Soros and Schwarzman speak

  • Robert Peston
  • 1 Apr 08, 02:30 PM

The two biggest names I interviewed for my film on the financial mess we’re in, Super Rich: The Greed Game (to be broadcast at 9pm on BBC2), were Stephen Schwarzman and George Soros.

Mr Schwarzman is the founder and chairman of Blackstone, which – with Kohlberg Kravis Roberts and Texas Pacific Group – is one of the super-elite of private equity. And Mr Soros, apart from being the trader who broke sterling in 1992, has been one of the most consistently successful hedge-fund superstars.

The take of these multi-billionaires on the causes and consequences of the current global financial crisis is oddly complementary: Soros is very gloomy; Schwarzman sees a glistening golden lining.

George SorosMr Soros says we are witnessing the end of a 60-year “superboom”, characterised by ever-rising levels of debt within the economies of the US and much of the West, especially the UK.

He is a critic of what he calls market fundamentalists who believe that financial markets tend towards equilibrium. His view, which he has applied to great personal profit as a trader, is that markets have a tendency to move towards disequilibrium, that bubbles and excess are the natural order of things.

And each time since the War that one of these bubbles has gone pop, central banks have slashed interest rates and bailed out those with the greatest debts. Which Mr Soros says has created a massive moral-hazard problem, in that businesses, financial institutions and individuals have all been encouraged to become even more indebted in subsequent economic booms - because they’ve been confident that if it all went horribly wrong, the central banks would bail them out.

This is what he says about how bad it will get for all of us:

“You can’t rekindle the willingness to borrow and the willingness to lend because the balance sheets of the banks are now over-burdened and there are all kinds of risks that have become apparent. And they haven’t yet fully worked themselves out, so there’s a great deal of unknown credit risk in the system. And as a result, the banks are husbanding their resources because they’ve actually lost a lot of money...

Now the financial crisis is going to abate because basically central banks know how to provide liquidity. But there is also a question of solvency, and that they don’t quite know how to handle. So there is going to be a fallout... partly because of the housing crisis itself, and partly because of the contraction of the financial system, the de-leveraging of the financial system - because it has become apparent that it was over-leveraged…

Right now it has affected the housing market. It will, in due course, affect commercial real estate as well. It is also going to affect credit card performance and so on… Then there are all these leveraged buyouts which will take a couple of years before a number of those go sour. So you really have now, as I say, the end of a super boom that will take us much, much longer to work itself out.”

What Mr Soros expects is a recession in the US and a sharp economic downturn in the UK. And he expects the financial industry, here and in New York, to shrink very considerably.

He believes the UK economy is vulnerable, due to its dependence in recent years on financial services and the risk that there’ll be a sharp fall in house prices. But he doesn’t expect the entire world to fall into recession, largely because of the strength of the Asian economies. (You can watch my interview with George Soros here)

Stephen SchwarzmanMr Schwarzman is less apocalyptic. Like Mr Soros, he’s lived and worked through many financial crises – and he’s unconvinced that this one will turn out to be significantly more dire than its predecessors. That said, he says that from mid-2006 he became concerned that credit was becoming too easy to obtain and the price of assets was becoming inflated.

But right now, Schwarzman is hoping for the worst. This is what he said to me:

“It’s going to be a great opportunity. And when people were giving interviews a year ago talking about the golden age of private equity, my back was just like tensing up because that was a golden age for paying a lot of money to people who were selling businesses.

The real golden age comes when you have a mess. You have economies that are on their back. You know, capital inadequate. And when you start buying businesses at that part in the cycle you inevitably do extremely well - unless you are too early.

And right now it’s a little bit too early. But as you wait and this develops it’ll be a great time to be buying businesses.”

In a way it’s a statement of the bloomin’ obvious that the best time to buy assets is after they’ve collapsed in price. But to seemingly wish for as much economic misery as possible, so that Blackstone can buy companies at a knockdown price, is perhaps not the most politically sensitive statement ever made by Mr Schwarzman.

UBS: Another fine mess

  • Robert Peston
  • 1 Apr 08, 07:25 AM

UBS was already one of the main victims of the calamitous losses being suffered by global banks on their exposure to US subprime lending.

But there had been a hope that it and other banks were over the worst.

Marcel OspelToday's announcement that the giant Swiss bank has made a loss of around £6bn in the first three months of the year - due to losses of £9.5bn on what it describes as exposure to US real estate - may unnerve both its shareholders and the markets, although analysts had been expecting more bad news from UBS of this sort for some time.

There had been criticism of UBS's chairman, Marcel Ospel, for weeks - so it is no surprise that he is now quitting.

And the bank is taking steps to make sure it can weather the global financial storm by raising £7.5bn in new equity from its shareholders in a rights issue.

But investors have heard before from UBS that it had identified its problems and taken steps to remedy them.

Earlier this year it raised more than £5bn from the government of Singapore and around £1bn from a Middle East investor.

They may be feeling a bit sore that they invested at the wrong time and the wrong price - although UBS's decision to raise new capital gives them the right to renegotiate the terms of their investment.

As for other investors, they will be concerned about what other nasties may lurk at other banks.

Only today Deutsche Bank said it estimates its writedowns on loans and investments were almost £2bn in the first quarter of this year, mostly due to worsening conditions in the US mortgage market. That represents a significant rise in such losses for Germany's biggest bank.

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