crucial in enabling him to voice maverick views: “That’s what led me to oppose Bush very publicly, because I was in a position that I could afford to do it,” he said. But he also believes his fortune and the automatic credibility it gives him in America has drawn the fire of conservative pundits such as Fox’s Bill O’Reilly and extremist pamphleteer Lyndon LaRouche. “Given the excessive esteem in which people who make money are held in America, I had to be demonised,” he said.
Their attacks worked. So much so that last year, as the Obama bandwagon gained speed and American financiers, along with much of the rest of the country, clamoured to jump on, his earliest heavyweight Wall Street backer kept a low profile. “Obama seeks to be a unifier,” Soros said. “And I have been a divisive figure because I’ve been demonised by the right. I thought my vocal support for him would not necessarily benefit him.”
. . .
At around 1.00am on November 5 2008, Soros sat on a peach-coloured sofa in his elegant Fifth Avenue apartment, with Queen Noor of Jordan to his left and Steve Clemons, of the New America think-tank, perched on the edge of a chair to his right. Around them milled a crowd of eclectic and jubilant guests, many still teary-eyed from Obama’s Grant Park victory speech, which had been broadcast on four flat-screen television sets in the apartment. Like most Soros soirées, the gathering included more artists and statesmen than Masters of the Universe: Michèle Pierre-Louis, the prime minister of Haiti and former head of her country’s Soros foundation; former World Bank chief James Wolfensohn; Volcker; and twentysomething Kwasi Asare, a hip-hop music promoter, were among the visitors.
Soros drank an espresso and, a few minutes later, a final champagne toast with the last of his guests. Alexander, his 23-year-old son, perched on the arm of his chair and ruffled his father’s hair in farewell. Everyone else took that as a signal to depart, too. Soros was in a mellow, triumphant mood that night – and with good reason. He had spotted Obama early on. His ubiquitous political consigliere, Michael Vachon, still has among his papers a rumpled itinerary from a trip he and Soros took to Chicago in February 2004. In the upper right-hand corner of the page, Vachon had scrawled, “Barack guy”. The Senate candidate had been keen to meet Soros and called the pair repeatedly during their visit. But it was a packed schedule and Soros could only offer a 7.30am breakfast slot at the Four Seasons.
Soros left that meal “very impressed”, a view that was confirmed when he read Obama’s autobiography and deemed him “a real person of substance”. A few months later, on June 7, Soros hosted a packed fundraiser for Obama’s Senate campaign at his upper east side home. Soros and his family contributed roughly $80,000, then the legal maximum.
Obama was impressing a lot of people at that time. But once it became clear that Hillary Clinton would be in the presidential race, nearly all of the established New York Democrats, particularly the older Wall Street crowd, lined up behind their local Senator and her machine, driven by a combination of loyalty and calculation. Dominique Strauss-Kahn, now the head of the IMF and then a possible French presidential candidate, said Soros told him in 2006 he was supporting “this young guy, Barack Obama. He was the first one to tell me this and he was right.” On January 16 2007, the day Obama formed a presidential exploratory committee, Soros contributed to his campaign and officially offered his backing. Before doing so, Soros called Hillary Clinton to let her know. “I look forward to your support in the general election,” she told him.
His decision to back Obama was consistent with his life-long affinity for moments of radical change. “I felt that America had gone so far off base that there was a need for discontinuity,” he said. As in the markets, Soros’s political bet on systemic transformation – his support for Obama, but also his early opposition to the war in Iraq and the “war on terror” – has come good.
For Soros, one happy consequence of now being in tune with the zeitgeist is that he is being taken seriously as a thinker on American public policy issues, particularly to do with the financial crisis. When he, along with the other four highest-earning hedge fund managers, testified before Congress in November, he was treated with respect and even deference – not the prevailing attitude towards billionaire financiers at the moment. Before Soros had even taken his coat off, he was greeted in the corridors by Democratic New York Congresswoman Carolyn Maloney. “Give him a nice office,” she told a staffer who was looking for a place where Soros could wait before his testimony. “He creates a lot of jobs in my district and supports a lot of good people.” After the hearing, a lawmaker and a staffer both approached Soros and asked him to autograph their copies of his book.
. . .
Being listened to on Capitol Hill, and by global policymakers more generally, is important to Soros. But what matters to him most of all – more than money, more than the political and social accomplishments of his foundation – is leaving an enduring intellectual legacy. He describes reflexivity as “my main interest”. Even as Soros met with increasing financial and public success through his fund and his foundation, he was deeply frustrated by his failure to be accepted as a serious thinker. He titled one chapter in his latest book “Autobiography of a Failed Philosopher”, and once delivered a lecture at the University of Vienna called “A Failed Philosopher Tries Again”. As a young man, he wanted to become an academic, but “my grades were not good enough”.
He writes that his first book, The Alchemy of Finance, was “dismissed by many critics as the self-indulgence of a successful speculator”. That reaction still prevails in some circles. Paul Krugman, the Nobel prize-winning economist, devotes half a chapter to Soros in his latest book, characterising him as “perhaps the most famous speculator of all times”. He also raises an eyebrow at Soros’s intellectual “ambitions”, tartly observing that he “would like the world to take his philosophical pronouncements as seriously as it takes his financial acumen”.
Another barrier to academic respectability is Soros’s self-confessed “phobia” of formal mathematics: “I understand mathematical concepts but I’m afraid of mathematical symbols, because you can easily get lost in them.” That fear proved no impediment to success in the quantitative world of finance, but it has hurt Soros’s street cred in economics departments. “Among academics, he suffers from the additional liability of not expressing it in the language of mathematics that has become fashionable,” Joe Stiglitz, another Nobel prize-winning economist, said. But Stiglitz believes his friend’s writing has become more current, partly thanks to the financial crisis: “By those economists interested in ideas, I think his work is taken seriously as an idea that informs their thinking.”
In the view of Larry Summers: “Reflexivity as an idea is right and important and closely related to various streams of existing thought in the social sciences. But no one has deployed a philosophical concept as effectively as George has, first to make money and then to change the world.”
Paul Volcker delivered a similar verdict: “I think he has a valid insight which is not always expressed as clearly by him as I might like.” Overall, he said, Soros is “an imaginative and provocative thinker … he’s got some brilliant ideas about how markets function or dysfunction.”
This is as close to mainstream intellectual acceptance as Soros has come in his two decades of writing and more than five decades since he gave up on academia. It feels like a breakthrough. When I asked him if he would still describe himself as a failed philosopher, he said no: “I think that I am actually succeeding as a philosopher.” For him, that is “obviously” the most important human accomplishment.
“I think it has to do with the human condition,” he said. “The fact that we are mortal and we would like to be immortal. The closest thing you can come to that is by creating something that lives beyond you. Wealth could be one of those things, but evidence shows that it doesn’t survive too many generations. However, if you can have an artistic or philosophical or scientific creation that withstands the test of time, then you have come as close to it as possible.”
Chrystia Freeland is the FT’s US managing editor
http://www.ft.com/cms/s/2/9553cce2-eb65-11dd-8838-0000779fd2ac.html
By Chrystia Freeland
Published: January 30 2009 11:38 | Last updated: January 30 2009 11:38
On Friday, August 17 2007, 21 of Wall Street’s most influential investors met for lunch at George Soros’s Southampton estate on the eastern end of Long Island. The first tremors of what would become the global credit crunch had rippled out a week or so earlier, when the French bank BNP Paribas froze withdrawals from three of its funds, and in response, central bankers made a huge injection of liquidity into the money markets in an effort to keep the world’s banks lending to one another.
Although it was a sultry summer Friday, as the group dined on striped bass, fruit salad and cookies, the tone was serious and rather formal. Soros’s guests included Julian Robertson, founder of the Tiger Management hedge fund; Donald Marron, the former chief executive of PaineWebber and now boss of Lightyear Capital; James Chanos, president of Kynikos Associates, a hedge fund that specialised in shorting stocks; and Byron Wien, chief investment strategist at Pequot Capital and the convener of the annual gathering – known to its participants as the Benchmark Lunch.
The discussion focused on a single question: was a recession looming? We all know the answer today, but the consensus that overcast afternoon was different. In a memo written after the lunch, Wien, a longtime friend of Soros’s, wrote: “The conclusion was that we were probably in an economic slowdown and a correction in the market, but we were not about to begin a recession or a bear market.” Only two men dissented. One of those was Soros, who finished the meal convinced that the global financial crisis he had been predicting – prematurely – for years had finally begun.
His conclusion had immediate consequences. Six years earlier, following the departure of Stan Druckenmiller from Quantum Funds, Soros’s hedge fund, Soros converted the operation into a “less aggressively managed vehicle” and renamed it an “endowment fund”, which farmed most of its money out to external managers. Now Soros realised he had to get back into the game. “I did not want to see my accumulated wealth be severely impaired,” he said, during a two-hour conversation this winter in the conference room of his midtown Manhattan offices. “So I came back and set up a macro-account within which I counterbalanced what I thought was the exposure of the firm.”
Soros complained that his years of less active involvement at Quantum meant he didn’t have the kind of “detailed knowledge of particular companies I used to have, so I’m not in a position to pick stocks”. Moreover, “even many of the macro instruments that have been recently invented were unfamiliar to me”. Even so, Quantum achieved a 32 per cent return in 2007, making the then 77-year-old the second-highest paid hedge fund manager in the world, according to Institutional Investor’s Alpha magazine. He ended 2008, a year that saw global destruction of wealth on the most colossal scale since the second world war, with two out of three hedge funds losing money, up almost 10 per cent.
Soros’s main goal was to preserve his fortune. But, as has been the case throughout his career, his timing and financial acumen enhanced his credibility as a thinker, and never more so than in 2008. In May and June, after more than two decades of writing, he hit bestseller lists in the US and in the UK with his ninth book, The New Paradigm for Financial Markets. In October, he received an invitation to testify before Congress about the financial crisis. In November, Barack Obama, whom he had long backed for the presidency, defeated John McCain.
“In the twilight of his life, he’s achieved the recognition he has always wanted,” Wien said. “Everything is going for him. He’s healthy, his candidate won, his business is on a solid footing.”
. . .
Many comparisons have been drawn between 2008 and earlier periods of turmoil, but the historical moment with most personal resonance for Soros is not one of the conventional choices. The parallel he sees is with 1944, when, as a 13-year-old Jewish boy in Nazi-occupied Budapest, he eluded the Holocaust.
Soros credits his beloved father, Tivadar, with teaching him how to respond to “far from equilibrium situations”. Captured by the Russians in the first world war, Tivadar was imprisoned in Siberia. He engineered his own escape and return home through a Russia convulsed by the Bolshevik revolution. That sojourn stripped him of his youthful ambition and left him wanting “nothing more from life than to enjoy it”. Yet on March 19 1944, the day the Germans occupied Hungary, the 50-year-old sprang into action, rescuing his immediate family and many others by arranging false identities for them.
Before the invasion, George was still enough of a child, his father thought, to need a bit of parental coddling. Yet the teenager who spent the war living apart from his parents under a false name found the danger exhilarating. “It was high adventure,” Soros wrote, “like living through Raiders of the Lost Ark.” And as the latest financial crisis gathered momentum, he admitted to the same thrill. “I think the same thing applies again. I feel the same kind of stimulation as I felt then,” he told me.
Part of the stimulation is intellectual. Soros’s experiences in 1944 laid the groundwork for the conceptual framework he would spend the rest of his life elaborating and which, he believes, has found its validation in the events of 2008. His core idea is “reflexivity”, which he defines as a “two-way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them, but on their perception or interpretation of the situation. Their decisions make an impact on the situation and changes in the situation are liable to change their perceptions.”
It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.
The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.
As an investor and as a thinker, Soros has always thrived in times of upheaval. But he has also remained something of an outsider. He recalls how he “discovered loneliness” when he arrived to study at the London School of Economics in 1947. Later on, as he worked his way up from being a journeyman arbitrage trader in London and then New York, to running one of the world’s most successful hedge funds, Soros remained, in the words of one private equity acquaintance, a bit of “an oddball”, both on Wall Street and in the academic world. He is frequently described as “charming”, yet few see the fit, tanned, twice-divorced billionaire as an emotional confidant. “If I had an idea about India-Pakistan, I would talk to him about it,” Wien said. “If I were having a problem in my marriage, I don’t think I would go and talk to George about it.”
Strobe Talbott, now the president of the Brookings Institute and a former deputy secretary of state, said: “He likes to think of himself as an outsider who can come in from time to time, including to the Oval Office, where I took him on a couple of occasions. But simply hobnobbing with the powerful isn’t important.”
That lack of clubbiness, and the associated trait of iconoclasm, may explain why, for all his worldly success, Soros has had a rather mixed public reputation. His speculative plays, which have often targeted currencies, have earned him the wrath of political leaders around the world. The ambitious, global reach of his richly funded Open Society foundation has prompted some critics to accuse him of suffering from a Messiah complex. He was so effectively demonised by the US right earlier this decade that he kept fairly quiet about his support of Obama, lest the association hurt his candidate. Probably most painfully, his forays into economics and philosophy often have met with considerable scepticism, especially from academia.
The one time and place where he instantly became a highly regarded insider was in the former Soviet Union and its satellites, at the moment the Berlin Wall came down. More completely and more swiftly than any other foreigner, Soros grasped and embraced the systemic transformation that was unfolding, and was rewarded with influence and respect. The question for Soros today is whether, as the west undergoes its own once-in-a-century systemic shock, this arch-outsider will finally find himself in the mainstream in the society which has been his main home for more than half a century.
. . .
Soros’s most famous – or infamous – speculative play as an investor was his bet against sterling in 1992, a wager which won him more than $1bn and earned him the epithet from the British press of “the man who broke the Bank of England”. That bet also turns out to be a perfect illustration of the specific talent which his past and present fund managers agree has been central to his investing success.
Soros’s best-known investment was not, in actual fact, his own idea. According to both Soros and Druckenmiller, who was managing Quantum at the time, it was Druckenmiller who came up with the plan to short the pound. But when Druckenmiller went through his rationale with Soros, in one of their twice- or thrice-daily conversations, Soros told his protégé to be bolder: “I said, ‘Go for the jugular!’.” Druckenmiller duly raised their stake – Quantum and several related funds wagered nearly $10bn, according to interviews Soros gave afterwards – and Soros earned both a fortune and an international reputation.
Druckenmiller, who spent 12 years at Quantum, says that conversation exemplifies Soros’s singular financial gift: “He’s extremely good at using the balance sheet – probably the best ever. He is able to use leverage when he likes it, but he is also able to walk away. He has no emotional attachment to a position. I think that is an unusual characteristic in our industry.”
Chanos agrees: “One thing that I’ve both wrestled with and admired, that [Soros] conquered many years ago, is the ability to go from long to short, the ability to turn on a dime when confronted with the evidence. Emotionally, that is really hard.”
Soros denies any great degree of emotional self-control. “That’s not true, that’s not true,” he told me, shaking his head and smiling. “I am very emotional. I am as moody as the market, so I’m basically a manic depressive personality.” (His market-linked moodiness extends to psychosomatic ailments, especially backaches, which he treats as valuable investment tips.)
Instead, Soros attributes his effectiveness as an investor to his philosophical views about the contingent nature of human knowledge: “I think that my conceptual framework, which basically emphasises the importance of misconceptions, makes me extremely critical of my own decisions … I know that I am bound to be wrong, and therefore am more likely to correct my own mistakes.”
Soros’s radar for revolution is the second key to his investing style. He looks for “game-changing moments, not incremental ones”, according to Sebastian Mallaby, the Washington Post columnist and author who is writing a history of hedge funds. As examples, Mallaby cites Quantum’s shorting of the pound and Soros’s 1985 “Plaza Accord” bet that the dollar would fall against the yen – his two most famous currency trades – as well as a lesser-known 1973 bet that, as a consequence of the Arab-Israeli war, defence stocks would soar. “It’s not that reflexivity tells you what to do, but it tells you to be on the look-out for turn-around situations,” Mallaby said. “It’s an attitude of mind.”
Some Soros-watchers intimate that his vast network of international contacts might be an important source of his market prescience. But it was in the one part of the world where Soros really did have an inside track – the former Soviet bloc – that he made his most disastrous deal. In Russia, as in much of the former Soviet Union, he was intensely engaged with the country’s political and economic transformation. In June 1997, as the Kremlin struggled to pay overdue wages, Soros extended a bridge loan to the Russian government, acting as a one-man International Monetary Fund.
He came to believe in Russia’s commitment to reforms, and to see himself as an insider – two convictions that were his financial undoing. He invested $980m with a consortium of oligarchs who acquired a 25 per cent stake in Svyazinvest, the national telecoms company, deciding to participate because “I thought that this is the transition from robber capitalism to legitimate capitalism”. But instead, the Svyazinvest privatisation turned out to be the moment when the oligarchs redirected their energies from fleecing the state to fleecing one another. Soros, as an outsider, was an obvious casualty. “Never have I been screwed so much since Russia. For them, they get a satisfaction out of doing it.
“It was the biggest mistake of my investment career. I was deceived by my own hope.” In his most recent book he dismisses Russia with a single sentence, further diminished by parenthesis: “(I don’t discuss Russia, because I don’t want to invest there.)”
. . .
On a chilly Monday night in December, Soros took the hour-long drive from Manhattan to the Bruce Museum in Greenwich, Connecticut. He was due to speak at a benefit for the Scholar Rescue Fund, a programme he has partly financed and which, since 2002, has provided safe havens for 266 persecuted academics from 40 countries. After his talk (on the global financial crisis, of course), Soros filed out of the auditorium chatting with Stanley Bergman, a founding partner of the law firm that had sponsored the evening.
“You like the game?” Soros asked his host with a smile.
“Yes,” the white-haired Bergman replied.
Then, in a flash of the competitive spirit that makes Soros an avid skier and player of tennis and chess, Soros asked: “And how old are you?”
“75.”
“I’m 78,” Soros replied. “But what’s the use of good health if it doesn’t buy you money?” The vigorous septuagenarians flashed each other a complicit smile.
According to Wien, Soros likes the game, too: “George loves to be able to show from time to time that he can do it.” But while he loves to play, he is disdainful of a life lived purely to accumulate more chips. His epiphany came in 1981, when he had to scramble to raise money to pay for an investment in bonds. “I thought I would have a heart attack,” he told me. “And then I realised that to die just for the sake of getting rich, I would be a loser.”
For Soros, the solution was philanthropy. “To do something really that would make a significant difference to the world, that would be worth dying for,” he said. “The Foundation enabled me to get out of myself and to somehow be concerned with other people than myself.” Soros’s fortune has given his causes enormous firepower: according to Aryeh Neier, the human rights activist who has been running the Open Society Foundation since 1993, its budget was $550m in 2008 and will increase to $600m this year. By his own calculation, Soros has donated a total of more than $5bn to his causes, primarily directing his giving through his foundation.
“No philanthropist in the second half of the 20th century has done better in deploying resources strategically to change the world,” Larry Summers, the newly appointed head of Barack Obama’s National Economic Council, told me in a conversation early last autumn. Talbott compares Soros’s impact to that of a sovereign nation. In the 1990s, says Talbott, “when I got word that George Soros wanted to talk, I would drop everything and treat him pretty much like a visiting head of state. He was literally putting more money into some of the former colonies of the former Soviet empire than the US government, so that merited treating him as someone with a very high impact.”
Soros’s philanthropic lieutenants report an approach remarkably similar to the investing style observed by his fund managers: he knows how to make big, original bets, and he isn’t afraid to cut his losses when a project isn’t working out. Anders Aslund, an economist who has studied Russia and Ukraine and who has worked with Soros on various projects, believes his philanthropic style “is very much formed by the money markets, which are always changing. He assumes any idea he has now will be wrong in a few years. He is always asking himself, when he has a wonderful project going, ‘When should I stop this project?’.”
Soros’s war chest, and his determination to deploy it beyond the usual blue-chip charities of hospitals, universities, museums or even poverty in Africa, had long made him an occasionally controversial figure outside the US. He was among the western culprits accused by the Kremlin of inciting Ukraine’s 2004 Orange Revolution; his foundation’s offices have been raided in Russia and he was forced to close them down in authoritarian Uzbekistan.
America, it turns out, can also be sensitive to plutocrats using their wealth to address socially contentious subjects. In recent years, his foundation became more active in the US, taking on issues including drug policy. His engagement became more intense during the George W. Bush presidency, when Soros decided that the open society he had worked to foster in repressive regimes abroad was imperilled in his adopted home.
Some admired his chutzpah. The famously independent-minded Paul Volcker, who was appointed to lead the Fed by Jimmy Carter and reappointed by Ronald Reagan, said: “The drug thing is a perfect example that he doesn’t adopt a conventional view. I think drug policy needs a new look and he’s been one of the people who say that.”
Soros’s money has been crucial in enabling him to voice maverick views: “That’s what led me to oppose Bush very publicly, because I was in a position that I could afford to do it,” he said. But he also believes his fortune and the automatic credibility it gives him in America has drawn the fire of conservative pundits such as Fox’s Bill O’Reilly and extremist pamphleteer Lyndon LaRouche. “Given the excessive esteem in which people who make money are held in America, I had to be demonised,” he said.
Their attacks worked. So much so that last year, as the Obama bandwagon gained speed and American financiers, along with much of the rest of the country, clamoured to jump on, his earliest heavyweight Wall Street backer kept a low profile. “Obama seeks to be a unifier,” Soros said. “And I have been a divisive figure because I’ve been demonised by the right. I thought my vocal support for him would not necessarily benefit him.”
. . .
At around 1.00am on November 5 2008, Soros sat on a peach-coloured sofa in his elegant Fifth Avenue apartment, with Queen Noor of Jordan to his left and Steve Clemons, of the New America think-tank, perched on the edge of a chair to his right. Around them milled a crowd of eclectic and jubilant guests, many still teary-eyed from Obama’s Grant Park victory speech, which had been broadcast on four flat-screen television sets in the apartment. Like most Soros soirées, the gathering included more artists and statesmen than Masters of the Universe: Michèle Pierre-Louis, the prime minister of Haiti and former head of her country’s Soros foundation; former World Bank chief James Wolfensohn; Volcker; and twentysomething Kwasi Asare, a hip-hop music promoter, were among the visitors.
Soros drank an espresso and, a few minutes later, a final champagne toast with the last of his guests. Alexander, his 23-year-old son, perched on the arm of his chair and ruffled his father’s hair in farewell. Everyone else took that as a signal to depart, too. Soros was in a mellow, triumphant mood that night – and with good reason. He had spotted Obama early on. His ubiquitous political consigliere, Michael Vachon, still has among his papers a rumpled itinerary from a trip he and Soros took to Chicago in February 2004. In the upper right-hand corner of the page, Vachon had scrawled, “Barack guy”. The Senate candidate had been keen to meet Soros and called the pair repeatedly during their visit. But it was a packed schedule and Soros could only offer a 7.30am breakfast slot at the Four Seasons.
Soros left that meal “very impressed”, a view that was confirmed when he read Obama’s autobiography and deemed him “a real person of substance”. A few months later, on June 7, Soros hosted a packed fundraiser for Obama’s Senate campaign at his upper east side home. Soros and his family contributed roughly $80,000, then the legal maximum.
Obama was impressing a lot of people at that time. But once it became clear that Hillary Clinton would be in the presidential race, nearly all of the established New York Democrats, particularly the older Wall Street crowd, lined up behind their local Senator and her machine, driven by a combination of loyalty and calculation. Dominique Strauss-Kahn, now the head of the IMF and then a possible French presidential candidate, said Soros told him in 2006 he was supporting “this young guy, Barack Obama. He was the first one to tell me this and he was right.” On January 16 2007, the day Obama formed a presidential exploratory committee, Soros contributed to his campaign and officially offered his backing. Before doing so, Soros called Hillary Clinton to let her know. “I look forward to your support in the general election,” she told him.
His decision to back Obama was consistent with his life-long affinity for moments of radical change. “I felt that America had gone so far off base that there was a need for discontinuity,” he said. As in the markets, Soros’s political bet on systemic transformation – his support for Obama, but also his early opposition to the war in Iraq and the “war on terror” – has come good.
For Soros, one happy consequence of now being in tune with the zeitgeist is that he is being taken seriously as a thinker on American public policy issues, particularly to do with the financial crisis. When he, along with the other four highest-earning hedge fund managers, testified before Congress in November, he was treated with respect and even deference – not the prevailing attitude towards billionaire financiers at the moment. Before Soros had even taken his coat off, he was greeted in the corridors by Democratic New York Congresswoman Carolyn Maloney. “Give him a nice office,” she told a staffer who was looking for a place where Soros could wait before his testimony. “He creates a lot of jobs in my district and supports a lot of good people.” After the hearing, a lawmaker and a staffer both approached Soros and asked him to autograph their copies of his book.
. . .
Being listened to on Capitol Hill, and by global policymakers more generally, is important to Soros. But what matters to him most of all – more than money, more than the political and social accomplishments of his foundation – is leaving an enduring intellectual legacy. He describes reflexivity as “my main interest”. Even as Soros met with increasing financial and public success through his fund and his foundation, he was deeply frustrated by his failure to be accepted as a serious thinker. He titled one chapter in his latest book “Autobiography of a Failed Philosopher”, and once delivered a lecture at the University of Vienna called “A Failed Philosopher Tries Again”. As a young man, he wanted to become an academic, but “my grades were not good enough”.
He writes that his first book, The Alchemy of Finance, was “dismissed by many critics as the self-indulgence of a successful speculator”. That reaction still prevails in some circles. Paul Krugman, the Nobel prize-winning economist, devotes half a chapter to Soros in his latest book, characterising him as “perhaps the most famous speculator of all times”. He also raises an eyebrow at Soros’s intellectual “ambitions”, tartly observing that he “would like the world to take his philosophical pronouncements as seriously as it takes his financial acumen”.
Another barrier to academic respectability is Soros’s self-confessed “phobia” of formal mathematics: “I understand mathematical concepts but I’m afraid of mathematical symbols, because you can easily get lost in them.” That fear proved no impediment to success in the quantitative world of finance, but it has hurt Soros’s street cred in economics departments. “Among academics, he suffers from the additional liability of not expressing it in the language of mathematics that has become fashionable,” Joe Stiglitz, another Nobel prize-winning economist, said. But Stiglitz believes his friend’s writing has become more current, partly thanks to the financial crisis: “By those economists interested in ideas, I think his work is taken seriously as an idea that informs their thinking.”
In the view of Larry Summers: “Reflexivity as an idea is right and important and closely related to various streams of existing thought in the social sciences. But no one has deployed a philosophical concept as effectively as George has, first to make money and then to change the world.”
Paul Volcker delivered a similar verdict: “I think he has a valid insight which is not always expressed as clearly by him as I might like.” Overall, he said, Soros is “an imaginative and provocative thinker … he’s got some brilliant ideas about how markets function or dysfunction.”
This is as close to mainstream intellectual acceptance as Soros has come in his two decades of writing and more than five decades since he gave up on academia. It feels like a breakthrough. When I asked him if he would still describe himself as a failed philosopher, he said no: “I think that I am actually succeeding as a philosopher.” For him, that is “obviously” the most important human accomplishment.
“I think it has to do with the human condition,” he said. “The fact that we are mortal and we would like to be immortal. The closest thing you can come to that is by creating something that lives beyond you. Wealth could be one of those things, but evidence shows that it doesn’t survive too many generations. However, if you can have an artistic or philosophical or scientific creation that withstands the test of time, then you have come as close to it as possible.”
Chrystia Freeland is the FT’s US managing editor
http://www.ft.com/cms/s/2/9553cce2-eb65-11dd-8838-0000779fd2ac.html
Wednesday, November 12, 2008
Soros bets a few quid on Gutnick
Soros bets a few quid on Gutnick
DIAMOND JOE GUTNICK has found a new chum in the form of billionaire investor George Soros. Over the past few weeks, Soros has been throwing a few beans the way of two Australian-based companies, Gutnick's Legend International and another digging hopeful, Sphere Investments.
Soros Fund Management has outlaid about $US8.4 million ($12.5 million) for more than 5 per cent of Gutnick's US-listed Legend, taking his stake to about 10 per cent. Legend, listed on the Over-the-Counter market in the US, is developing a phosphate deposit in the Georgina Basin in Queensland.
Perhaps Soros has heard of Gutnick's ability to go looking for diamonds and come back with gold. Last week Soros, who ranks 99th on the Forbes Rich List with nearly $US9 billion to his name, bought a 5 per cent stake in Sphere, which is planning to develop a $2.1 billion iron ore mine in Mauritania.
Soros, who bought the stake through another of his funds, Quantum Emea, is well known for his uncanny ability to make money when everyone else is having a tough time of it.
In 1992, he famously shorted the pound to earn $1 billion in a single day, leading to the currency losing 20 per cent of its value and prompting a downturn.
http://business.smh.com.au/business/soros-bets-a-few-quid-on-gutnick-20081109-5kvo.html
Soros invested in Legend International and Sphere Investments.
DIAMOND JOE GUTNICK has found a new chum in the form of billionaire investor George Soros. Over the past few weeks, Soros has been throwing a few beans the way of two Australian-based companies, Gutnick's Legend International and another digging hopeful, Sphere Investments.
Soros Fund Management has outlaid about $US8.4 million ($12.5 million) for more than 5 per cent of Gutnick's US-listed Legend, taking his stake to about 10 per cent. Legend, listed on the Over-the-Counter market in the US, is developing a phosphate deposit in the Georgina Basin in Queensland.
Perhaps Soros has heard of Gutnick's ability to go looking for diamonds and come back with gold. Last week Soros, who ranks 99th on the Forbes Rich List with nearly $US9 billion to his name, bought a 5 per cent stake in Sphere, which is planning to develop a $2.1 billion iron ore mine in Mauritania.
Soros, who bought the stake through another of his funds, Quantum Emea, is well known for his uncanny ability to make money when everyone else is having a tough time of it.
In 1992, he famously shorted the pound to earn $1 billion in a single day, leading to the currency losing 20 per cent of its value and prompting a downturn.
http://business.smh.com.au/business/soros-bets-a-few-quid-on-gutnick-20081109-5kvo.html
Soros invested in Legend International and Sphere Investments.
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