WHEN: Today, Wednesday, January 28th
Following is the unofficial transcript of a FIRST ON CNBC interview with George Soros, Soros Fund Management Chairman, today on CNBC's "Squawk on the Street" and CNBC's "Closing Bell with Maria Bartiromo."
All references must be sourced to CNBC's Maria Bartiromo.
ON CNBC'S "SQUAWK ON THE STREET"
MARIA BARTIROMO: Hi, there, Mark. Thank you very much. I am indeed sitting here with George Soros to talk a little about where we are in this environment. And, of course, George, you were one of the few people out there-- who were predicting-- that we would see-- a market meltdown and an economic slowdown around the world. Let me begin by asking you what you believe-- to be the case right now. Would you say the worst is to come? Where are we in this cycle?
GEORGE SOROS: Well, what I did not predict is that the financial system would actually meltdown. And that's what happened when Lehman was allowed to go into bankruptcy, that that was a game-changing event. The system broke down, had to be put on artificial life support. That's where it is now. Life support is working. Some of the channels, credit, you know, inter-bank and so on-- are reopening. But that-- that event has had a tremendous effect on the real economy. So the storm that started in the financial system has now spread in a very big way to the real economy, which has fallen off the cliff following the Lehman thing. And additional measures are now taken, a stimulus, everything, it's-- it will slow down the rate of decline. But it won't turn the economy around unless a couple of other things are done, recapitalizing the banking system-- preventing-- reorganizing the mortgage system, and taking care of the international repercussions that's something that is not being discussed. But it has had a tremendously negative effect on the emerging economies.
MARIA BARTIROMO: Yeah.
GEORGE SOROS: And something has to be done about it because there's big, big trouble brewing there.
MARIA BARTIROMO: Right. And-- and, of course, we still have the emerging economies also burst. I mean, perhaps the bubble was there as well simultaneously when we saw the bubbles burst in finance and housing. I wanna ask you about the solutions because you talked about recapitalizing the banks, which I'll get to in a moment. One of the ideas coming out of the Obama administration, one of the news items of the day, is that we may see the idea of a bad bank-- solution here, where the government will be buying these-- these assets. Now, you have written about this extensively saying that this is not the way to go.
GEORGE SOROS: That is correct. And if-- when the original-- $700 billion-- program had been passed, it had been used to-- to-- systemically and methodically replenish-- the banking system. It could-- it would have worked. In fact, it may not have needed $700 billion. But the money was sort of used capriciously as-- as-- half of which was-- was wasted. The other half will be largely needed to plug the holes which have already emerged. And in the meantime, the deficiency in-- in the banking system is now in the range of $1 trillion and a half, which is what would be needed and should be used to recapitalize the banks. However-- you know, the-- the bell (?) has been a little bit poisoned by the way Paulson handled this thing. And I-- I think-- the Obama administration doesn't feel that it can come back, asking for $1 trillion and a half in addition to the-- to the-- stimulus package. And, therefore, they saved up $100 billion from this top (?)--
MARIA BARTIROMO: Right.
GEORGE SOROS:--and they are going to add to it-- a leveraged top from the Federal Reserve so they have $1 trillion. And that will help to relieve the situation. But it will not be sufficient to turn it around.
MARIA BARTIROMO: You know, you just hit on something and I wanna ask you a little more about-- about what the solutions are because with that second traunch of-- of TARP, the-- the need for recapitalizing the banks remains.
GEORGE SOROS: Yes.
MARIA BARTIROMO: But, you know, the public outrage is there. People are saying why are we keeping-- recapitalizing the banks when, in fact, they're not doing any lending?
GEORGE SOROS: And--
MARIA BARTIROMO: How do you get the banks to lend?
GEORGE SOROS: Yeah. Well, that's important. You have to recapitalize them to get them to lend. But, you see, I would actually now go to a good bank-- bad bank situation. But I would do it the opposite way from the one that is now going to be used because what's happens with-- you divide good bank/bad bank. You put bad assets into the bad bank. You keep the capital in-- in the good bank. I would keep the capital or the existing capital with the bad assets, move the good assets out, and recapitalize that, giving the shareholders the right to subscribe to the required capital. And if they don't do it or to the extent they don't do it then the government could put in the money. Now, this amounts to what people talk about nationalizing the banks.
MARIA BARTIROMO: Exactly.
GEORGE SOROS: And that-- the political will to do that is not there. But in the end, that is what will have to happen if we want the banks to start lending again. The alternative is that we can order them to lend as-- by fiat, dic-- a government dictate, which is as bad as-- in fact, worse than putting capital in because that's kind of arbitrary dictating to the banks what they should do. It's much better to let them decide what's right but give them the capital to do it with. So I would turn around the good bank/bad bank, keep the capital, the existing capital in the bad bank, and put the new capital into the good bank. And then I think you'd also find that the public, other investors, would be willing to put money into a good bank that doesn't have any of those bad assets. They're very-- very little-- lending going on. The margins are terrific. It's a very good business to go into.
MARIA BARTIROMO: Yeah. You know, I wanna ask you-- later on, the closing bell, what you think about this leveraging up on the part of governments because "debt" has because a bad word, "leverage" has become a bad word.
ON CNBC'S "CLOSING BELL WITH MARIA BARTIROMO"
MARIA BARTIROMO: And I wonder how you feel about governments now around the world doing exactly what-- has been criticized (UNINTEL).
GEORGE SOROS: (IN PROGRESS) --resources and-- and-- and the power that United States has. As a result, capital started pouring out of the periphery countries back to the center. That's when the dollar rallied. And all the banks were pulling back their assets to the-- to the center. And-- you have a lot of debt coming due. Estimates are over $1 trillion of borrowing-- requirements for the periphery in '09. And unless some collective effective action is taken similar to what has been done to stabilize the situation in America and-- and-- and Europe then the emerging markets will be in a terrible mess. So already now-- there's problems with trade financing. And then you also have to stimulate those economies, have some domestic demand, because export demand has fallen off the cliff. And the United States is now not going to import six and a half percent more than it's exporting. And so that falls out, you see? Commodity prices have collapsed. So there has to be-- here-- here you have a storm that has suddenly hit those countries-- all the way from Brazil-- South Africa, all the African countries, Latin America, it's all-- the storm comes from the center. These countries have actually been-- following good market discipline. Suddenly they are hit and the international financial institutions have to do something to provide them with relief. They need two-- two types. One is to support the banking system and the currency, the debt requires some-- you know, funds that can be employed urgently when needed. And then you need longer term capital to allow the banks to-- the-- countries to engage in counter cyclical-- policies stimulating the domestic economy. So those are the thoughts. And no thought-- not sufficient thought is given to that. Now, what we are doing, we are creating money to make up for the-- for the collapse of-- credit. We need to do that internationally. And there is a mechanism. It already exists. It's called special drawing rights. So we ought to issue special drawing rights on a very large scale, like $1 trillion, and then the rich countries would lend or donate, preferably donate, their allocations to--
MARIA BARTIROMO: To the poorer countries.
GEORGE SOROS: --to-- to the-- the poorer countries. And that is what the-- that would be the, let's say, the centerpiece of-- there are other measures that need to be taken. But that's the one that would make-- it would be similar to the stimulus-- that we are passing in the United States.
MARIA BARTIROMO: But do you worry that, you know, while we talk about-- debt and leverage having really, in many cases, gotten us to where we are today, that today the governments are-- are borrowing so much money? I mean-- I mean, you know, some people would say, look, the governments can't afford it. Can the governments, even the-- the richest countries, afford doing this?
GEORGE SOROS: Well, that's a very legitimate question. And-- and I think the-- the-- my answer is that you can't avoid doing it because the alternative is that you are now in a period of deflation and depression, economic-- call it recess.
MARIA BARTIROMO: Right.
GEORGE SOROS: And-- and you have the weight of debt is accumulating. And unless you inflate the-- inject a lot of money-- the weight of debt is going to sink the economies. That's what happened in the 1930s. So that's one lesson we have learned, that you mustn't allow that to-- what-- whatever it takes, you mustn't let that-- that happen. Now-- so you-- you can't reestablish equity improvement in one fell swoop. You've got to take two steps. One actually in-- involves printing a lot of money, increasing the national debt, expanding the Federal Reserve's-- until--
MARIA BARTIROMO: Which we've seen so much of already. --expanding what? More than-- $1 trillion in a couple of months.
GEORGE SOROS: Abso-- well, from-- it went more than that.
MARIA BARTIROMO: Yes.
GEORGE SOROS: And we've got guaranteed $7 trillion. So it's in-- incredible amount.
MARIA BARTIROMO: Amazing.
GEORGE SOROS: That's the right thing actually. But then even when you restart the lending, then you have to drain the-- the-- the-- this money as fast as you put it in because otherwise you swick-- you-- you tip, you-- just-- tip over from the threat of deflation to the-- a threat of inflation. So, first, you have to induce inflation. And then you have to reduce inflation. These are two steps. Very complicated (LAUGHTER) operation. And the second step in many ways is more difficult because-- you know, it's easier to spend money than to-- than to let's say impose taxes or reduce the money supply.
MARIA BARTIROMO: But let me ask you a question about the banks because you've said that we really need to continue to see the capitalization of the banks on-- and then I wanna get back to international and ask you about India and-- and some of the other emerging economies out there. But regarding the banks, the governments are saying to the banks, "Look, you have to lend." And at the same time, they're saying, "You have to increase capital levels." Isn't this-- a-- a tough thing to do at the same time?
GEORGE SOROS: I think-- to import-- what is probably going to happen, that you will impose the (UNINTEL) and if you get money-- we take your toxic assets, but you must now lend that. That I think is real interference. It's all-- it's, in my opinion, worse than giving them capital but letting them--
MARIA BARTIROMO: Decide.
GEORGE SOROS: --you (UNINTEL) efficient-- manner. So it's better to own the shares. And also, as a taxpayer, you're more likely to actually get the money back because this-- is effectively a subsidy to the banks. It's a gift. And people rightly ask why Wall Street and why not Main Street? So it become-- it will become politically very-- unpopular. And that will make it more difficult to do the recapitalization because the-- doing it the way I purpose, good bank/bad bank-- with the capital staying in the bad bank, the first loss goes to the shareholders. They may be wiped out.
MARIA BARTIROMO: Right. Many of them-- --already have been.
GEORGE SOROS: They may be totally wiped out. And it's only when that money runs out that the-- that the government is-- is on the hook. Whereas this way we are nationalizing the debt. But we are keeping the business in private hands. So the upside belongs to them and the downside belongs to the-- to the taxpayers. That is not fair and I think politically not acceptable.
MARIA BARTIROMO: Well, what about what the-- regulators in-- in the U.K. have done in terms of nationalizing a bank like RB-- RBS, you know?
GEORGE SOROS: Yes.
MARIA BARTIROMO: Seventy percent ownership there. Will we see more of that?
GEORGE SOROS: Yes, you-- you will because the hole is very big. And the later you do it, since the situation's deteriorating, you see, what-- what's happening in '08, the-- the-- the banks that suffered were the banks that had a lot of securities that had to be mark to market. In '09 the banks that will suffer will-- are the banks that were good in '08, the ones that have a lot of loans because, you know, consumer loans, auto loans-- credit card loans, and business loans are all deteriorating. They're all losing value. So now the good banks are also going to be bad banks. So the situation is deteriorating. And the longer you wait, the more money it will take to get it right. It would have been $700 billion-- six months ago. Now it's a trillion and a half. And in-- in a year's time it may be $3 trillion.
MARIA BARTIROMO: Is there any reason to believe that the governments who are taking these stakes in the banks will make money on this?
GEORGE SOROS: Yes, they could if they-- if you did it the way I suggest because they would be putting money in the good banks. With that, our debt would be earning money. And eventually the shares would be sold to the public. And they would actually come out ahead.
MARIA BARTIROMO: Have you spoken with the Obama administration about the bad bank idea? Because it just seems that, you know, the-- ideas coming out of the administration right now are to create this bad bank and-- and buy the assets, which I know you've written extensively about, which is-- not what you're talking about.
GEORGE SOROS: No, I think that my views are well known.
MARIA BARTIROMO: And as far as those-- those toxic assets, when will there be a market for them? I mean, some people say, look, at some point, you know, those bad assets will be able to get sold. And people will look back and say, well, it should not have gone for pennies on the dollar. What do you think?
GEORGE SOROS: Well, a lot of them will never have a market because they are unique. They're-- they've got their own character. They're not fungible. They're not a commodity. And those will, you know, they were created, specially-- structured so that the-- the-- investment bank that structured it would make an extra margin of profit.
MARIA BARTIROMO: And lured (?) by compensation also.
GEORGE SOROS: Right. And so-- and so those will never be marketable. But-- in going forward in the future, I think you have to also reform the mortgage system so it's more uniform and more transparent so that you can actually-- have a market. And these instruments are too opaque.
MARIA BARTIROMO: Tell me a little about-- revising the mortgage part of the problem here because this is an area where people say the foreclosures still haven't stopped. And we need to see a floor here. And unless we really focus on helping the mortgage-- out there, the mortgage holder out there, we won't actually see an end.
GEORGE SOROS: I agree with you.
MARIA BARTIROMO: Yeah.
GEORGE SOROS: And I think the next step really ought to be to help stabilize the housing situation and then go back to recapitalizing the banks. It would help to stabilize the mortgages and then go back. And-- I am advocating-- new-- because the system is broken. So I'm advocating a-- a radically different-- system built on the Danish model, which has been in existence since 1795 and has worked very well. And it could be adapted for-- for our use. And this would be-- uniform transparent mortgages with the issuing house on the line for the credit risk. They would be only-- selling the mortgage bonds to pass on the interest rate risk. And the mortgages and the mortgage-- securities would be identical, exchangeable at all times. So a householder could redeem his mortgage-- ahead of time where buying a security, tendering it, and taking back his mortgage.
MARIA BARTIROMO: And creating a-- a new market.
GEORGE SOROS: That-- so this would work very well. The question is-- how do you get from here to there? And there I think the-- the-- the best thing in the current circumstances would be for the government to use the-- the Fannie Mae and Freddie Mac as the agents for doing it. They actually-- those banks-- those instruments have been nationalized. It could be used as an instrument of public policy. They could be used to introduce these mortgages, reduce the mortgage fees. Right now they are in limbo. They still nominally belong to the shareholders even though the shareholders will ne-- unlikely ever to see a penny because the losses are so great. But in the meantime, they are trying to actually-- make a profit by charging high fees and restricting the-- the-- terms on which they give the mortgages. This should be changed. It should be done to help the householders. So the-- the Fannie Mae and Freddie Mac could be the instruments. They've been the cause of trouble.
MARIA BARTIROMO: Right.
GEORGE SOROS: They will-- they are the problem. They could actually be the solution.
MARIA BARTIROMO: What do you think was the biggest policy or regulatory failure?
GEORGE SOROS: That-- that's very simple. Regulators basically--renounced their duty to regulate. They said this is too complicated.
MARIA BARTIROMO: Laissez-faire regulation.
GEORGE SOROS: Yes. I mean, they said-- look-- markets can correct their own excesses-- we deregulate. And then because of the-- all these new financial engineering products, it got too complicated for them to actually calculate the risks. So they actually delegated the-- the-- task of-- of-- controlling risk to the investment banks. So it's an abandonment of duty. The fact is it's a false idea. Markets don't tend to an equilibrium. They tend to-- towards bubbles. And you need to regulate them to prevent bubbles from growing too big. And so the-- this is a-- (UNINTEL) that they actually refused to exercise. In the future they'll have to.
MARIA BARTIROMO: And you have been saying this for so long. What were the main red flags that you saw that-- led you to expect what actually did play out?
GEORGE SOROS: Well, the-- the-- rapid expansion of credit and the loosening up of credit conditions, credit standards. So as the-- the housing market rose-- the-- the-- the banks and the-- lent more on looser standards. And, of course, it was bound to come (UNINTEL).
MARIA BARTIROMO: When do you expect us to come out of this, George? I mean, really on a global-- on a global basis?
GEORGE SOROS: It depends-- it depends on what the-- how the authorities react. But it's-- it's-- it's certainly not before-- the end of the-- end of the year. That would be the earliest. But unless those-- tough measures are taken, this could linger on for-- for-- for a decade.
MARIA BARTIROMO: And what about those emerging economies? Talk to me a little about India. We're still seeing growth there. We're still seeing growth in China. Would you be investing in these areas of the world?
GEORGE SOROS: Well, actually I do invest in India. But-- but-- I'm losing money on it. So-- but I think that India's relatively well situated in the sense that it's not so-- so exposed to the world economy.
MARIA BARTIROMO: More domestic.
GEORGE SOROS: It's more domestic growth. And-- and-- it-- it's-- still growing at seven-- seven percent. It's not over leveraged. The banking system largely-- still largely in the hands of-- of the government. Therefore, you don't have the problem that you have in the banking system.
MARIA BARTIROMO: Right. They didn't have the self-regulatory idea.
GEORGE SOROS: That's right. So-- so actually-- I mean, India will, of course, also suffer. Remittances from the government are going to be lower. But-- relatively speaking, I think the outlook is-- is-- is-- is better for India than for most other countries. The other country, of course, is China, which-- has more discretion as to what-- greater options than-- than-- than most other countries. And I think they-- they will get their economy going because they-- they know-- I mean, they're-- China is not a democracy. And unless they deliver-- meek (?) material benefits to the people, there could be a political upheaval. So they know they have got to deliver growth. And they're a little bit slow because they work by consensus. But-- in six months' time or so, they will I think have a major, major infrastructure-- broadband, all sorts of things, and get the economy going.
MARIA BARTIROMO: And I know earlier you said that we've really seen this move into other asset classes throughout the real economy. When would you actually look at an area wherever it is in the real economy or financial-- and-- and say, okay, I think there's real value here? What do you look for in terms of-- of finding value?
GEORGE SOROS: Well, the-- that's a very difficult question. And it's-- the-- the answer varies from day to day--
MARIA BARTIROMO: Sector and geography.
GEORGE SOROS: --and-- and so I-- so I'd rather not say it because it-- conditions might change in three months' time. I think that there will be very wide swings in the number of markets in '09, you know? Up and down. And you-- either you have to catch it, you have to-- be nimble or be very conservative and don't get involved.
MARIA BARTIROMO: Yeah. My final question, George, you said earlier that, you know, you were talking about how the dollar had rallied as a result of really external forces. It's not necessarily that it's moved on any fundamental change in the United States but more so relative to other currencies around the world.
GEORGE SOROS: Well, the-- the-- first of all, what's the alternative to the-- to the-- dollar? The euro has its own problems. The other thing is that the strength of the dollar-- at least recently has been not because people want to own dollars. It's because they owe dollars. And they can't roll over that debt. So they have got to repay in dollars. And for that they have to buy. So that's a little bit of a forced. It's like buying in the shorts.
MARIA BARTIROMO: Yeah. Not-- not a great-- reason to buy. George Soros, so nice to have you on the program.
GEORGE SOROS: Pleasure.
MARIA BARTIROMO: We appreciate it.
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