Soros: This Is Act 2 of the Crisis

I’ve been a Soros fan ever since reading “The Alchemy of Finance” in the early ’90s and an even bigger fan since seeing him speak at the “Secretary’s Open Forum” at the U.S. Department of State in 2003.  The following is a clear, concise, and up-to-date explanation of his main theories and their implications for financial markets and their participants and regulators.

This Is “Act 2″ of the Crisis
George Soros
2010-6-14

In the week following the bankruptcy of Lehman Brothers on Sept. 15, 2008 — global financial markets actually broke down, and by the end of the week, they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties.

As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.

This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.

The first phase of the maneuver has been successfully accomplished — a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt.  Greece and the euro have taken center stage, but the effects are liable to be felt worldwide.

Ten Principles for a Black Swan-proof World

A year and a half ago, Nouriel Roubini gave us his recipe for financial meltdown, The Twelve Steps to Financial Disaster, each of which unfolded in sequence. Now Nassim Nicholas Taleb gives us his “Ten Steps for a Black Swan-proof World” (below).

Roubini’s steps were the inevitable outcome of a flawed system. Sadly, perhaps, Taleb’s steps are not inevitable.

Additional reading:

• Selected Roubini articles on this blog
• Nouriel Roubini’s Global EconoMonitor blog
• Nassim Nicholas Taleb’s Fooled by Randomness blog

Now on to the article:

Life Is Beautiful

Rob and Hugo

Fourteen months have gone by since I wrote the following letter, on December 21, 2008, the day after my wife Susanne’s godfather, Hugo, died, at his home in Gothenburg, Sweden.

I’ve wanted to share it for a long time as a memorial to Hugo and to remind myself, and maybe help others remind themselves, that life is beautiful, that we need to cherish it, be kind, pay it forward, live in the present, and generally try to do no harm and leave this earth better than we found it.

The reason I publish this letter today is two fold:

Barack Obama Wins, We Win! Acceptance Speech Video and Transcript

(Note: the screenshot above is from this morning. Since then, the Obama margin has increased. See The New York Times interactive election map and Big Board for the latest. You can toggle the map to any of the past four presidential elections. There are also links to speeches, polls, and more.)

My hope in USA is restored; we are not scared anymore. Fear, bullying and “me, me, me” loses. Courage, cooperation, and “we, we, we” wins. Thank you is all I can say. Thank you, Barack Obama. Thank you, world! Be the change!

Video of Obama’s acceptance speech:

• BBC
• New York Times

Did it bring tears to your eyes the way it did mine?
Yes, we can! That message is global; it’s for all of us.

Here is my uncut reaction video and below is the transcript of Obama’s speech. Here is how Washington DC voted.  Update: Fast forward to my January 2009 blog post: Gearing up for Obama-Rama-Palooza in DC.

Update: See the comments at the bottom of this post.  So far…

Bailout “Hope Rally” = Eye of the Storm

(just time for a quick, somewhat unpolished update)

What I mean by “hope rally” is the rally off a (bear-market) low that is driven by the hope that some specified thing (the Bailout legislation in this case) is going to make everything all better. That is never the case, of course, otherwise it would be called the start of a new bull market.  Also, in the current situation, it’s almost certainly (effectively certainly) too early (time and price) in the bear market for a new bull market to start.

That’s why I make the eye of the hurricane analogy, because any “Bailout Reprieve” will (almost certainly) be only temporary.

Last week’s…

BuzzPal Video Pitch to Seedcamp

The is a repost from The BuzzPal Blog, but this is personal as well as business (that’s why it’s on both blogs).

Here is the 10-minute version.and here is the 2-minute version that we posted on the Seedcamp blog. If you just want to see the 1-minute music/photo video of some of the people and places that got us this far, here ya go: BuzzPal Music/Photo Video.

When watching the video, please bear in mind that this is BuzzPal’s first-ever PowerPoint presentation, first-ever video “pitch,” and it was done in a couple of hours, using some new tools and low-budget equipment. So be kind!

Also, please bear in mind that BuzzPal’s founder was in venture finance in the media, communications, publishing, and technology areas from 1999 to 2003 (MCG went public on the NASDAQ in 2001). During that time he has seen hundreds of pitches, so he knows what he likes in a pitch, especially a first pitch (see you expose yourself and show your personality + be different) and what he doesn’t like (see your formal face or fake/boring personality + talk the same old smack).

Yes, we don’t go into a lot of detail. That’s pretty common for pre-launch startups. This is not the launch video or private presentation we give to prospective stakeholders. This is the public version, the teaser version. Don’t like it? Tough cookies. Unless you’re one of the guys and gals who has gotten down in the dirt, in the arena, struggled for your life, in full public view, then you probably have no business being a critic. Don’t take my word for it, here’s what Theodore Roosevelt, 26th President of the U.S., had to say about it:

“Must Read” Article And PDF

This essay is a “must read,” which is a phrase I can’t remember the last time I used. It’s 15 pages and I can’t even give it a proper introduction, you simply must read it, IMHO. And then ideally do something. I leave it to you to decide what. Here is the link to an introductory article on the NYT website, where you can find other links. And here is a link to the essay by Erik Camayd-Freixas.

Some excerpts and then on to the article:

Paulson Admits Deregulation Has Failed Us All

Could the be the end of denial? The first step on the path to recovery? Let’s hope so.

March 13, 2008
MarketWatch.com
Paulson Admits Deregulation Has Failed Us All
Commentary: Mortgage proposals spell end to decades of looking other way
By Rex Nutting, Washington bureau chief

WASHINGTON (MarketWatch) — You know things are very very bad on Wall Street when a guy like Henry Paulson — Treasury secretary, solid Republican, and former Goldman Sachs CEO — joins the crowd calling for more regulation over the financial markets.

Paulson spared no one in his criticism Thursday of the excesses of deregulation that has now created the worst global financial crisis in a generation, threatening the health of the U.S. economy, the savings of millions of Americans, and the survival of some of the biggest financial institutions in the world.

Ackman / Pershing Square Capital Bond Insurance Letter, Data and Model

The Open Source Model has been posted on the Internet at:
http://www.yousendit.com/download/Mmd0UXVuQzMzeUxIRGc9PQ (warning, it’s a massive model and requires powerful computer to run).

UPDATE: Post a comment if that yousendit link stops working and I will upload the model and provide a link here.

Article: The State of the Union

January 29, 2008
New York Times Editorial
The State of the Union
Six years ago, President Bush began his State of the Union address with two powerful sentences: “As we gather tonight, our nation is at war, our economy is in recession, and the civilized world faces unprecedented dangers. Yet the state of our union has never been stronger.”

Monday night, after six years of promises unkept or insincerely made and blunders of historic proportions, the United States is now fighting two wars, the economy is veering toward recession, the civilized world still faces horrifying dangers — and it has far less sympathy and respect for the United States.

Barack Obama’s South Carolina Primary Speech

For those of you who may not yet have a good picture of Obama’s message, this should clear things up. Also see Caroline Kennedy’s endorsement.

“This election is about the past versus the future”

From today’s New York Times:

January 26, 2008
Transcript
Barack Obama’s South Carolina Primary Speech

BARACK OBAMA: Thank you, South Carolina! (Cheers, applause.)

(Chants of “Yes, We Can! Yes, We Can!”)

MR. OBAMA: Thank you. Thank you.

(Continued chants of “Yes, We Can!”)

MR. OBAMA: Thank you, everybody. Thank you. Thank you, South Carolina. (Cheers, applause.) Thank you. Thank you, South Carolina. Thank you to the rock of my life, Michelle Obama. (Cheers, applause.)

Thank you to Malia and Sasha Obama, who haven’t seen their daddy in a week. (Cheers, applause.) Thank you to Pete Skidmore for his outstanding service to our country and being such a great supporter of this campaign. (Cheers, applause.)

You know, over two weeks ago we saw the people of Iowa proclaim that our time for change has come. (Cheers, applause.) But there were those who doubted this country’s desire for something new, who said Iowa was a fluke, not to be repeated again. Well, tonight the cynics who believed that what began in the snows of Iowa was just an illusion were told a different story by the good people of South Carolina. (Cheers, applause.)

What’s Wrong With the Credit Ratings System?

Everyone should read this article… and send it to their senators and congressmen:

Transcript from Heilbrunn Center for Graham & Dodd Investing

Heilbrunn Center for Graham & Dodd Investing
17th Annual Graham & Dodd Breakfast
David Einhorn’s Prepared Remarks
October 19, 2007

What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn’t an accident. We didn’t get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad ideas. Securitization is a mediocre idea. Re-securitization of already securitized assets into a CDO is a bad idea. Re-securitization of CDOs into CDO-squared is a really bad idea. So is funding a pool of long-term illiquid assets with very short-term funding in the so called asset backed commercial paper market. And as I will get to in a moment, it is a horrendous idea to delegate most of the responsibility for assessing credit risk to a group of credit rating agencies paid for by the issuers rather than the buyers of bonds.

Great Speech: Why Not Let Them Hate Us, as long as They Fear Us?

Everybody shoud read this speech and have their friends read it as well… Americans and the rest of the world. Here it is:

Remarks to the United States Information Agency Alumni Association
October 4, 2006 in Washington, DC
Chas W. Freeman, Jr.
Ambassador (USFS, Ret.)

We are gathered together to reflect upon our country’s adoption of Caligula’s motto for effective foreign policy – ODERINT DUM METUANT – “let them hate us, as long as they fear us.” As we do so, let us observe a brief moment of silence for the United States Information Agency and also for our republic, both of which long stood for a different approach.