soros 3

To create the mining city of Noril’sk, Stalin resorted to slavery. His secret police arrested hundreds of engineers on fabricated charges and hauled them off to the Siberian Arctic, where there were no trees or plants or vegetation. Perhaps two hundred thousand zeks, or political prisoners, died in the process of building the city and its mine; years later the annual melting of the snow continued to fl ush out the skulls and bones of Stalin’s victims. By the mid-1990s, some 260,000 inhabitants huddled in this bleak setting, fighting temperatures that fell to –40 degrees Celsius and choking on the sulfurous smog that billowed from Dickensian smelters. The sun vanished during the five months of the polar night. “Time somehow passes,” one resident told a visitor, “but we remain.”1 Geographically and psychologically, it was hard to imagine a setting more remote from the fast-paced trading rooms of Manhattan. But in 1990 Paul Tudor Jones and a few other hedge funders vacationed at a fi shing camp on the nearby Ponoi River.2 The visitors reveled in the Arctic wilderness, pitting their wits against powerful salmon; and with the instinct that wealthy people sometimes develop, they resolved that since they liked the camp so much the right thing was to buy it. When they got to negotiating the fishing rights with the provincial government, they 194 MORE MONEY THAN GOD heard a story that caught their attention. At a meeting in Helsinki that was ostensibly about fishing, one of the Russian officials had mentioned Noril’sk, lamenting that the creaking Soviet infrastructure at the mine was on the verge of collapsing. Thorpe McKenzie, the former partner of Julian Robertson’s at Tiger who was negotiating on behalf of the hedgefund fishermen, pricked up his ears. Noril’sk’s mine contained more than half the world’s palladium. A breakdown in production would have global consequences.3 McKenzie returned to the Ponoi River annually for the next few years; he hosted Russian officials at his fishing camp and pumped them for information about the mine and its prospects. He researched the structure of the palladium market and found that the metal had three principal uses: dentistry, for which demand was more or less stable; catalytic converters for automobiles, for which demand was growing thanks to environmental regulation; and cell phones, a new market that looked to have some promise. Aside from Noril’sk, the other major suppliers of palladium were in Africa, which faced its own infrastructure challenges. Having sized up the situation, McKenzie concluded that demand for palladium would outgrow the uncertain sources of supply. He bought some of the metal for his own account and passed the word along to Julian Robertson. By 1994 Tiger had bought $40 million worth of palladium, and a young Tiger commodities specialist named Dwight Anderson was dispatched to investigate. Anderson was one of those turbocharged young men whom Robertson hired, and an appetite for adventure came in useful on this mission. He fl ew to Moscow, which was then just emerging as a go-go town for Western deal makers, then boarded an ancient Aeroflot aircraft for the onward flight to Siberia. When he touched down in Noril’sk in the half-light of a bleak November day, he could make out the carcasses of wrecked aircraft that littered the airport; evidently they had been plundered for spare parts to keep the rest of the fleet going. Anderson gritted his teeth and tried not to think about the safety of the flight he would take home. But when he visited Noril’sk’s mine the next day, he was surprised at how well it was working.4 SOROS VERSUS SOROS 195 Anderson had seen many mines before, but this one was different. It was nothing like the Appalachian coal mines, where men crouch as they go underground; it was nothing like the open-pit mines in the western United States or the spectacularly deep shafts in southern Africa. The Siberian approach to mining was truly Soviet in scale: You could drive underground in a vast truck and tour a bewildering warren of caverns. The scale of the excavation exceeded anything that could possibly have been needed to extract the ore, but this excess was a blessing. If one tunnel or one trolley system developed a problem, there would be several alternative ways of getting the ore out; if a mechanical drill broke, there would be two defunct ones near to hand, and their carcasses could be plundered for spare parts like the abandoned planes at the airport. Noril’sk’s redundant scale allowed it to keep going, and Anderson soon concluded that the stories of a collapse in production had been deliberately exaggerated. Local officials understood that rumors of a collapse were bullish for palladium prices. Since they all had stakes in the mine’s sales, they seized every chance to tell visiting foreigners about an imminent production breakdown. Anderson could see that something else might collapse, however. As he built his contacts in Russia, he confirmed that the Russians were selling more palladium than they mined: They were ripping the stuff out of disused Soviet military equipment and selling it. Sooner or later, this plundering would have to stop: Somewhere around the year 2000, Anderson calculated, there would be no more missiles to be scrapped, and the price of palladium would skyrocket. And so, following Anderson’s investigations, Tiger held on to its palladium position, even though the logic for owning it had changed. The position lost money for the next three years; but then, as we shall see, things started to get interesting. TIGER’S SIBERIA N FOR AY WAS PART OF A L ARGER PHEnomenon. In the early 1990s the closed parts of the world economy opened up to Western capital, and hedge funds seized the opportunity. Before 1990, westerners were barred from the Kola Peninsula, whether to 196 MORE MONEY THAN GOD fi sh or to inspect mines; before 1990, likewise, the countries of East Asia and Eastern Europe allowed only a trickle of foreign money into their equity and bond markets, which were in any case too small to hold much opportunity. But around the turn of the decade, when Thorpe McKenzie led his first group of anglers to Siberia, emerging markets came into their own. The outstanding stock of developing-country bonds shot up from around $40 billion to $100 billion in the space of a year, and blistering growth continued through the rest of the decade. Traditional asset managers warmed to peripheral economies only gradually, but hedge funds moved fast. By the early 1990s, they were filling their coffers with the debt of countries such as Peru and reaping healthy profi ts.5 In 1992 Soros and Druckenmiller launched a new fund called Quantum Emerging Growth to take advantage of this new frontier. The following year Louis Bacon’s Moore Capital followed suit with a specialized emerging-market vehicle. From the point of view of developing countries, there was much to like in this new order. Hedge funds were willing to provide capital when others were not; once hedge funds led the way, other Western asset managers would eventually follow; and because foreigners were generally sophisticated in their choice of which companies to finance, their presence frequently boosted the quality of capital in an economy as well as the mere quantity.6 But the global spread of hedge funds also entailed risks. Hedge funds could provide capital to an emerging economy and juice its growth for a few years, but they could also yank their money out and cause growth to crater. As Britain’s government had discovered in 1992, and as Alan Greenspan had discovered two years later, deep and fastmoving capital markets could force wrenching movements in currencies and interest rates, shattering the illusion that economic statesmen were the masters of their nations’ destinies. If this was true in the rich world, it was even truer in frail emerging economies. At the end of 1994, Mexico succumbed to a full-blown currency crisis. And Mexico’s troubles turned out to be a dress rehearsal for a far bigger drama—one that was in large part conceived at Soros Fund Management. In the years after the sterling trade, Stan Druckenmiller had led the Quantum Fund to yet more profits. In 1993, the golden period for the SOROS VERSUS SOROS 197 bond market, Quantum was up 63 percent; the following year, despite the bond crash, it still battled to a gain of 4 percent; in 1995 it was back in stride again with a return of 39 percent.7 But during these years, Druckenmiller began a long-running debate with Soros about the proper size of their hedge fund. The sterling trade had shown that bulk could be a weapon in facing down a government, but it had also shown that Quantum was unnecessarily large. Soros and Druckenmiller had believed that given their fund’s size, they should sell $15 billion worth of sterling, but they had only been able to sell $10 billion; it followed that if their fund had been one third smaller, they would have aimed to sell $10 billion and actually sold that amount, yielding a percentage gain on their capital that would have been a third higher. For Druckenmiller, a stellar performance number was the main goal: His earnings were tied to it and his ego was invested in it. For Soros, on the other hand, the calculation was different. His ego was invested as much in the size of his empire as in the scale of his returns: Owning a global firm made him a global player, raising the profile of his writings and philanthropy. Soros was known as the only private citizen to have his own foreign policy, and he reveled in the fact that eminent statesmen beat a path to his office. One day a Soros employee overheard the boss tell Druckenmiller that Henry Kissinger was visiting. “Would you like a word with him?” Soros asked Druckenmiller. “Does he know anything?” Druckenmiller countered dismissively. “Oh, yes,” Soros answered, finding a way to vaunt his political connections while not seeming in awe of Kissinger’s star power. “I don’t like him, but he does know things.” Soros and Druckenmiller reached a compromise on the size of their hedge fund. Soros Fund Management would continue to accumulate assets, but they would not all go to Quantum. By 1996, just over half the $10 billion at Soros Fund Management was housed in three other funds: Quantum Emerging Growth, Quasar (which invested with outside hedge-fund managers), and Quota (which was managed by Nick Roditi, a secretive London-based macro trader). To run these new start-ups, Soros recruited new talent, including a Princeton-trained economist named Arminio Fraga. When the two men met in early 1993, Fraga, a Brazilian, 198 MORE MONEY THAN GOD had just left a position as a deputy governor at his country’s central bank. Within a few days, Soros had offered him a partnership. “Here, Stan, I hired this guy,” he told Druckenmiller breezily. Druckenmiller eyed Fraga, a slight, polite man with an academic demeanor. It was one of those moments when he might have been thinking, “How am I supposed to run this place when I can’t choose who works for me?” But his big frame gave nothing away. “Fine,” he said. “Let’s see if he’s any good.”8 For the next four years at Soros, Fraga performed the benign function of hedge funds: to finance emerging economies that were shunned by traditional investors. He bought the bonds of big Latin countries such as Brazil and Venezuela; he branched out into exotica such as Moroccan loans; he bought shares in Brazilian utilities, which were absurdly cheap by international standards. Then in late 1996 Fraga attended a talk by Stan Fischer, the number two at the International Monetary Fund. The mood was mostly upbeat: Mexico’s currency had recovered from its crisis, and emerging markets were booming. Still, somebody asked Fischer the question “Who do you think is the next Mexico?” “I’m not sure there’s another one out there at the moment,” Fischer answered. “But I do see some imbalances in Asia. That might be interesting to look at.”9 That comment, Fraga recalled later, “put a little light in my mind.”10 A few weeks afterward, Fraga read a joint IMF–Federal Reserve paper titled “The Twin Crises,” which laid out in terrifying detail how a currency collapse could interact with the collapse of a banking system.11 Casting his mind back to Fischer’s remarks, Fraga approached Druckenmiller. “Do you mind if I go and take a look at what is going on in Asia?” he asked him. “Sure,” came the answer. “Go.”12 IN JANUARY 1997, FRAGA LANDED IN THAILAND. AS HE made the rounds of local officials, company executives, and economists, it quickly became clear that the country fitted the double-crisis model laid SOROS VERSUS SOROS 199 out in the IMF-Fed paper. Thailand’s exports had been hammered by the rise of China as a low-cost rival, and to make matters worse, Thailand’s currency was linked to a basket of currencies dominated by a strong dollar, further eroding its ability to compete in world markets. As a result, Thailand was running a large trade deficit, but it was refusing to adjust: Rather than abandon its link to the dollar and allow a falling currency to restore its competitiveness, the country was consuming more than it produced, paying for the difference with loans from foreigners. This arrangement left the Thais exposed. If the foreigners tired of lending to Thailand, the country would have to export enough not only to cover its import bill but also to repay outsiders. To boost exports and cut imports, the Thai baht would have to fall—sharply. At the time of Fraga’s fact-finding visit, the willingness of foreigners to finance Thailand was already crumbling. In 1996 a major Thai bank had collapsed, raising doubts about the wisdom of lending to the country. Thailand’s central bank had cut interest rates to stave off further bank trouble, but this had dampened returns for foreign creditors and given them another reason to go elsewhere. Fragile banks and a reliance on foreign capital were coming together in the way that the IMF-Fed paper had described, and it was clear to Fraga that this interaction could turn toxic. If a withdrawal of foreign money drove Thailand to devalue, the banks would be tipped from fragility into outright ruin. Much of the foreign lending to Thailand was denominated in dollars, and it had been channeled into real estate and other projects that generated revenue in baht. If the dollar jumped against the baht, these debts would become impossible to service. The tipping point for Fraga came during a visit to the Bank of Thailand. Together with David Kowitz, Soros’s expert on Asian equities, and Rodney Jones, an economist who worked for Soros in Hong Kong, Fraga was granted an audience with a high-ranking offi cial at the central bank. Invoking his own experience as the deputy governor of Brazil’s central bank, Fraga offered some thoughts on the dilemma that Thailand confronted: On the one hand, the government was committed to defending its exchange rate, which would involve keeping interest rates high enough 200 MORE MONEY THAN GOD to attract capital; on the other hand, Thailand had a trade defi cit and wobbly banks, which made devaluation and lower interest rates attractive. Fraga had a mild manner, and his Brazilian background helped; he seemed more like a benign emerging-market peer than a menacing Wall Street predator. So the official looked at Fraga and gave him an answer that was at once honest and naive. Until now, he said simply, Thailand had accepted whatever interest rates proved necessary to maintain the exchange rate within its designated band. But now priorities might have to shift. Given the growing troubles at the banks, getting interest rates down might matter more than defending the level of the currency.13 The offi cial might as well have offered up a suitcase full of money. He had conceded that Thailand’s currency peg was unsustainable, meaning that shorting the baht was a no-brainer. Fraga and his colleagues could practically visualize the suitcase, cash spilling from its seams; but in order to reel in their prize, they had to pretend they hadn’t noticed it. If their host realized the full power of his comment, he could snatch the suitcase back: The central bank could hike interest rates, raising the cost of borrowing the baht in order to sell it short; or it might resort to some administrative crackdown on foreign speculators. Ever polite and self-effacing, Fraga nodded pleasantly at the Thai official and allowed the discussion to move on. After a little while, David Kowitz gently led the conversation backward. “Excuse me. I’m out of my depth here,” he said humbly. “Can you just repeat what you said a few minutes ago, just to make sure I got it right?” The official repeated his statement, and the Soros team got what it was looking for. Their host had told them that he knew the game was up: He had confessed and reconfessed his nakedness. Whatever the offi cial pronouncements on Thailand’s commitment to its exchange-rate peg, it was only a matter of time before the baht was devalued. After a stop in South Korea, Fraga returned to New York and reported back to Druckenmiller. The big man listened to Fraga’s story and quickly approved a trade, and over the space of a few days in late January, the Soros team sold short about $2 billion worth of the Thai currency.14 The selling SOROS VERSUS SOROS 201 was both a prediction of a crisis and a trigger that could bring it on: To defend the baht against the pressure from Druckenmiller and Fraga, the government sold a chunk of its dwindling foreign-currency reserves and raised interest rates by 3 percentage points—a punishing hike given that Thai banks were tottering.15 But the rate hike came too late to scare the predators away. The Soros team had taken out baht loans of six months’ duration and had locked in the low interest rates that had existed before the government hiked them. Secure in their positions, Druckenmiller and Fraga could afford to wait until the end of July for the inevitable to happen.16 In the months and years to come, a spirited argument would break out as to whether hedge funds precipitated Asia’s fi nancial crisis. We will get to that question, but for now the opposite one stands out: Why didn’t Druckenmiller and Fraga do more to force a Thai devaluation? Back in 1992, the Soros team had sold $10 billion worth of sterling, around two and a half times the firm’s capital. But the $2 billion Thai trade represented just a fifth of capital—a fraction of the selling of which Druckenmiller was capable. By repeating the leverage of his earlier exploit, Druckenmiller could have sold an additional $23 billion or so of baht, multiplying the Soros funds’ returns and wiping out most of the foreign-currency reserves held at the Bank of Thailand. Its reserves thus depleted, Thailand would probably have capitulated within days, so a quick and magnifi cent profi t apparently lay within Druckenmiller’s grasp. Why didn’t he seize it?17 In the popular imagination, the Soros team’s ruthlessness is unbounded. But the truth was that it had only a limited appetite for speculating aggressively in emerging markets. Soros himself was of two minds about speculation—he liked to say that markets, instead of swinging like a pendulum, could swing like a wrecking ball, laying waste to economies.18 Druckenmiller was clearer in his purpose, but he was not focused on Thailand: He was taking advice from Fraga and his team, so lacked the intense conviction that he felt when a trade was his entirely. Further down the hierarchy at the Soros funds, there were complex emotions. Rodney Jones, the Hong Kong–based economist, had challenged Fraga and Kowitz about the morality of speculation in developing countries: If currencies 202 MORE MONEY THAN GOD crashed, millions of innocents would be forced into desperate poverty.19 Back in 1992, Soros had famously urged Druckenmiller to “go for the jugular.” But when it came to Thailand in 1997, some members of the Soros team felt squeamish. In the aftermath of the discussions in Thailand, Jones settled on his own way of living with what he was doing; and in a book published after the Thai crash, Soros offered an identical defense of his funds’ actions.20 The defense boiled down to a simple idea: Speculation could benefi t poor societies if it served as a signal, not a sledgehammer. The function of the virtuous speculator was to alert governments to the need for change—in Thailand’s case, that the baht had to devalue. This signaling could avoid hardship for ordinary people, since the more a government procrastinated about devaluation, the more brutal the eventual currency collapse would be. Reserves would dwindle to zero, so that when the crisis came there would be nothing left to cushion the shock as capital flooded out of the country. This case for speculation was potentially correct, but it could only justify speculation of a mild sort. An all-out attack on the Thai baht would have precipitated a crisis rather than prodded the government to avoid one. In the weeks following Druckenmiller’s first baht sale, Thailand’s behavior revealed a flaw in the Jones-Soros rationalization. Speculative signals would only be helpful if governments were wise enough to respond to them. But rather than prompting the Thais to devalue sensibly and early, Druckenmiller’s short position provoked disastrous defi ance: The government threw away its foreign-currency reserves, buying baht from Druckenmiller at a rate that was sure to leave it with a loss once devaluation happened. Meanwhile, the Thai economy continued to weaken. When Rodney Jones next visited in the last days of April, the country was visibly grinding to a halt: Jones counted a hundred cranes on the Bangkok skyline, but almost none were working. Overextended real-estate companies had stopped servicing their loans; eighty-seven out of ninety fi nance companies in Thailand were said to be insolvent. Thailand had experienced a financial crisis at the end of the 1970s, but Jones could see, to SOROS VERSUS SOROS 203 his horror, that the next one would be worse. Back then, the total stock of loans was worth 40 percent of GDP; now, thanks to the globalization of capital fl ows, the ratio was 140 percent, rendering the consequences of a banking bust more serious for the real economy. The only silver lining, Jones concluded, was that the authorities still had a little time. They could come to their senses and devalue before a panic forced them into it. As it turned out, Jones’s presence in Thailand helped to precipitate the crisis that he dreaded. The Thai press got wind of his visit, and the news that a foreign hedge fund was circling spooked jittery local investors. Thai financiers and companies began to dump baht and buy dollars, forcing another round of central-bank intervention to defend the currency’s level. On the evening of Sunday, May 11, Prime Minister Chavalit Yongchaiyudh reinforced the sense of crisis by appearing on television and vowing to support the baht, then adding the self-defeating message that he could not promise to succeed in doing so. Just as in the case of Britain, which continued to defend sterling even as it knew the game was up, so the Thai leadership lacked the courage to accept the logic of their untenable position. And just as in the British case, the reaction from the Soros team was predictable. Three days after Chavalit’s televised statement, Druckenmiller increased his bet against the baht from $2 billion to $3.5 billion. The new position still represented only a third of the Soros funds’ capital, a fraction of what Druckenmiller could have sold if he had leveraged up aggressively. But now Druckenmiller was no longer the only player in the game; Thai investors were leading the charge out of the baht, and other hedge funds were following. Paul Tudor Jones, who spoke with Druckenmiller several times each day, was quick to put on a trade, as did several of the other macro funds from the tight-knit group around him. The biggest player after Druckenmiller was probably Julian Robertson’s Tiger, which built a short position in the baht that eventually came to $2 billion.21 The day that Druckenmiller increased his position, the Bank of Thailand was forced to use at least $6 billion of its reserves to maintain the baht’s level; and over the next week, the onslaught continued.22 But 204 MORE MONEY THAN GOD Thailand’s government still refused to embrace devaluation; and a visit from the IMF’s Stan Fischer, the man who had set Fraga on his path, failed to persuade it to accept the inevitable. Rather than bow to the markets, the Thai government counterattacked. This gets to a second reason why Druckenmiller had not gone for the jugular. Financial traders must contend with market risks, but they also face political ones.23 On May 15, the day after Druckenmiller upped the ante, the Thai authorities forbade all banks from lending baht to anyone outside the country. This put short sellers in a bind: They could no longer borrow baht in order to sell them unless they secured the loans offshore at punitive interest rates. Tiger, for example, had financed some of its positions by borrowing baht on a short-term basis, figuring that it could roll over the loans as they came due; now it was forced to renew them at vastly higher interest rates: At one point in early June, the cost of holding Tiger’s position hit $10 million per day. 24 The clampdown on lending to foreigners, combined with the central bank’s aggressive intervention, succeeded in reversing the baht’s fall: In the three weeks after Druckenmiller’s second strike, the Thai currency gained 10 percent against the dollar and hedge funds booked perhaps $500 million in losses. The region’s Englishlanguage newspapers were reporting gleefully that hedge funds were losing the “battle of the baht,” and the prime minister called the central bank to promise its staff a victory party. The Bank of Thailand was said to be gunning personally for Soros. According to one newspaper account, it was bent on inflicting losses on his funds of as much as $4 billion.25 Faced with this onslaught, Druckenmiller cut his short position from $3.5 billion to $3 billion. Had he leveraged up and sold baht to the max, he might have precipitated devaluation; but that was more than the political system seemed likely to tolerate. Yet although Druckenmiller was not going to stick his neck out, he was not going to walk away; he knew that the Thais were closer to collapse than they admitted publicly. The central bank’s position was ostensibly robust: Even in late June, it reported reserves of more than $30 billion. But it had effectively sold a vast quantity of reserves by taking positions in the forward market, which did not show SOROS VERSUS SOROS 205 up on its balance sheet. This maneuver had fooled almost all outsiders, including inspectors from the International Monetary Fund and members of the Thai government itself. But by doggedly calling the banks that executed the government’s sell orders in the forward markets, Jones had pieced together the alarming rate at which real reserves were dwindling. By his reckoning, the Bank of Thailand had used up $21 billion worth of reserves in May alone, a stunning two thirds of its war chest.26 Jones took little pleasure in this finding. His moral justifi cation for speculation had been battered: Far from reacting to speculators by adjusting their policies quickly, Thailand’s leaders were digging in their heels and condemning their people to a calamity. The combination of high interest rates and uncertainty about the Thai currency had pushed the financial system to a breaking point. Banks were charging exorbitant rates to lend to other banks, not knowing which among them would survive, and money was ceasing to flow through the economy. On June 25 Jones worked out his anguish in a memo entitled “The Economics of Deflation: What Keynes Would Say to Thailand.” For a country to choose sky-high interest rates in preference to devaluation was “sheer lunacy,” Jones wrote, and he invoked Keynes’s reflections on this folly going back to Roman times. In a.d. 274, Emperor Aurelian’s zeal to protect the integrity of the coinage caused deflationary misery and provoked a rebellion. The fi ghting that ensued resulted in the deaths of seven thousand soldiers and doubtless many more civilians. Jones’s anguish could not save the Thai people. Clamping down on baht loans to foreigners turned out to be about as effective as blocking up one hole in a showerhead: It only accelerated the pace at which capital whooshed out through other openings. Harassing short sellers encouraged foreigners who had lent dollars to Thai businesses to demand repayment, and the businesses dumped baht as they scrambled to meet their obligations. Besides, the attack on short sellers made it expensive to borrow baht but by no means impossible; if you were convinced that the currency was about to collapse, it paid to borrow it at sky-high interest rates in the offshore market just for a short period. As more capital fl ed Thailand, 206 MORE MONEY THAN GOD the odds of a collapse increased. On Tuesday, July 1, according to at least one account, Julian Robertson’s Tiger unleashed a barrage of baht selling, adding $1 billion to its short position until the Bank of Thailand fi nally ran out of reserves and it became impossible to find buyers for the currency.27 Thailand had finally been pushed over the edge. Robertson had played a role analogous to Druckenmiller’s in the sterling crisis.28 On the other side of the world, at around 4:30 a.m. Bangkok time, Bank of Thailand officials conceded that they had no more ammunition with which to defend the currency. After months of resistance, the baht peg had snapped: Over the next three months, it fell by 32 percent against the dollar. The Soros funds gained about $750 million from the devaluation, and Julian Robertson gained perhaps $300 million;29 meanwhile, Thailand’s output collapsed by 17 percent from its peak, destroying businesses and jobs and plunging millions into poverty. By an uncanny coincidence, July 1, 1997, was the day when Britain ceded control over Hong Kong. It also was the day when a new kind of imperialism put its stamp on Southeast Asia. In the wake of the devaluation, hedge funds were inevitably vilifi ed. There was some fairness to these complaints, since the Soros team had indeed led the selling in January, forcing the government to raise interest rates and throttle its weak economy. There was an additional element of fairness, given Tiger’s role on the last day—though at the time almost nobody knew about this. But in a larger sense, the complaints missed the point. The roots of the crisis stretched back to 1995 and 1996, when the Thais had refused to devalue their exchange rate gradually in the face of China’s rise; speculators had merely forced an adjustment that was ultimately inevitable. Besides, although Soros and Tiger were part of the trigger for the crisis, they were not quite the villains that critics imagined. In particular, Druckenmiller had refused to leverage to the max, rightly fearing a political backlash. As the endgame played out in June, he had actually reduced his position. As it turned out, Druckenmiller’s caution contained a prophecy. As Thailand’s crisis spread across East Asia and beyond, the image of the hedge fund as superpredator proved less and less accurate. SOROS VERSUS SOROS 207 IN LATE SEPTEMBER 1997, GEORGE SOROS FLEW TO HONG Kong. He went for the annual meetings of the World Bank and International Monetary Fund, and the reception he received mirrored his dual persona. Soros the speculator was predictably reviled: Having earlier called him a “criminal” and a “moron,” Prime Minister Mahathir Mohamad of Malaysia called for a ban on “unnecessary, unproductive and immoral” currency trading. But Soros the statesman-philanthropist was the toast of the meetings. He addressed a packed auditorium on how to stabilize the world economy and was lionized by the press, not least because he could rail against speculation as fiercely as the best of them. “The main enemy of the open society, I believe, is no longer the communist but the capitalist threat,” he declared, despite his own capitalist fortune. “The laissez-faire idea that markets should be left to their own devices remains very infl uential,” he went on. “I consider it a dangerous idea.” By the late 1990s, Soros had no doubt as to which side of his persona should dominate. He wanted to be a thinker, a statesman, a great public figure; he did not want to be a neoimperialist and smasher of small currencies.30 Inevitably, there was a risk that this preference might color his investment views: In a discussion with David Kowitz and Rodney Jones during the Hong Kong meetings, Soros declared confidently that the time for shorting Asian currencies had passed, even though Mahathir’s outburst against markets had triggered a new sell-off in the region. The lieutenants had doubts about the boss’s rosy prognosis, but Soros was not in the mood to listen. Although he would not micromanage the funds’ decisions—he would leave these to Druckenmiller and the team—his optimistic bias was evident. The bias played out first in Indonesia. In the run-up to the Hong Kong meetings, the Soros team bought about $300 million worth of Indonesian rupiah, believing that the turmoil in Thailand had spilled over to neighbors without justifi cation.31 Rather than repeat the Thai error of defending an unsustainable exchange-rate peg, the Indonesians had let their currency fall 11 percent in August; now a rebound might be in the 208 MORE MONEY THAN GOD offing. Following a visit to Indonesia by Arminio Fraga and Rodney Jones in October, the Soros funds increased the rupiah bet to about $1 billion. Not all hedge funds thought this was sensible. Julian Robertson’s Tiger, which had bet on the rupiah too, dumped its holdings at the end of October. But the Soros team followed the technocratic consensus, which held that the decline in the rupiah would prove temporary. The IMF seemed confi dent that Indonesia would pull through, and on November 2 it announced a $33 billion credit line for the country, designed to give the central bank the foreign reserves it needed to bolster confidence in its money. The next day the rupiah rallied healthily, and Soros’s position was showing a small profi t. Up until this point, Soros’s optimism at the Hong Kong meetings had achieved a shaky vindication. Yet by mid-November, the Soros team and its IMF allies were losing their moorings. The IMF’s $33 billion credit line had been extended in exchange for two key commitments: Indonesia would close down sixteen corrupt banks, and it would run a responsible monetary policy. But the cronies around the ailing President Suharto were determined to frustrate this plan. The corrupt banks belonged to the cronies so were impossible to close down; and the cronies were also hammering on the central bank for loans, which inflated the money supply and destroyed confidence in the rupiah. By late November, the currency was in free fall; and in early December things got worse. Suharto was rumored to be seriously ill, and the prospect of a power vacuum panicked the country. By December 15 the rupiah was down 44 percent from its high in early November, and the trade had cost Soros $400 million. The strange thing was that the Soros team continued to stick with the currency. In the aftermath of the Wall Street crash ten years earlier, Soros had dumped his positions as soon as they went wrong, capping out his losses. But this time the Soros team seemed paralyzed, despite the clear signs that Indonesia had turned into a disaster. On December 10 Rodney Jones got his hands on data from the Bank of Indonesia, which confi rmed that the central bank had been printing money that found its way to the lenders run by Suharto’s cronies. Jones fired off a note to Soros headquarters in New York, laying out the details of the monetary binge. But the funds still stuck with the rupiah position. SOROS VERSUS SOROS 209 Around the same time the Indonesian finance minister, Mar’ie Muhammad, was dispatched by his government to reassure foreign investors. Muhammad had spent years building up a reputation as a respected technocrat; now his task was to defend a recovery program in which money was being printed to pay off the undeserving friends of the Suharto family. On a stop in New York, Muhammad met Soros and his lieutenants at the Plaza Hotel; but although he was going through the motions of talking up Indonesia’s prospects, his heart was not in it. Soros, Fraga, and Druckenmiller posed question after question, but, placed in an impossible position, Muhammad refused to meet their gaze, mumbling his way through a series of evasive answers. “Oh my God,” Druckenmiller said as he strode back to the offi ce. “I can’t believe that we are long. “I don’t believe anything that guy said,” he continued. “I don’t even believe he’s from Indonesia.”32 The group made its way across midtown Manhattan, back to the Soros offices by Columbus Circle. They knew that they were trapped in an appalling trade, but there were so few willing buyers for rupiah that it was not obvious how to get out of it.33 Casting around for some kind of exit, David Kowitz suggested using the rupiah to buy a physical commodity such as iron, which could eventually be bartered. “That’s an interesting idea,” Soros said gravely, in his thick central European voice. But nobody followed up on Kowitz’s proposal—not even when Indonesia’s government, unable to print money fast enough, released plastic souvenir banknotes as legal currency. The Soros team followed the rupiah down to the bottom, eventually losing about $800 million. The profi ts from the Thai baht trade had been wiped out in their entirety.34 The Indonesian fiasco dented the image of the Soros funds as relentless superpredators. But it was compounded at the same time by an extraordinary missed opportunity. IN MID-NOVEMBER 1997, RODNEY JONES VISITED SOUTH Korea. Calling on a local bank, he found its boardroom festooned with 210 MORE MONEY THAN GOD triumphant notices of financings it had done for Thai companies. Jones knew these companies, and he knew that they had since gone bust; inquiring as to how many of the bank’s Thai borrowers were behind on their payments, he learned that the total came to more than fifty. As he made the rounds of other offices, Jones realized that this was just the tip of the iceberg. Thailand’s bust had clobbered South Korea’s fi nancial fi rms, leaving them short dollars that they were likely never to recover. With a bit more digging, Jones found that South Korea’s central bank was scrambling to cover up the mess by depositing dollars in Korean banks, using its reserves of foreign currency. And this discovery led to the bombshell: Like the central bank of Thailand five months previously, South Korea’s central bank was misleading the markets. Officially, its foreign-currency war chest contained $57 billion. But if you subtracted the amounts promised to wounded banks or committed on the forward markets, the real number was closer to $20 billion.35 Jones had uncovered the equivalent of that Thai suitcase full of prize money. In the fortnight prior to his visit, the South Korean won had dipped by 4 percent against the dollar, and the stock market had weakened. But nobody imagined that the central bank had already chewed through two thirds of its reserves, or that Korea was in the midst of a full-blown banking-cum-currency crisis of the sort that Fraga had anticipated in Thailand. Only a month earlier, the IMF had completed its annual assessment of South Korea’s economic health and concluded that the country was immune from the turmoil elsewhere in the region. But in a memo to Soros headquarters dated November 17, Jones was able to explain why the IMF was flat wrong. Korea was “in the late stage of the crisis,” he warned. The official and widely believed numbers on the dollar debts of South Korean companies understated their real liabilities by a whopping $60 billion; and much of this debt would mature within weeks. A catastrophic collapse was in the offi ng. Over the course of the next month, the Jones memo proved prescient. Nine days after it landed in New York, the IMF’s top Asia hand flew into Seoul on an emergency mission; ushered into a meeting at the central bank, he discovered that its reserves were falling at a rate of $1 billion SOROS VERSUS SOROS 211 per day and were now down to $9 billion.36 Just as Jones had reported, much of the dollar debt held by Korean borrowers was of short maturity, so money was flying out of the country at a rate that would exhaust the reserves imminently. On December 3, the IMF announced a hastily assembled $55 billion package of loans to South Korea—a record number for an IMF bailout—but given that the dollar obligations of the private sector were more than twice that size, the package was inadequate. By the end of December, the won had fallen 60 percent from its level at the time of Jones’s November 17 memo. Yet Jones’s spectacular call earned the Soros team precisely nothing. Despite the strong language in the November 17 memo, and despite a follow-up message from Jones the next day, no action was taken to sell the won short and repeat the gains in Thailand. It is not certain why this was. At the time of Jones’s memo, top IMF officials believed that South Korea would escape trouble; this may have persuaded the Soros team to focus on other challenges.37 But it is hard to escape the suspicion that Soros’s dual persona contributed to the missed opportunity as well. The boss wanted to be a statesman, not a wrecker of nations. If he was going to get involved in South Korea, it would be not as a scourge but as a savior.38 In the first days of January 1998, Soros traveled to Korea. He went as the guest of Kim Dae-jung, the country’s president-elect, and there were camera crews waiting at the airport. The great man dined with Kim at his home and affectionately called him “DJ”; he visited the top industrialists and breakfasted with Michael Jackson, who was plotting to take over a theme park from a bust South Korean underwear maker.39 Addressing the local media, Soros was not shy about laying out what Korea should do. He criticized the IMF prescriptions for the country, which involved saddling it with more debt, and called for a “radical restructuring of industry and of the financial sector,” comprising a cleanup of accounting practices and fl exibility for managers in fi ring workers.40 If Korea did these things, he said, his Quantum Fund would be willing to invest substantial sums in the economy, and other Western investors would flood in. Investors responded to Soros’s pronouncements by rushing into South Korean stocks, and Seoul’s KOSPI index jumped by a quarter in the ten days following his visit.41 212 MORE MONEY THAN GOD Soros’s mission to South Korea did his own fortune few favors. Not only had he missed the chance to short the won on the way down; his funds did not take a stake in Korea’s rebound until the following October. But the South Korea trip had a different payoff. The press coverage of his visit inevitably emphasized the comparison with the atmosphere in Hong Kong: Back in September, one Asian leader had vilified Soros as a criminal and moron; now another Asian leader was giving him the red-carpet treatment. Asked about the contrast between Mahathir and Kim, Soros allowed himself a smile. “One of them must be wrong,” he answered.42 THE STRUGGLE BETWEEN SOROS’S TWO PERSONAS WAS most acute in Russia. As far back as 1987, before the Soviet Union crumbled, Soros had set up a branch of his Open Society Institute in Moscow. In the 1990s the institute supported educational reform, the printing of textbooks free of Marxist ideology, and provided millions of dollars’ worth of grants to support scientists. István Rév, a Hungarian historian who served on Soros’s philanthropic boards, thought that Soros was drawn to Russia by the same forces that fascinated Napoleon: “Its vastness, its historical challenge, its backwardness, its perpetually unfulfi lled promise.”43 Not wanting his philanthropy to be seen as a Trojan horse for his fi nancial interests, Soros made it a principle not to get involved in Russian investments, though he allowed Druckenmiller and the team to take positions. But in the spring of 1997 he cracked. He took an astonishing fi nancial gamble in Russia, one that mirrored his errors in Indonesia and South Korea. Soros was not the only Western financier to fall for Russia. At the end of 1996, when President Boris Yeltsin reenergized his economic reform program, hedge-fund managers began jetting to Moscow, going out to the Bolshoi Opera and taking walks through the famous Novodevichy Convent gardens. A flood of foreign capital poured in. Portfolio investment increased from $8.9 billion in 1996 to $45.6 billion in 1997, equivalent to 10 percent of Russia’s GDP; the Russian equity index almost tripled in SOROS VERSUS SOROS 213 the first nine months of the year, making it the hottest among a lot of hot emerging markets. There were risks in this euphoria, to be sure: Property rights and the rule of law were vague concepts in Russia. But from the point of view of portfolio investors, Russia seemed a good bet so long as the reformers had the upper hand in Yeltsin’s government. If the reformers lost out, the foreigners could dump their shares and bonds and head for the exit. As a creature of the markets, Soros understood the importance of an exit strategy. But in 1997, he staked $980 million on a venture that was almost totally illiquid. Going over the heads of Druckenmiller and his colleagues, he joined a consortium bidding for 25 percent of Svyazinvest, Russia’s sprawling, state-owned telephone utility. It was an investment that might pay off over the long term: With nineteen phone lines per hundred people, compared with fifty-eight per hundred in the United States, telecoms in Russia had undeniable potential. But a $1 billion-odd stake in a state company was not something you could dump easily if Russian politics turned bad, and it entailed the sort of risk that seemed crazy to most foreigners. Even amid the torrent of portfolio investment into Russia, foreign direct investment into the country never amounted to more than a trickle. If the Svyazinvest bet seemed reckless on its face, it was all the more crazy given what Soros knew about Russia.44 In June 1997, shortly before the Svyazinvest auction was due to close, Soros received a secret request from the Russian government for emergency financing. President Yeltsin had sworn to start making good on the backlog of unpaid state wages and pensions by July 1, and he needed a temporary loan to meet the deadline. Unbeknownst to the markets or the International Monetary Fund, which was monitoring the parlous state of Russia’s debt, Soros lent the government several hundred million dollars. Had he not done so, Yeltsin’s brittle legitimacy might have cracked and unpaid workers might have rioted. From the point of view of Soros the philanthropist-statesman, the secret loan raised questions. Soros was going behind the back of the International Monetary Fund even as he urged Russia to become a responsible member of the international monetary system.45 But from the point of 214 MORE MONEY THAN GOD view of Soros the investor, the secret loan looked even more bizarre. Soros was about to plunk down a hard-to-exit bet of $1 billion on the theory that Russia was turning the corner to stability; but the desperation evidenced by the secret loan screamed out that stability was tenuous. In its triumph against sterling, and again in the Thai baht trade, the Soros team had used its insights into governments’ financial and political frailties to stage profitable attacks. In Russia in 1997, Soros had a privileged window on these frailties, yet he invested as though he had never even thought about them. Soros behaved this way because of his messiah complex. In his role as a philanthropist, he had tried to save Russia from its sins; now he convinced himself that he could save Russia even more if he risked his fortune in the country. As he put it himself: I deliberately chose to expose myself. To be a selfless benefactor was just a little too good to be true. It fed my self-image as a godlike creature, above the fray, doing good and fighting evil. I have talked about my messianic fantasies; I am not ashamed of them. . . . I could see, particularly in Russia, that people simply could not understand what I was all about. . . . It seemed to me that to appear as a robber capitalist who is concerned with cultural and political values was more credible than to be a disembodied intellect arguing for the merits of an open society. I could serve as a role model for the budding robber capitalists of Russia. And by entering the fray as an investor, I descended from Mount Olympus and became a fl esh and blood human being.46 Soros’s hope was that the Svyazinvest privatization would mark a turning point for Russia.47 Until 1997, Russia’s state assets had been transferred at knocked-down prices to the country’s oligarchs, with foreign investors excluded; this time foreigners were allowed in, and the auction would be won by the highest bidder. Up to a point, Soros was right: When the bids were opened in July 1997, the consortium to which he contributed did indeed win out by offering the most money. But it was not remotely obvious that the messiah’s participation was necessary for this victory; SOROS VERSUS SOROS 215 and besides, the victory was Pyrrhic. The oligarchs who lost the auction owned newspapers and television stations, and these soon released a string of smear stories about the winning faction. For weeks the mudslinging dragged on, forcing three government officials to resign and distracting the Yeltsin administration from its reform agenda. Far from helping Russia to turn a corner to a cleaner kind of capitalism, the Svyazinvest episode plunged the government into chaos. Meanwhile, shock waves started to arrive from Asia. Banks that had lent to Thailand, Indonesia, and South Korea began to register losses and were forced to pull some loans from Russia. Russian financiers could see that the war over Svyazinvest meant the end of economic reform, so they joined the scramble to get money out of the country. The economic collapse in Asia drove down the price of oil, which is Russia’s primary export. Caught between collapsing export income and capital flight, Russia faced an excruciating crunch. In order to attract investors, the government was forced to offer ever higher interest rates on its bonds. By April 1998, the annualized interest rate on short-term ruble bonds hit 30 percent, even though their short maturity reduced the risks to purchasers. In May the yield on these so-called GKOs reached an astonishing 70 percent. The chaos following the Svyazinvest auction made Soros’s illiquid $1 billion bet look crazy. But the prospect of earning 70 percent from short-term government bonds was a different matter entirely, and soon half the hedge funds in New York were salivating. Three-month bonds with double-digit yields were surely the bargain of the decade; Russia’s finances presented some risks, but these seemed acceptable on a short horizon. The West was not going to let a nuclear power like Russia default and descend into chaos, the argument went; if worse came to worst, the United States would force the IMF to increase its support for the country. In June, Goldman Sachs underwrote a $1.25 billion issue of Russian bonds, and the issue was so popular that it sold out within an hour. Every macro investor in Manhattan, from Soros to Tiger and on down, was hungry for Russian investments.48 But the most exotic Russia play of the moment had nothing to do with GKOs. It was about palladium. 216 MORE MONEY THAN GOD SINCE HIS FIRST TRIP TO SIBERIA IN 1994, DWIGHT ANDERson had continued to build Tiger’s palladium position. He learned to navigate Russia’s palladium bazaar: Each year the parliament and the government export company would haggle over how much of the metal should be sold, then the central bank, finance ministry, and offi cials in Noril’sk would argue over who could sell how much of the allotment. Anderson nurtured his relationship with the key selling officials over long meals and whiskeys, buying the metal whenever he got the chance. And then in the summer of 1998 he saw an opportunity to break out of this pattern. The financial desperation of the Russian state could change the game for palladium. Anderson approached his Russian friends with a modest proposal. He offered to buy the entire stock of nongold precious metals held by the central bank and finance ministry. He would take the palladium, the rhodium, and the silver. All of it. Anderson’s audacious plan involved delicate logistics. Some of the metal would have to be brought to Moscow from Siberia by armored train; the entire consignment would then be flown to Switzerland and placed in a bank vault with Tiger’s name on it. Tiger would pay $4 billion once the metal was in its hands, an amount that would relieve the immediate pressure on the Russian budget. It would then sell the stockpile gradually into the market, sharing the profits with the Russian government. The eventual proceeds to Moscow would come in around $8 billion, or so Anderson estimated. Anderson flew to Moscow in July to meet a senior official at the central bank. The climate seemed propitious for a deal: GKO yields had jumped from 70 percent in May to more than 100 percent. Anderson and his counterpart got along well; President Yeltsin apparently knew about the deal and had approved it. Returning to the Tiger offices on Park Avenue after a few days, Anderson felt that the deal of a lifetime was almost in the bag: Soros and Napoleon could salivate over Russia’s limitless romance, but Anderson was about to show that a single hedge fund in New York SOROS VERSUS SOROS 217 could buy the treasure of the country. Then a message reached Manhattan from Moscow. There would have to be a commission. Anderson looked at the request and responded carefully. Tiger had no problem paying commissions on its trades, he said; after all, it paid them all the time to stockbrokers. But Tiger could not agree to the details of the Russian proposal. The Russians wanted two contracts for the metal sale: an official one that made no mention of the commission and a private one that laid down how it should be paid into a bank in Cyprus. Russia’s parliament and people would only see the official version, so no questions would be asked about who kept the commission. Anderson said he had a problem with that. “It’s got to be one contract,” he insisted. For a while there was silence from Moscow. Then a response came back: Okay, understood—what about paying the commission into a bank in Gibraltar? Anderson had to explain himself again. It didn’t matter if the payment was to Cyprus, Gibraltar, or some other haven. But it had to be disclosed, and there had to be one contract. Tiger’s lawyers and Russia’s lawyers had to be looking at the same piece of paper, and it would have to stand up to public scrutiny, both in the West and in Russia. The messages bounced back and forth between New York and Moscow until eventually it became clear that agreement was impossible. For the Russians, there was no earthly reason to sell without a private commission. For Anderson, there was no way to salvage the deal of the decade.49 BY THE TIME THE PALLADIUM NEGOTIATIONS BROKE down in late July, Russia’s crisis was taking on a new intensity. A large IMF loan had been announced on July 13, but it had calmed the markets only briefly. The week after the IMF announcement, a second Goldman Sachs–backed bond issue, intended to raise a whopping $6.4 billion, only attracted bids for $4.4 billion. The Russian bond market tumbled, quickly followed by the stock market: Suddenly even risk-seeking hedge funds 218 MORE MONEY THAN GOD were leery of fi nancing Russia. With their options running out, the Russians reopened secret talks with their old friend George Soros. Yeltsin’s economic team made Soros a proposal. The state would auction off another 25 percent of Svyazinvest; meanwhile, the winners of the first auction would provide an immediate bridge loan to the government, just as Soros had done a year earlier. But this time Soros was not ready to play ball: In the summer of 1997, he had furnished Russia with a few hundred million dollars, but now it would take billions to tide the country through its crisis. On Friday, August 7, Soros telephoned Anatoly Chubais and Yegor Gaidar, Yeltsin’s top economic officials, and told them to get real. Foreign investors and Russian investors were tired of buying Russian debt, and it would be impossible to roll over the vast quantities of GKOs as they matured. To make it through this crunch, Russia needed billions, not millions. After listening to Soros, Gaidar gave his estimate of Russia’s funding need: He put it at $7 billion. Soros countered that Gaidar was still lowballing the challenge: He reckoned $10 billion was needed. The Svyazinvest consortium could kick in $500 million, Soros suggested. The rest would have to come from Western banks and governments.50 Soros’s next call was to David Lipton, the top international man at the U.S. Treasury. Soros urged the Treasury to contribute to a bridge loan, using the same facility that it had used in its Mexico bailout three years previously. Lipton retorted that there was no support in Congress for this sort of rescue: The Russians had already been given their last chance in the form of the July IMF package. On Monday, August 10, Soros spoke briefly with Lipton again. He called Lawrence Summers, the number two at Treasury, and on Friday he spoke with Treasury secretary Robert Rubin. To galvanize the Treasury team, Soros urged Senator Mitch McConnell, an influential Republican, to call Rubin and offer his party’s support for a last-ditch attempt to save Russia. In this flurry of telephone diplomacy, Soros was going beyond the role he had played in South Korea, when he had behaved like the International Monetary Fund, laying out the economic policies that would attract private capital. Now he aspired to broker a full-blown government rescue. SOROS VERSUS SOROS 219 Not for the first time, Soros’s dual personas caused trouble. His government interlocutors did not know how to interpret his views: Was Soros saying what would be good for the world, or was he saying what would be good for his portfolio? Sensing that his private discussions were not gaining traction, Soros went public with his Russia plan by publishing a long letter in the Financial Times on August 13; now it was investors’ turn to feel uncertain. Soros proposed that, as part of a package that would include new Western financing, the Russians should reduce the burden of the ruble-denominated GKOs by devaluing the currency by 15 percent to 25 percent. It was a sensible policy prescription, but to everyone in the markets it read as a public announcement that Soros was shorting the ruble. On the reasonable assumption that Soros was getting ready to repeat the sterling trade of 1992, investors ran for the exit; the day after Soros’s letter appeared, the yield on GKOs hit 165 percent. On Monday, August 17, facing an inexorable assault from the markets, Russia devalued the ruble and defaulted on its debts to foreigners.51 The truth, of course, was that Soros had not shorted the ruble. He had seen the inevitability of devaluation and even hastened the moment; but instead of selling the life out of the currency in the knowledge that politicians would do nothing to save it, he had attempted to make politicians behave differently. Indeed, far from being short the ruble, the Soros funds were vastly long—on top of the $1 billion exposure to Svyazinvest, they owned all kinds of Russian bonds and equities.52 As a result of the default and devaluation, Quantum and its sister funds lost 15 percent of their capital, or between $1 billion and $2 billion.53 For Stan Druckenmiller, whose lifework was the performance of the Quantum Funds, it was a bitter moment. For anyone who knew the size and manner of the loss, it made nonsense of the idea that Soros was a superpredator. But Soros himself processed the failure on an entirely different level. Looking back on the experience, he wrote, “I have no regrets with regard to my attempts to help Russia move toward an open society: They did not succeed but at least I tried.”54 Soros had come down from Mount Olympus like a messiah to save sinners. He had suffered crucifixion.