Soros sees more decline after brief rebound

Billionaire George Soros called the current financial crisis the worst since the Great Depression and said markets will fall more this year after a brief rebound.

"We had a good bottom,'' Soros said yesterday in an interview in New York, referring to the rally in stocks and the dollar after JPMorgan Chase agreed to buy Bear Stearns on March 17.

"This will probably not prove to be the final bottom,'' he said, adding the rebound may last six weeks to three months as the US moves closer to a recession.

Last summer, worried about market disruptions that started with rising subprime-mortgage defaults, Soros, 77, returned to a more active role in managing the $17 billion Quantum Endowment Fund, whose profits pay for his philanthropic projects. Quantum returned an average of 30 per cent a year before Soros started using outside managers in 2000 for much of his money.

He also decided to write a book, his 10th, "The New Paradigm for Financial Markets'' (Public Affairs, 2008).

Released today online, the book explains the causes of the current meltdown, a crisis he says has been in the making since 1980, and the trades he put in place this year to protect his wealth, much of it in Quantum.

Soros has bet on declines in the dollar, 10-year treasuries and US and European stocks. He expected foreign currencies to rise, as well as Chinese and Indian equities. The latter bet helped Quantum return 32 per cent in 2007. Quantum's returns this year have ranged from up 3 per cent to down 3 per cent.

'Heightened uncertainty'
The euro has climbed 7.5 per cent against the dollar this year and the Japanese yen has gained 9.1 per cent. These and other currencies may continue to strengthen, he said. "There is an increasing unwillingness to hold dollars, though there's a lack of suitable alternatives,'' he said. "It's a period of heightened uncertainty."

Federal Reserve officials dropped their benchmark interest rate 2 percentage points this year to 2.25 per cent, and Soros doesn't see that they can lower the rate much further, given the weak dollar.

"We are close to the limit,'' he said. As for his wagers on developing markets, Soros hasn't abandoned his holdings in India, even with the 22 per cent drop in the benchmark Indian index this year.

"The fundamentals remain good,'' he said. He is less certain about what will happen to Chinese H shares, which trade in Hong Kong.

Credit-Default Swaps
Credit default swaps "" a way to bet on the creditworthiness of a company "" may be the next crisis area because the market is unregulated, and it's impossible to know whether counterparties can meet their obligations in the event of a bond default. The market has a notional value of about $45 trillion "" or about half the total wealth of US households.

Soros recommends the creation of an exchange with a sound capital structure and strict margin requirements, where current and future contracts could be traded.

The cause of the current troubles dates back to 1980, when the US President Ronald Reagan and the UK Prime Minister Margaret Thatcher came to power, Soros said. It was during this time that borrowing ballooned and regulation of banks and financial markets became less stringent.

These leaders, Soros said, believed that markets are self-correcting, meaning that if prices get out of whack, they will eventually revert to historical norms. Instead, this laissez-faire attitude created the current housing bubble, which in turn led to the seizing up of credit markets and the demise of Bear Stearns, Soros said.

To avoid a super-bubble in the future, Soros said banks must control their own borrowing. They must also curtail lending to clients such as hedge funds by demanding greater collateral and margin requirements on loans.

Asked if such moves would make it impossible to achieve returns like those of his pre-2000 days, Soros laughed.

"Since I'm designing these regulations, they would not hurt me,'' he said. "We made direction bets but we haven't used leverage'' like the $25-to-$1 borrowing that brought down John Meriwether's Long-Term Capital Management in 1998.