Soros Backs Plan to Buy Equity in Banks

Legendary investor sees "quite serious recession" on the way.

— -- The following is a transcript of a "World News" interview by ABC News' Dan Harris of George Soros, the billionaire entrepreneur and philanthropist, who has just published a book titled "The Credit Crisis of 2008 and What It Means."

Q: So, you have consistently said that governments, including the American government have been behind the curve during this crisis. Have you seen anything over the last 48 hours that's made you more optimistic that governments are catching up?

A: Yes, I think that the Secretary of Treasury Paulson is coming around to the need to inject capital, equity capital into the banking system directly. And I think...

Q: But this is a big shift, I'm sorry to interrupt you sir, but that's a big shift, isn't it, because the White House and the Secretary of the Treasury initially said they didn't want to take partial ownership in these banks. Have they wasted time in the last couple of weeks focusing on this $700 billion bailout?

A: I'm afraid that a lot of time has been lost and a lot of altitude has been lost. But eh, I think that if they announce a coherent plan now and if they also act and I think they probably need to take action on Morgan Stanley right away, then I think the market will stabilize and they will have time to implement the scheme.

Q: Do you have any optimism that we may have seen the worst of this crisis?

A: Yes I think there's a good chance that Friday intraday low was eh, a good bottom, if a number of things are now done. Eh, one is recapitalize the banks, eh and then you also have to do something about the housing market and reforming the mortgage system, and reducing the foreclosures.

Eh, then I think eh, you will of course have the repercussions in the, eh, real economy, but at least the financial system which has been the source of the trouble will begin to heal.

Q: What is the difference between recapitalizing the banks, to use your phrase, which is essentially buying, having the government buy a share, an ownership stake in these banks, and the initial plan which was to buy back the bad assets that are on the banks' books right now? What's the difference?

A: Well putting money at the level of the capital injection is much more high-powered money, because you only need to maintain 8 percent eh, capital for your balance sheet. If you're putting money at the level of the balance sheet, you eh, you know, need to put in 100 percent. Here you only need to put in 8 percent. So $700 billion would be sufficient to recapitalize the banks, but it wouldn't be sufficient to take off their hands all the bad stuff that they've accumulated. In addition, if you, eh, make the terms right and I spell this out in an article in the Financial Times tomorrow, then I think you could attract eh, private capital. Existing shareholders and giving them rights to subscribe, which they could sell to others. Other investors, to come in, and you may not even need tax payers money for this.

Q: I'm sorry to be obtuse, but I think for a lot of our viewers some of this is hard to understand, and so why don't we just take another crack at this. In the simplest possible terms, what is the difference between the initial plan, which was to buy the bad or toxic mortgage assets the banks were holding, and the current plan, which appears to be to have the government go in and say we're going to be part owner of these banks.

A: If you inject eh, money into the capital of the banks themselves, that is much more high-powered. Because eh, you only need to have for eh, a hundred dollars worth of loans, you only need 8 percent capital. So if you provide additional capital, then you can support a lot more of, of the the balance sheet than if you take some of the assets from the balance sheet and take it off the hands of the banks.

So it is much more effective. It's also would be the right thing to do because there is a hole, the banks lost money, they need to replenish eh, their equity. And that could be done by shareholders themselves, eh, or by others who want to invest. Because the, the Treasury would merely underwrite the issue but would give preference to the existing shareholders to subscribe.

And those rights to subscribe would be trade-able. So if the shareholders don't have money themselves, they can sell the rights to someone else, who does have the money. And the deal would be attractive enough because if the treasury is willing to buy those shares, then that is probably the cheapest price at which you can buy. So it would attract private capital.

Q: I'm pleased to note that you sound more optimistic right now than you have in recent days when you've said some rather gloomy things. What has changed if anything?

A: Well I think that the secretary of the treasury has come around, eh, to this view. And I think that also the European governments realize that they have to fix their system. And eh, you know when you go to the brink as we are right now, then something happens to pull you back. Because the alternative of allowing this to continue is so horrendous that even people who don't want any government intervention realize that such intervention IS necessary.

Q: You have been a phenomenally successful investor over the years. As you look out at the stock market right now, do you see bargains out there? Is now the time to buy?

A: Well you know I don't want to give people advice, eh, I think people have to make up their own minds. But certainly you are now in a period, of lets say, give up. And at times like this there are bargains. But unless the government does the right things, eh, then things could still go wrong.

And in any case, the real economy is now going to enter into eh, quite serious recession. But if you do the right things, then you could see how you could come out of that recession.

You could see across the valley. And when you can see across the valley, then usually financial markets do it, and you find that at the time of recession, actually, stock markets tend to go up, rather than go down.

Q: I've heard you say recently that we're entering into a new and more difficult era What do you mean by that? That the United States will have less power in the world, and also perhaps that American citizens will have less money in their pocket?

A: All of the above. Because for the last 25 years, we have basically consumed, 6 to 7 percent a year more than we produced. And the other people, the Chinese, the oil producing countries, have eh, built up a lot of dollar reserves, which they are now going to convert into real assets, so they will be wealthier, and we will have more debt.

This is what we have to pay for the excesses of the last 25 years, Because, you have to recognize, that eh, this crisis is due, has been generated inside the financial system itself. It isn't something that has been inflicted from some outside source, like a rise in oil prices or whatever.

This is a crisis that comes from the financial system, and the system itself is flawed and it needs to be repaired.

Q: But in terms if us living in a new era, what will that look like, will that mean that my parents, and me and our children will have less walking around money, how is that specially going to look in your mind?

A: Well certainly uh the US consumer uh will cease to be the motor for the world economy. So we will need another motor. And I think that the problems that confront us with regard to energy, global warming, energy dependence, will require very large investments. And I think those investments can replace the consumer as the driving force for the economy in the next few years.

So if we don't deal with those problems you will have large unemployment. But I think that the unemployed resources can be put to good use, if we now confront these pressing problems. Global warming and energy dependence.

Harris: George Soros, thank you very much, thanks again sir, I appreciate it.