Billionaire investor George Soros spoke to Reuters recently in a phone interview and painted a grim picture when it comes to the outlook for mortgage giants Fannie Mae and Freddie Mac, the dollar, and the larger U.S. economy. Reuters’ Jennifer Ablan wrote this morning:

“This incident (with Fannie and Freddie) is not the last one,” Soros told Reuters in a phone interview, adding the year-long global financial market turmoil represented “the most serious financial crisis of our lifetime.”

“Freddie Mac and Fannie Mae have a solvency crisis not a liquidity crisis,” said Soros. “There’s no problem in their borrowing. And in fact, insofar there is a problem, the Fed is there to provide the liquidity.”

That said, both Fannie and Freddie are “extremely leveraged,” he said. “The deterioration in the housing market, the foreclosures are going to cause losses which exceed their equity,” said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.

The former partner of Jim Rogers added that problems with the greenback would continue as well. Soros told Reuters:

I think the dollar is vulnerable because the economy is going into a recession and the actions of the authorities do involve the accumulation of debt. There is various ratios by which the creditworthiness of a country’s assurances are deteriorating.

The ongoing credit crisis is taking a toll on the larger U.S. economy. The Hungarian-born investor said:

It is an idle dream to think that you could have this kind of crisis without the real economy being affected.

Soros believes the options available to Ben Bernanke and the Federal Reserve are extremely limited. From the Reuters piece:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said.

However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession.

“Therefore, his options are limited — he is boxed in,” Soros said.

Source:

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

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