NEW YORK (Reuters) - George Soros, the hedge fund legend and billionaire philanthropist, said on Wednesday the subprime mortgage crisis is likely to cause global losses of over $1 trillion, characterizing the situation as the most severe since the Great Depression.
“Losses being recognized now amount to $1 trillion,” from the subprime crisis, Soros said on a conference call when asked about a similar estimate from the IMF.
“I think that is a fair estimate, but that number is likely to still grow,” as house prices in some countries including the United States continue to come under severe pressure, he said.
He was answering questions from reporters on a conference call to discuss his latest book, “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.”
Soros is less fearful about the potential crippling of the American banking system, thanks to the Fed’s actions to increase liquidity in financial markets and its role in a deal for JPMorgan Chase & Co. (JPM.N) to take over Bear Stearns Cos BSC.N.
“I think the acute phase of the crisis is behind us in the sense that (fears that) the financial system will be allowed to collapse are unfounded,” Soros said.
In mid-March, the Fed brokered JPMorgan’s take-over of Bear Stearns and also dusted off a Depression-era rule to let securities firms borrow directly through its discount window, which is usually reserved for commercial banks. That has significantly helped restore investor confidence.
Even so, he noted, the financial crisis is beginning to have serious effects on the real economy, adding: “The extent of that is not, in my opinion, yet fully recognized.”
Soros said global financial markets are in a period of rapid, massive deleveraging that will keep them volatile.
“We are in a period of financial wealth destruction ... and now we have deleveraging,” he said.
Soros blamed the lack of transparency in the credit default market, which he calculates at $45 trillion, as the root of the curtailing of bank lending and hence the credit squeeze.
“That is an amazing figure,” Soros said, noting the size of the CDS market is equal to the total wealth of U.S. households and five times the national debt level.
Soros called credit default swaps — a sector in which he said hedge funds are particularly active — a “totally unregulated” market fraught with risks. “You don’t know if their counterparties will meet their obligations,” he said.
Hedge funds have immense influence on the financial system, but they have used an enormous amount of leverage over the years, Soros said, emphasizing that their leverage has not been regulated.
“I have operated a hedge fund myself,” said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.
“I have never used the kind of leverage others have employed and some of them have not proven to be sustainable.”
In that regard, Soros said he believes the amount of leverage hedge funds and other players are using needs to be regulated . But that regulation should be done through the banks, he added.
All told, investors are facing the “worst financial crisis of our lifetime,” said Soros.
Reporting by John Parry and Jennifer Ablan; Editing by Chizu Nomiyama