The New York Times
Sunday, December 6, 1998
"GEORGE SOROS HAS SEEN THE ENEMY. IT LOOKS LIKE HIM."
By Timothy O'Brien
NEW YORK -- What would Freud have made of the way George Soros, the world's most famous hedge fund manager, describes the tension brought on by having made a fortune as a speculator and then having reinvented himself as a globe-trotting philanthropist?
"Sometimes I felt like a gigantic digestive tract, taking in money at one end and pushing it out at the other," Soros writes earthily in the preface to his new book, "The Crisis of Global Capitalism" (Public Affairs, $26). "But in fact a considerable amount of thought connected the two ends."
And what to make of a man who has raked in billions of dollars through lightning strikes in free-wheeling currency markets, but now advises the world on how to clean up the messes he thinks such strikes create?
While Soros has been playing the multiple roles of trader, philosopher and philanthropist for many years, the friction has come into sharpest relief in recent months, as he has boldly prescribed cures for a variety of the world's economic ills.
It has been most conspicuous in Russia, where Soros, with more than $1 billion at stake in the country, actively lobbied Russian and American officials to accept his advice on the best way to resolve the summer's financial crisis.
Soros' book includes a day-by-day account of his high-level phone contacts and memo-writing in the weeks before and after the August devaluation of Russia's currency, the ruble.
"There's a potential conflict -- I've always taken great care not to exploit it," said Soros, 68, gently tapping his eyeglasses against a conference table in his mid-Manhattan office. "And I think that people, both in Russia and Washington, knew that, and that's why they took the calls, because I think I have established a certain record in that regard."
Still, many observers wonder about Soros' straddling of so many fences inthe worlds of finance, economics and politics.
"I think there's a built-in conflict between making money in public markets and improving the world," said James Grant, editor of a newsletter, Grant's Interest Rate Observer, and the author of several studies of financial markets. "Soros is out there telling you what he's done, what he's going to do and how he'll save the world. I think there's a conflict because those goals seem at cross-purposes."
"It raises questions about inside information when you're able to talk to central bankers and policy makers at the same time that you're involved in financial markets," Grant said.
For his part, Soros, dapper and attentive, defended his probity in a wide-ranging interview last week, saying he has always strived to keep separate his roles as a hard-nosed trader placing global bets and a financial guru able to rub elbows with the highest of the high and mighty.
Though he had run-ins with American regulators in the 1970s and 80s, he has never been accused of insider trading or similar financial wrongdoing.
"We have to distinguish between playing by the rules and making the rules," Soros said. "Playing by the rules, one does the best one can, irrespective of the social consequences. Whereas in making the rules, people ought to be concerned with the social consequences and not with their personal interests -- in other words, not to bend the rules to their benefit or their advantage. This is a principle which I have certainly observed."
Yet Soros, who is believed to be worth about $5 billion, is uniquely positioned to help determine how the rules are made in some parts of the world, and he built his fortune in currency markets where the rules were never entirely clear.
As the Russian crisis mounted in August, for example, Soros worked his Rolodex, summoning influential Russian politicians and United States Treasury Department officials to the telephone. He pushed for a big international bailout and a devaluation of the ruble to bolster Russia's troubled economy.
At the same time, Soros had $1 billion invested in a Russian telecommunications concern -- through a partnership with one of Russia's powerful "oligarchs" -- as well as investments in Russian stocks, bonds and the ruble.
Soros was also the overseer of a philanthropic foundation in Moscow that generously financed a range of causes, including education, the arts, sciences and media, through about $61 million in annual grants.
If Soros ruled the world, he said, he would establish an international regulatory agency to rein in speculative excesses and provide financing during economic crises.
"To put it bluntly, the choice confronting us is whether we will regulate global financial markets internationally, or leave it to each individual state to protect its own interests," he wrote in his book. "The latter course will surely lead to the break down of the gigantic circulatory system which goes under the name of global capitalism."
That prescription reflects the fact that Soros has long harbored a certain disdain for the profession that made him rich. Indeed, his record is such that he -- along with Warren E. Buffett, the Omaha financier, and perhaps Peter Lynch, the Fidelity fund guru -- is among the few investors whose names are widely recognized by the public.
A Hungarian-born Jew, Soros was 14 when the Nazis invaded his homeland. He avoided the fate of many Jews by posing as the godson of a Hungarian official overseeing the confiscation of Jewish properties. He moved to London after the war and eventually graduated from the London School of Economics.
There he came under the influence of the philosopher Karl Popper, whose "open societies" credo Soros re-fashioned as his own. Popper opposed totalitarian states; Soros believes that participatory democracy and regulated market economies are the vehicles for insuring individual freedom.
His academic training led to the fascination with abstract thinking that pervades much of his writing. "But if you get too abstract, you have nothing to grapple with and abstraction empties your thinking of content," he acknowledged last week.
Soros, at first hard up for cash and then stymied by limited opportunities in London, moved to New York in the late 1950s and became a trader. He soon carved out a niche exploiting differences between the London and New York markets, a gulch he mined through the 60s before venturing into the new world of hedge funds.
Hedge funds -- largely unregulated investment pools open only to wealthy investors and big institutions -- aim to provide consistently outsized returns on stocks, bonds, currencies or other securities while limiting losses from market downturns.
Soros, an aggressive, gutsy speculator, ran one of the earliest and most successful of these -- the Quantum Fund -- for two decades beginning in1969.
Basing Quantum in the loosely regulated confines of the Caribbean island of Curacao, Soros often racked up returns in excess of 30 percent a year and twice posted annual returns of more than 100 percent, according to the fund's most recent quarterly report.
He was one of the first investors to hunt down opportunities around the world, eventually spawning a legion of imitators and fellow enthusiasts. "George opened all of our thinking to macroeconomic theory, and he made globalists of us all by making us understand the importance ofgeopolitical events on the U.S. economy," said Byron Wien, chief domestic investment strategist at Morgan Stanley Dean Witter, who has known Soros for about 30 years.
Soros gave up day-to-day management of Quantum in 1989, but he is still consulted on major trades and is one of three supervisors of Soros Fund Management, the New York firm that oversees Quantum and his other funds.
Since the late 1980s he has also been a ubiquitous philanthropist, donating money to causes around the globe to realize his vision of an open society. Last year, his foundations gave away $428 million, with Russia the single largest recipient and political reform in Eastern Europe one of his chief causes.
Along the way, Soros has become an incisive critic of the predations of unfettered capitalism, a theme that has taken on even greater resonance in the wake of the financial calamities in Asia and Eastern Europe over the last 18 months.
"Markets basically are amoral, whereas society does need some kind of morality -- a distinction between right and wrong," Soros observed. "And by allowing market values to become all-important, we actually narrow the space for moral judgment and undermine public morality. This has actually happened, and globalization has increased this aberration, because it has actually reduced the power of individual states to determine their destiny."
Of course, no one in the markets proves the point better than Soros himself. It was in 1992 that he became a household name, when Quantum and related funds, largely using piles of borrowed money, made more than $1 billion in a few weeks by betting against the British pound.
Britain's central bank wasted its reserves in an unsuccessful effort to defend the currency's value. The episode derailed Britain's membership in a European initiative seeking to rationalize exchange rates -- and it earned Soros this sobriquet: "the man who broke the Bank of England."
Soros has also described some forms of financial derivatives -- highly volatile and complex investing products -- as the economic equivalent of crack cocaine. Yet he has used derivatives in his own speculating, explaining that his funds favor only the simplest varieties.
Such inconsistencies give pause to those who might otherwise share his views. "It's an amusing spectacle to see a guy like him who's made a fortune speculating now going around denouncing newcomers to the field," said Doug Henwood, author of "Wall Street" (Verso, $25), an examination of financial markets. "It's like he suddenly found religion late in life and now wants to be Hegel in a hedge fund."
Closet Hegel or not, Soros is still very much a market maven, intimately involved in his hedge funds' overall activities. That has created some notable flare-ups in the last year, as politicians and financiers alike grappled with understanding the causes of the recent wave of global economic turmoil.
Repeatedly, the finger has been pointed at speculators. Developing nations that had welcomed the capital of foreign investors when it flowed into their economies decried "hot money" as it whipped out.
Speculators like Soros were blamed for destabilizing one nation after another that lacked the financial resources to defend their currencies when signs of economic weakness drew traders' attacks.
In early 1997, Soros' funds were shorting Thailand's currency, the baht, and Malaysia's currency, the ringgit -- that is, betting that the value of both currencies would drop. In July, Thailand dropped its defenses, devaluing the baht. That set off the wave of devaluations in Malaysia and elsewhere that marked the beginning of the current global economic turmoil.
Soros said that by the time of the devaluations, his funds had become active buyers of the currencies, believing that they had already hit bottom. But that did not shield him from withering accusations, mainly from Prime Minister Mahathir Mohamad of Malaysia.
"The Jews robbed the Palestinians of everything, but in Malaysia they could not do so, hence they do this -- depress the ringgit," Mahathir said in blaming Soros and other currency traders for Malaysia's economic woes.
In a speech in Washington on Thursday, Soros criticized Mahathir and his policies. "He needs to be removed from power," Soros said.
SOROS' manifold roles on the world stage became most apparent in August, during the Russian economic meltdown, when he leaped into the fray.
Though he had a longstanding interest in Russia -- inspired by his father's time there as a prisoner of war, followed by a brief residency, during and after World War I -- Soros said he had steered clear of investing there in the years immediately after the fall of communism. Rather, he sank money into the country through philanthropy.
"I abstained from investing in Russia," Soros wrote in his new book, "partly to avoid any conflict-of-interest problems but mainly because I did not like what I saw."
But as early as 1994, he had been in and out of Russia as an investor. And in 1997, he plunged headlong into Russian markets when they were among the frothiest on the planet.
Soros explains now that his concerns about the country were allayed by his confidence in the young reformers surrounding President Boris N. Yeltsin.
But his largest single holding in Russia -- a $1 billion stake in Svyazinvest, a telecommunications concern -- put him into partnership with Vladimir Potanin, the young chairman of one of Russia's biggest banks. Potanin is a member of a powerful and politically influential clique of Russian businessmen known as the "oligarchs."
These men deftly exploited lucrative opportunities that came with privatization in Russia and used dubious tactics to snare control of huge industrial concerns. "I bought it on the thesis that robber capitalism was ready to turn into legitimate capitalism," Soros said of his holding in Svyazinvest.
But the transition proved bumpy. In March, Soros lent the Russian government several hundred million dollars to help it meet overdue pension payments. By the summer, as a corrupt and debt-ridden economy was tumbling toward insolvency, Soros was Russia's biggest individual investor.
Besides his investment with Potanin -- which he now describes as the worst of his career -- he also held Russian stocks, bonds and rubles.
All of this hardly made Soros a disinterested observer when he sprang into action in mid-August to try to stem the crisis.
According to the account in his book, Soros contacted both Robert E. Rubin, the American Treasury secretary, and David A. Lipton, an under secretary who has since left the Treasury Department. He also telephoned two influential former members of Yeltsin's administration, Yegor T. Gaidar and Anatoly B. Chubais, to lobby them on how to prevent an economic collapse.
On Aug. 13, a Thursday, Soros published a letter in The Financial Times saying that the meltdown in the Russian financial markets had "reached the terminal phase."
He called for immediate action, including a devaluation and the institution of a currency board -- a system fixing a nation's currency to the value of its richest trading partner. Such a plan would have taken away Russian central bankers' discretion over monetary policy.
The letter helped prompt a panic in Russian markets -- and invited a fresh bout of suspicion about Soros' motives. Later in the day, he issued a statement saying that he was not shorting the ruble, adding that his own portfolio "would be hurt by any devaluation." In his book, he added that he did not trade any Russian securities during the crisis.
By the weekend, Russia appeared headed for a default on its foreign and domestic debt. In a private meeting in Russia's White House on Sunday, Aug. 16, business leaders -- including Potanin -- persuaded members of the Yeltsin administration to add a moratorium on debt repayment to a deep devaluation of the ruble that was to be announced the next day.
That announcement caused international investors to flee Russia, touching off a global financial panic and setting in motion the events that would lead, a month later, to the near-collapse and government-orchestrated bailout of another big hedge fund, Long-Term Capital Management.
Soros says self-interest played no part in his financial diplomacy during the meltdown.
"In Russia, of course, I had been very involved and became more involved at the time of the crisis," he said last week. "But the advice that I gave, which I think would have avoided the breakdown, was not designed to benefit me personally."
Indeed, at the end of August, Soros' funds announced a $2 billion loss in Russia. But it is hard to imagine that the country's economic stabilization -- the goal of his activism -- could have failed to bolster Svyazinvest.
Ever philosophical, Soros acknowledges that his foray into Russia was problematic. "I have no regrets with regard to my attempts to help Russia move toward an open society: They did not succeed, but at least I tried," he wrote in his book. "I have grave regrets as an investor. It goes to show how difficult it is to reconcile the two roles."
But a former American official who has crossed paths with Soros said the speculator's many roles made it hard to weigh his advice. "The fact that one part of him is motivated by the philanthropy and another part by the investments makes it very difficult to deal with him," said the former official, who insisted on anonymity. "Sometimes the philanthropy dominates his motives. Sometimes investing does. But there's that duality, and you never know."
Copyright 1998 The New York Times Company