“From now on, depressions will be scientifically created.”
– Congressman Charles A. Lindbergh Sr., 1913, following the passage of the Federal reserve Act.
GEORGE Soros, billionaire, philanthropist and hedge fund legend, has characterised today’s situation in global markets as the most severe since the Great Depression.
Mr Soros said global financial markets were in a period of rapid, massive de-leveraging that would fuel volatility.
“We are in a period of financial wealth destruction … and now we have de-leveraging,” he said.
At the same time, Mr Soros said “the acute phase” of the crisis in the US banking system was past, thanks to the US Federal Reserve’s actions to increase liquidity in financial markets.
He was less fearful about the potential crippling of the US banking system and credited the Fed’s actions to boost cash reserves in financial markets and its role in a deal for JPMorgan Chase to take over Bear Stearns.
“I think the acute phase of the crisis is behind us in the sense that (fears that) the financial system will be allowed to collapse are unfounded,” Mr Soros said.
Mr Soros made his comments while promoting his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.
The billionaire blamed the lack of transparency in the credit default market, which he calculated at $US45 trillion, as the root of the curtailing of bank-lending, and hence the credit squeeze.
“That is an amazing figure,” Mr Soros said, noting that the size of the CDS (credit default swaps) market is equal to the total wealth of US households and five times the national debt level.
Mr Soros called credit default swaps – a sector in which he said hedge funds are particularly active – a “totally unregulated” market fraught with risks.
“You don’t know if their counterparties will meet their obligations,” he said.
Hedge funds have immense influence on the financial system, but they have used an enormous amount of leverage over the years, Mr Soros said, emphasising that their leverage has not been regulated.
“I have operated a hedge fund myself,” said Mr Soros, whose famous bet against the British pound earned his Quantum Fund $US1 billion in 1992.
“I have never used the kind of leverage others have employed and some of them have not proven to be sustainable.”
In that regard, Mr Soros said he believed the amount of leverage that hedge funds and other players are using needed to be regulated.
But, he said, that regulation should be done through the banks.
Mr Soros also agreed that the latest official forecast for $US1 trillion ($1.08 trillion) in global losses stemming from the US sub-prime crisis was a “fair estimate”.
When asked about the forecast for global losses by the International Monetary Fund, Mr Soros said: “I think that is a fair estimate, but that number is likely to still grow.”
He said house prices in the US and elsewhere would continue to come under severe pressure.
Even so, he noted, the financial crisis is beginning to have serious effects on the real economy, adding: “The extent of that is not, in my opinion, yet fully recognised.”
All told, investors are facing the “worst financial crisis of our lifetime”, Mr Soros said.
In mid-March, the Fed brokered JPMorgan’s takeover of Bear Stearns and also dusted off a Depression-era rule to let securities firms borrow directly through its discount window, which is usually reserved for commercial banks. That has significantly helped restore investor confidence.