The credit crisis is far from over, billionaire financier George Soros warned Thursday, urging regulators to move faster to contain damage...
SHANGHAI, China — The credit crisis is far from over, billionaire financier George Soros warned Thursday, urging regulators to move faster to contain damage from the collapse of the housing finance markets.
“I think the situation is more serious than the authorities admit or recognize,” Soros told journalists in a conference call.
Measures taken so far to slash interest rates and stimulate the economy were “necessary but not sufficient,” he said. “Because of that, I think the situation is going to get worse before it gets better.”
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Soros is promoting a new book, “The New Paradigm for Financial Markets: The Credit Crisis and What It Means.” He wants regulators to move swiftly to improve market oversight in order to curb risks from relying heavily on debt for financial speculation.
Soros said he agreed with the International Monetary Fund’s estimate of more than $1 trillion in losses linked to the collapse of mortgage-backed securities.
Losses disclosed by financial institutions so far are related only to the decline in value of those financial instruments, Soros said.
“They do not reflect in any way a possible decline in the value of the loans held by the banks,” he said.
“We have not yet seen the full effect of the possible recession.”
Soros said hedge funds struggling to clear up massive debt are another pitfall.
“They are all now in this … very painful process of wealth destruction,” he said.
He pointed to the potential for massive losses from complex investments linked to the subprime-mortgage market, such as credit default swaps, which allow investors to put bets on the likelihood that companies will default on bond payments.
He described the $45 trillion market in credit swaps as a “sword of Damocles.”
“That’s more than five times the entire government-bond market of the United States. It’s almost equal to the entire household wealth of the United States,” Soros said.
“This $45 trillion market is totally unregulated,” he said. “You can have very large positions with very little capital, and you can actually assume risk and get paid for assuming that risk without being regulated.”
American International Group, the largest U.S. insurer, for example, reported its swap portfolio lost $11.12 billion in value in the fourth quarter of 2007 because decaying credit quality means insured debt is less likely to be repaid.
That news prompted fears of further losses throughout the industry.
The potential risks from such investments has engendered a damaging level of mistrust among financial institutions, accentuating the credit crunch, Soros said.