Finance: The Unifying Theme

A profile of financier George Soros

The Hungarian-born investment genius and philanthropist George Soros has shied away from publicity for most of his life, but the self-styled "financial and philosophical speculator" fairly vaulted into the public eye not long ago. Soros, age sixty-two, has been a figure of note on Wall Street for many years; his canny sense of financial-market turns led Institutional Investor magazine in 1981 to anoint him "the world's greatest money manager," a title he arguably retains today. He has also been exerting a significant and salutary influence in Eastern Europe since the mid-1980s, when he started distributing scholarships and photocopiers to dissident intellectuals in Hungary and other Soviet satellite nations, helping to set the fuse for the implosion of communism at the end of the decade.

Late last year he was yet more active in both spheres than he had ever been before. With the European monetary system groaning under high German interest rates, Soros's Quantum Fund and its investment outriders placed a $10 billion wager that Britain would be compelled to devalue the pound sterling. When this came about, on September 16, his funds were suddenly around $1 billion richer, and Soros had become the Man Who Broke the Bank of England. He made headlines again last December by committing $100 million of his own money to stave off the dispersion of the Soviet scientific establishment and by pledging $50 million to help provide areas of safety for Bosnia's tormented civilian population. Then, in January, he lent Macedonia $25 million to buy winter heating oil. All this is on top of the approximately $100 million annual budget of his many foundations. Explaining, Soros said that his financial gains had simply outrun his ability to give them away—though his magnanimity surely helped smooth feathers ruffled by his enormous profit from Britain's monetary misfortune.

Taken at face value, this is the tale of a Wall Street tycoon who made a bundle in the market and decided to give some of it back. But Soros has made rather more than a bundle—his personal worth probably approaches $1 billion—and his philanthropic method is anything but typical. What distinguishes him in particular is the elaborate philosophy underpinning both his financial dealings and his efforts in behalf of Eastern Europe. In books such as The Alchemy of Finance and Underwriting Democracy, Soros has developed an operating theory he describes as "reflexivity." His notion is that the movements of financial markets and of history are shaped both by the perceptions of those caught up in them and by purely objective factors; the term "reflexivity" refers to the interplay, or "feedback loop," between events and participants' views of them. Most often the two tend toward convergence, but frequently what Soros calls "far-from-equilibrium conditions" develop—for instance, when market trends or historical events move so wildly that they defy the comprehension of those involved in them.

Soros's reflexivity theory can easily be seen at work in financial markets, where prices often soar or plunge on little more than psychology. But Soros says that the rise and fall of Soviet communism was much akin to a classic stock-market boom-bust cycle: the destruction of the Berlin Wall became inevitable once belief in Marxism-Leninism had seeped away and a "dynamic disequilibrium" set in.

Whatever the intellectual validity of his theories, Soros has seldom been let down by his intuitions as to the direction of markets or history. "I am particularly concerned with these extreme conditions when there is no tendency toward convergence," Soros tells a visitor to his Manhattan offices, as a rainstorm rattles the thirty-third-floor windows that give on a mist-enshrouded Central Park. Paintings by Hungarian artists of the interwar years hang on the walls. "I specialize in these far-from-equilibrium experiences," Soros says, adding, "This is the unifying theme."

George Soro's wits were sharpened during the Second World War, when he went underground in Nazi-controlled Budapest with his Jewish family. His father, Tivadar Soros, an attorney, handed down the lessons he had learned as an escaped prisoner of war adrift in the Russian civil war. "That, of course, was a formative experience, a traumatic experience, for him," Soros says. "It changed his character and his outlook on life, and he passed it on to me." George fled postwar Hungarian Stalinism in 1947 to enroll in the London School of Economics. He studied under Karl Popper, whose critique of Marx, Hegel, and other proponents of historical determinism, in The Open Society and Its Enemies, has had an enduring influence on Soros's thought. Soros launched his financial career in London, and pursued it in New York beginning in 1956, with stellar results—though he still describes himself as a failed philosopher.

After serving Wall Street firms as an investment-portfolio manager and analyst, Soros turned to managing the Quantum Fund, an investment vehicle that he launched (under another name) in 1969. Its performance has been spectacular: compounded annual returns of 34 percent by the end of 1992 brought the fund's assets to $3.734 billion. An investor who placed $10,000 in Quantum at its inception and reinvested all dividends would by last year have held the sum of $12,982,827.62.

Soros has had financial setbacks, though. His fund posted a 22.9 percent loss in 1981, when he miscalled the direction of interest rates and took a bath in bonds; it shed $800 million in the 1987 market crash, which Soros had as much as predicted in The Alchemy of Finance earlier that year but had expected would hit first and with most force in Tokyo. High risk is a feature of "hedge" funds like Quantum, whose managers may borrow several times the value of their holdings to place large, aggressive market bets using futures, options, and other derivative securities, while hedging, or minimizing, potential losses with other such combinations of financial instruments. But at the end of the day they must be right in their hunches, or the consequences will be devastating. "To me, it's always been a very painful process, very painful, involving great suffering, actually," Soros once told a reporter. "Because if you lose money, it's very painful, and you can't make it without the threat of losing it."

Toughness is a Soros trait. Financial peers at one time described Soros as cold and arrogant, and Quantum has come under scrutiny for allegedly joining forces with the Salomon Brothers investment bank in a 1991 Treasury market "squeeze" maneuver. But he allows that his fiercely single-minded approach to markets has mellowed in recent years, referring to a 1981 "crisis" that he describes as "a battle between me and my success—that is to say, 'Am I the slave of my success or am I the master of my destiny?'" He resolved this in part by shifting his focus to Eastern European philanthropy and activism.

Another trademark is Soros's ability to discern patterns where others see only chaos. "He sees trends globally, and he understands enough about how markets work so that he can see where to apply leverage—both intellectual and financial leverage," says Michael Lipper, the head of a Wall Street firm that tracks investment-fund performance, and a longtime Soros-watcher. "He can think out where a trend is going, and which security would be the major beneficiary of it."

Soros's bet against the British pound was one such play. On instructions from his Soros Fund Management think tank in New York, the Netherlands Antilles-based Quantum Fund (its offshore status frees it from U.S. regulation, and U.S. citizens, excepting Soros and a few officers of the fund, are not allowed to hold its shares) and related entities borrowed heavily in sterling, sold those pounds for German marks and French francs, and then locked in profits by repaying the sterling loans with devalued pounds. Soros made parallel bets in British stocks and German and French bonds to boost profits, which eventually came to $1.3 billion. Soros felt confident betting much on the collapse of the pound: the same process that had lifted the Iron Curtain and reunified Germany obliged the Deutsche Bundesbank to raise interest rates in order to dampen inflation, putting unbearable pressure on the recessionary British economy—and the pound.

Soros has brought much the same astuteness to his efforts in Eastern Europe. Tibor Vidos, a Hungarian political consultant, says that in 1984 Soros skillfully played on the Hungarian communist government's need to service its large foreign debt. "A billionaire stockbroker from New York was exactly the right person to have good relations with," Vidos says of Soros's approach to Budapest. Soros secured quasi-official status and then funded prodemocracy thinkers. Establishing an alternative to communist institutions heartened the opposition and helped to undermine the government. Soros encouraged the emergence of democratic movements, among them the Federation of Young Democrats, a group that today is in parliamentary opposition to the conservative nationalist Hungarian government, and could take power in the 1994 elections. "That he played a significant and historic role is without doubt," Vidos says.

Soros was a presence not only in Hungary: he backed Czechoslovakia's Charter 77 human-rights group from 1981 onward, and his Open Society Fund created a Polish foundation in 1985 to support the democratic process. But he has been as quick to cut his losses in international philanthropy as he has been in finance. He shut down his Chinese foundation in 1989, upon learning that it was controlled by the Beijing security apparatus, and he disengaged from intense efforts to rescue the Soviet economy in 1990 when the Shatalin Plan for immediate free-market conversion failed to win Mikhail Gorbachev's endorsement.

In the years since the Eastern European communist regimes started toppling, in 1989, the Soros Foundations network has widened to encompass Albania, Belarus, Bosnia, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Slovakia, Slovenia, Ukraine, and even, still, Yugoslavia. Soros has given a network offspring, the Central European University, in Budapest and Prague, a $25 million endowment with the aim of promoting understanding among the region's fractious nationalities and educating its future leaders.

Although Soros's initial objective in Eastern Europe was political—bringing down communism—the focus of his foundations now is education, nudging history by altering perceptions. His foundations also promote plurality in the media by supporting independent publications: in Romania the Soros Foundation for an Open Society spent $550,000 on newsprint for independent newspapers during last year's election campaign, and his Hungarian foundation subsidizes the newspaper Magyar Narancs (Hungarian Orange), a weekly in tune with the Young Democrats.

Ironically, communism's demise has complicated Soros's task. Funding decisions are tougher than when simple dissident status was an applicant's key qualification. Soros's dollars buy less and less as local currencies strengthen and Western prices arrive. More worrisome, Soros has become the target of anti-Semitic broadsides in Magyar Forum, a weekly published by the far-right wing of the governing Hungarian Democratic Forum. In one virulent attack, published in September of last year, an HDF parliamentarian disparaged Soros's role in the 1989 democratic transition, calling it "a self-engineered coup by cosmopolitans," the term "cosmopolitan" being a long-standing communist euphemism for "Jew." The article was titled "Termites Are Devouring Our Nation—Reflections on the Soros Regime, the Soros Empire." In Romania, as well, Soros has been maligned. Ultra-nationalists based in the ethnically mixed city of Cluj, in Transylvania, vilify Soros as a Hungarian infiltrator, and a parliamentarian representing Romania's Democratic Front for National Salvation has demanded that Soros's foundation be expelled.

Such attacks have put the various foundations somewhat on the defensive, even as their sense of mission has intensified. "We're very proud of the enemies we make, frankly," says Sandra Pralong, Soros's Romanian-born co-chair for the foundation in that country, "because the people who are most threatened by us are the ones who are most damaging for Romania." Soros "reminds the political circles in this country that the time when a society or a country could live as an [isolated] entity is over," says Andras Kereszty, the executive editor of Nepszabadsag, Hungary's largest daily newspaper. "Everything is integrated in the modern world; he represents this interrelatedness."

The Soros foundations taken together amount to a major regional institution influencing a generation of opinion-makers. The index of the Soros Foundations directory lists 641 names. The Hungarian television journalist Janos Horvat reckons that one in ten members of his country's first post-communist Parliament have had some Soros connection. For many in Eastern Europe, Soros represents success, reform, and hope. Ethan Klingsberg, an American lawyer who is the executive director of a Soros offshoot that helps new governments draft constitutions, recalls a meeting in Kazakhstan in January between Soros representatives and a group of independent intellectuals. "They had this club," Klingsberg recalls, "and they wanted to name it for him." Soros inspires fervor among his staff, too.

For all the undeniable progress to which he has contributed, Soros's outlook on the former Eastern bloc is decidedly dark. He fears that it may have shaken off communism only to succumb to nationalist dictatorships, and that "what used to be the Soviet Union may become a black hole that may eventually swallow up civilization." Soros initially envisioned his foundations as a short-term venture. He now says that "things haven't worked out, they're not going to work out, and so you've got a much longer period while I will need to be engaged." Yet he retains considerable relish for the task, which he says affords him more satisfaction than making money ever has.

This brings to mind a revealing story that Soros once told an associate about his wartime years in hiding. Holed up in a Budapest cellar at one point, he passed long hours with his father and brother playing games, a small cache of candies being the stakes. He and his brother saved up the sweets they won—but Tivadar Soros ate his winnings. "The point is that you have to do something with the bonbons," Soros said. "You can't just play with them and you can't just eat them all."