Credit crisis losses to top $1trillion, says Soros

Billionaire George Soros said the seizure in global credit markets caused by the subprime collapse will get worse before it gets better.

Lack of oversight is partly responsible for problems in the financial markets, Soros told reporters on a teleconference today.

He said regulators and the US administration "failed to perform their job'' in a crisis that began in the US housing market and which the International Monetary Fund estimates will cost global financial institutions almost $1 trillion.

"This is a man-made crisis and it's made by this false belief that markets correct their own excesses,'' Soros, 77, said. "It will take much longer for the full effect of the decline in the housing market to be felt.''

More than 45 of the world's biggest banks, including Citigroup Inc and UBS AG, have recorded a combined $232 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans.

"The credit market is on a very vulnerable cusp at the moment,'' said Tim Barker, head of credit research at Morley Fund Management in London, which oversees £160 billion ($317 billion) of assets.

"The market's road to recovery will be bumpy because we still have major economic headwinds. Even if the US is not in a recession, it certainly feels like it is.''

Taking responsibility
The Federal Reserve added $4.5 billion in temporary reserves to the banking system on March 14, and provided financing to help JPMorgan Chase & Co buy Bear Stearns for a fraction of the troubled bank's market value, in an attempt to forestall losses in the credit and equity markets.

Authorities did not accept the responsibility "to try to control asset bubbles from going too far,'' Soros said. Recently established markets, including credit-default swaps, are "totally unregulated; that's the cause of the troubles.''

Credit-default swaps, contracts designed to protect investors against default and used to speculate on credit quality, grew 49 per cent to cover a notional $43 trillion of debt in the six months ended June 30, according to the Bank for International Settlements.

The market for derivatives grew at the fastest pace in at least nine years to $516 trillion in the first half of 2007, the BIS said in a report. Money at risk through credit-default swaps increased 145 per cent from last year to $721 billion, according to the BIS, which was formed in 1930 to monitor financial markets and regulate banks.

More losses
Total losses for banks, hedge funds, pension funds, insurance companies, and sovereign wealth funds may swell to $945 billion, the IMF said in a report on April 8.

"I think it's a pretty accurate estimate of the loan losses,'' Soros said.

"But we have not yet seen the full effect of possible recession. It only relates to the decline in the value of the various financial instruments which are held by the banks and other institutions.''

IMF's estimates don't "in any way reflect possible decline in the quality of the loans that they hold. These are the eventual losses that are yet to be seen,'' he said.

Last year, Soros returned to a more active role in managing the $17 billion Quantum Endowment Fund, whose profits pay for his philanthropic projects, because of concerns about market declines that started with rising subprime-mortgage defaults.

Mistrust in markets
Uncertainty about the ability of investors and traders to meet contract obligations is creating "mistrust'' in the markets that "will not be fully cleared up until you have a regulated delivery mechanism and oversight over this market,'' he said.

Morgan Stanley Chief Executive Officer John Mack said on April 8 the credit crisis will last a couple of quarters longer and that the markets are facing the most difficult conditions he's seen in 40 years.

Soros said the crisis will last longer than authorities predict.

"They claim that there will be a pickup in the second half of the year,'' he said. "I cannot believe that.''