George Soros spoke to a full house of bankers, lawyers, Wall Street types and journalists this morning at Bryant Park Grill behind the landmark New York Public Library this morning. The billionaire is not only one of the world’s best investors, but is also one of the great philosophical leaders and engaging speakers of our time. In measured tones, the 79-year-old warned that Americans still have their head in the sand about the implications of the financial crisis and the prospects for their economic and political welfare.
He says that political rhetoric and "story telling" is shielding Americans from the harsh truth that the financial system is still in dire need of a dramatic overhaul and that our living standards based on debt and over-spending must be changed. "The political discourse is effectively manipulating reality," he said. "The electorate needs to be concerned with the truth."
Soros blamed a 25-year stretch of bubbles, from tech to housing, as well as lax regulation for bringing on the excesses of debt and spending. He worries that there is “too much continuity” between the Bush and Obama administrations. “We needed to have radical change; dealing with this problem was messed up by [former Treasury Secretary Hank] Paulsen. It was done in a haphazard way,” he said, adding that the infusions into the bank should have been with equity, not in supporting their balance sheets.” Despite the bailout money, he says, banks are nevertheless still weighed down by their bad assets. "I don't think the Obama Administration is ready for radical change." (He did cut Paulsen a break by saying he was in a pressure cooker and it's easy to criticize in hindsight, but quickly added that the crisis has been handled in "the wrong way.")
Soros had retired from investing (his sons now run Soros Fund Management) but returned in August 2007 through the beginning of this year to “preserve” his own capital. The author of “The Crash of 2008 and What it Means, philanthropist, Holocaust survivor and a graduate of the London School of Economics, Soros told the audience he succeeded in not only preserving capital but even made a nice return to boot. Right now, he says, “my theory is the future is unpredictable so I’m not going to predict it...it’s not the time to have firm conviction.” He did say however that the market and hedge funds, for example, no longer made investments based on fundamentals, making "markets more unstable."
Soros also believes that the securitization model is not dead. But he says the method that separated what he called “the agent and the principal,” or in other words the underwriter from the homebuyer, introduced new risk into the financial system. Rather, Wall Street and banks were much more interested in generating fees from the transactions, and not the fate of the borrower.
More regulation is needed, says Soros. But he also warned against oppressive regulation that could stifle innovation. “You can’t expect market participants to resist bubbles which are why you need an outside force to prevent them from going too far. Unlimited innovation can be harmful.”