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Soros urges containment of credit crisis

George Soros, chairman of Soros Fund Management, listens during a debate at the World Economic Forum in Davos, Switzerland, on Jan. 23. PHOTO: AFP

The credit crisis is far from over, billionaire financier George Soros warned yesterday, 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,” he said.

Soros is promoting a new book, The New Paradigm for Financial Markets: The Credit Crisis and What It Means.

He has urged regulators to move aggressively to improve market oversight to curb risks from excessive reliance on debt for financial speculation.

He said he agreed with the IMF estimate of more than US$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,” he said.

Soros said that hedge funds struggling to clear up massive levels of debt are another pitfall.

He pointed to the potential for massive losses from complex investments linked to the US subprime mortgage market, such as credit default swaps, or CDS, which allow investors to put bets on the likelihood that companies will default on bond payments.

He described the US$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 US$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 Inc, the largest US insurer, for example, reported that its swap portfolio lost US$11.12 billion in value in the fourth quarter of last year 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 current credit crunch, Soros said.
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