Soros Says the Pain Has only just Begun

 

George Soros Part 1

George Soros Part 2

Louise Story | International Herald Tribune | Friday, April 11, 2008

George Soros will not go quietly.

At the age of 77, Soros, one the world’s most successful investors and richest men, leapt out of retirement last summer to safeguard his fortune and legacy. Alarmed by the unfolding crisis in the financial markets, he once again began trading for his giant hedge fund — and won big while so many others lost.

Soros has always been a controversial figure. But he is becoming more so with a new, dire forecast for the world economy. Last week he rushed out a book, his 10th, warning that the financial pain has only just begun.

“I consider this the biggest financial crisis of my lifetime,” Soros said during an interview Monday in his office overlooking Central Park. A “superbubble” that has been swelling for a quarter of a century is finally bursting, he said.

Soros, whose daring, controversial trades came to symbolize global capitalism in the 1990s, is now busy promoting his book, “The New Paradigm for Financial Markets,” which goes on sale next month.

And yet this is not the first time that Soros has prophesied doom. In 1998, he published a book predicting a global economic collapse that never came.

Soros thinks that this time he is right. Now in his eighth decade, he yearns to be remembered not only as a great trader but also as a great thinker. The market theory he has promoted for two decades and espoused most of his life — something he calls “reflexivity” — is still dismissed by many economists. The idea is that people’s biases and actions can affect the direction of the underlying economy, undermining the conventional theory that markets tend toward some sort of equilibrium.

Soros said all aspects of his life — finance, philanthropy, even politics — are driven by reflexivity, which has to do with the feedback loop between people’s understanding of reality and their own actions. Society as a whole could learn from his theory, he said. “To make a contribution to our understanding of reality would be my greatest accomplishment,” he said.

Soros has been worrying about the fragile state of the markets for years. But last summer, at a luncheon at his home in Southampton with 20 prominent financiers, he struck an unusually bearish note.

“The mood of the group was generally gloomy, but George said we were going into a serious recession,” said Byron Wien, the chief investment strategist of Pequot Capital, a hedge fund.

Soros was one of only two people there who predicted the American economy was headed for a recession, he said.

Shortly after that luncheon Soros began meeting with hedge fund managers like John Paulson, who was early to predict a crisis in the housing market. He interrogated his portfolio managers and external hedge funds that manage his fund’s money, and he took on new positions to hedge where they might have gone wrong. His last-minute strategies contributed to a 32 percent return — or roughly $4 billion for the year.

The more Soros learned about the crisis, the more certain he became that he should rebroadcast his theories. In the book, Soros, a fierce critic of the Bush administration, faults regulators for allowing the buildup of the housing and mortgage bubbles. He envisions a time, not so distant, when the dollar is no longer the world’s main currency and people will have a harder time borrowing money.

Soros hopes his theories will finally win the respect he craves. But, ever the trader, he hedges his bets. “I may well be proven wrong,” he said. “I would say that I’m the boy who cried wolf three times.”

Many of the people Soros wants to influence may view him with skepticism, in part because of how he made his fortune. In 1992, his fund famously bet against the British pound and helped force the British government to devalue the currency. Five years later, he bet — correctly — that Thailand would be forced to devalue its currency, the baht. The resulting bitterness toward him among Thais was such that Soros canceled a trip to the country in 2001, fearing for his safety.

Asked if it bothers him that people accuse him of causing economic pain, his blue eyes dart around the room. “Yes, it does, actually yes,” he said.

Asked if those people are right to blame him, he says, “Well no, not entirely.”

No single investor can move a currency, he said. “Markets move currencies, so what happened with the British pound would have happened whether I was born or not, so therefore I take no responsibility.”

Soros, came of age in Nazi-occupied Hungary and has for decades longed to write a masterpiece that might put him among thinkers like Hegel or Keynes, said Michael Kaufman, who wrote a book about Soros. “He spent years writing papers and letters to people, but everyone ignored him,” Kaufman said.

But when Soros became rich, people began listening. He also started giving large sums to charities, and in Eastern Europe, as the Soviet Union crumbled, he distributed copy machines to encourage free speech in his native Hungary. So generous was Soros with his money that “Sorosovat” became a new verb in Russian, loosely meaning to apply for a grant.

He continues to be one of the top givers to charities around the world, and has given more than $5 billion away through his foundations.

Yet even Soros acknowledges that many economists still slight his theories.

“I am known as a hedge fund manager and I am known as a philanthropist, and it’s very hard for, say, academics to accept that a hedge fund manager may actually have something to say about economics,” Soros said. “So that has been difficult for me to overcome.”

But Joseph Stiglitz, a professor at Columbia who won the Nobel for economics in 2001, said Soros might still meet success. “With a slightly different vocabulary these ideas, I think, are going to become more and more part of the center,” said Stiglitz, a longtime friend of Soros.

Soros’s firm, Soros Fund Management, has been through several turbulent years. Stanley Druckenmiller, his longtime No. 2, left in 2000, in part because he was tired of the constant media attention Soros attracted. ( Soros credits Druckenmiller for the winning gamble on the British pound, saying he added the encouragement to bet more money on the trade.)

Several outside investors also left, and Soros overhauled the company as more of a wealth management tool for his own family and related charities. Soros said in 2000 that he no longer desired returns like the 30.5 percent his fund returned on average, after management fees, from 1969 to 2000.

In 2004, Soros tapped his oldest son, Robert, to become the chief investment officer, despite Robert’s reluctance.

At that time, Soros, was busy trying to turn public opinion against President George W. Bush. He donated $27 million to anti-Bush organizations and traveled the country speaking out against the president. This time around, he is less involved. He endorsed Senator Barack Obama but kept his distance from the campaign trail.

Robert Soros, 44, who once claimed his father based his trades not on grand theories like reflexivity but rather on his back pain, never shared his father’s enthusiasm for the markets. “When you’re a billionaire’s son, you’re less hungry than when you’re a Hungarian immigrant,” one former Soros Fund Management executive said.

Even so, the Soros fund performed well under the younger Soros, and as recently as last June, it was up 10 percent for the year, according to a letter to investors. At the end of July, Robert stepped down from his head investment role, just before his father returned to trading. Robert and his brother Jonathan remain deputy co-chairmen, under their father, the chairman of the fund.

This week, Wien illustrated the knack of Soros for timing with an old story. In 1995, Soros asked Wien why he bothered going to work every day. Why not go to work only on days when there is something to do?

“I said, ‘George, one of the differences between you and me is you know when those days are, and I don’t,'” Wien said.