Thursday, March 26, 2009

Soros on Commercial Real Estate and Inflation

From Bloomberg News:

Billionaire investor George Soros said U.S. commercial real estate will probably drop at least 30 percent in value, causing further strains on banks.

“Commercial real estate has not yet fallen in value,” Soros, 78, speaking at a forum in Washington, said. “It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent.”

Soros said the risk of further declines in property prices is reason for the administration of President Barack Obama to move quickly to recapitalize banks. Soros said Obama acted too slowly on a banking overhaul and should have moved immediately upon taking office.

“At that moment of enthusiasm, fresh out of the gate, he would have gotten that money, and then we could have recapitalized the banks the right way, which would be to draw a line over the existing past accumulated bad assets and create new banks on top of these old banks,” Soros said.

Soros also said that the U.S. may face a new round of inflation should the flow of credit recover because of the large increase in the money supply stemming from the Federal Reserve’s purchases of Treasury securities.

“In order to make up for the collapse of credit, we are effectively creating money,” Soros said. That creates “an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

Friday, March 20, 2009

A Collection of George Soros Interviews

Here is an interesting collection of interviews with George Soros.

George Soros Interviews A giant collection of interviews with George Soros

Monday, March 16, 2009

Jim Rogers: Depression and Crude Oil

Bloomberg News:

The U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, investor Jim Rogers said.

“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”

The U.S. government should let American International Group Inc., whose fourth-quarter loss was the worst in corporate history, go bankrupt, Rogers added in a Bloomberg Television interview today. Congress approved a $700 billion bank bailout package in October, and President Barack Obama’s administration has suggested it may need an additional $750 billion.

The U.S. is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under, Rogers said.

New York-based AIG has received $173 billion in government aid, and had earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave.

The Treasury this week intends to provide more information about a $1 trillion plan to remove distressed mortgage assets from banks’ balance sheets. The Federal Reserve is also scheduled this week to start the first phase of a $1 trillion program to revive the market for securities backed by consumer and business loans.

Oil Prices

Oil prices may rise to record levels in the future because of depleting reserves and a lack of major field discoveries, Rogers said. Crude oil in New York hit a record $147.27 a barrel in July and traded at $46.98 at 12:13 p.m. Singapore time.

“Reserves of oil are going down all over the world,” Rogers said. “The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”

People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.

“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”

Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.

Goldman Betting On Distressed Debt

It is clear that huge fortunes will be made in distressed debt, when the smoke clears and the economy recovers. But, as the following article mentions, timing is critically important. It will be interesting to see when John Paulson begins buying debt and financials, given his impeccable performance throughout this crisis.


From The Financial Times:

Goldman Sachs is asking investors in its $15bn private equity fund for approval to shift much of its remaining uninvested money into distressed debt in a stark indication of just how dysfunctional the buy-out business has become amid the meltdown in credit markets.

In recent months, many private equity firms have quietly shifted their focus to buying debt at a discount as they are unable to pay for acquisitions with cheap flexible debt as they could during the boom years. Goldman is now seeking to do likewise.

“Given the dislocation we are facing in the credit markets, we believe the ability to achieve private equity-like returns at an even more senior position in the capital structure provides a significant opportunity for the fund,” the bank told investors.

TPG, for example, plans to dedicate $2.5bn of its $18.8bn buy-out fund to distressed debt, and has hired Alan Waxman from Goldman Sachs to run it.

GSO, Blackstone’s debt specialist, has also been buying debt at a discount and plans to step up such purchases of the debt in its own deals.

For example, it has told investors in its funds that it and Bain Capital now control $500m of the debt of portfolio company Michaels Stores, bought from a hedge fund at cents on the dollar.

But such a shift in strategy can be perilous. On its earnings call in early March, Steve Schwarzman, Blackstone’s founder, noted that the firm lost money by wading into the corporate debt market too early. Blackstone also marked a multibillion dollar portfolio of debt purchased from Deutsche Bank to zero at its year-end.

For Goldman, there are also other issues. In some cases, Goldman will potentially be pitting itself and its investors against some of its best clients, the private equity firms controlling these highly indebted companies. Often, the goal of buyers of distressed debt is to ultimately control the issuing company when it cannot meet all its obligations.

However, one person familiar with the thinking at Goldman said: “Goldman will never go hostile against our clients. We will come to agreement and not push companies to file for Chapter 11 bankruptcy protection.”

Of the $9bn remaining in the fund, Goldman plans to allocate $4.5bn to stressed and distressed investments and increase open market purchases of both debt and equity securities from 10 to 25 per cent of total commitments.

Another $1.5bn will go to firms Goldman already owns in part to help them buy their own debt. Only $3bn will go to buy-outs, originally the only mission of the fund. Goldman has invested $2bn in the fund, including an additional $500m injected recently.

Saturday, March 14, 2009

Alan Blinder: Origins of the Financial Mess

Alan Blinder of Princeton University gives an excellent lecture on the financial crisis:

Monday, March 9, 2009

Where Are We?

Some interesting charts...

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This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.