When George Soros cries 'wolf', bet on the wolves arriving

After trailing George Soros for nine years, Irene Hell comes face to face with him again - and his latest grim warning for the financial system

George Soros spoke very calmly: "There is no free lunch. First you have to listen to me." I felt the tension in the room and sensed a scary sharpening of knives among the attendees of a lunch session at the Federal Reserve Bank of Chicago.

The billionaire currency speculator and mover of markets had just published his book The Crisis of Global Capitalism and had flown to Chicago. I was curious to meet the legendary whistleblower who had dared to criticise the global financial system – sacrilege in some quarters. "You got rich with the system and now you want to change the rules. We want to become rich as well," complained one of the brokers, in a harsh tone fuelled by hatred. Soros smiled. He obviously did not care that some bankers and financiers in the room were ready to leap from their seats and eat him for lunch.

After this first meeting in May 1999 – and my first interview with Soros, which raised more questions than it answered – I was hooked. Determined to learn more about this mysterious gentleman in the elegant grey suit, I decided to follow him around the planet.

That journey took me most recently to the Royal Academy of Music in London. At a private recital, his new love and inspiration, the violinist Jennifer Chun, wowed the audience while performing a duet with her sister Angela. This week, Soros will be taking centre stage with the launch of his new book, The New Paradigm for Financial Markets: the Credit Crisis of 2008 and What it Means. After a series of prophetic books in which he has has warned about a meltdown in the global financial markets, an Orwellian surveillance state and the current sub-prime crisis, his latest work will wow a different audience altogether.

Wherever he appears – whether at the World Bank meeting in Prague, at events in his Open Society Institute in Budapest, or celebrations such as the one in Berlin at which he was awarded the Hannah Arendt Prize for promoting the development of free societies – journalists surround him. "Will the dollar rise or fall?" "What about the euro and the yen?" "What about gold, gas, oil?"

No matter what he says, it has always had some effect on the markets. Since his famous bet against sterling in 1992, which earned him the title "the man who broke the Bank of England" (an appellation he hates), he has assumed legendary status in the world of finance.

Worldwide headlines proclaiming his "one billion dollar profit" dominated business pages.

"This is not true," Soros argues. "It was almost two billion."

Being underestimated seems to be an article of faith for him. While he was a student at the London School of Economics, he became intrigued by the concept of an open society advanced by a professor at the LSE, the hugely influential philosopher Karl Popper. As an émigré from Hungary who had experienced both Nazi and Communist rule, Soros wanted to follow in Popper's footsteps. However, he did not feel he was given the encouragement and attention that he needed. Out of frustration that almost nobody was interested in his writings and his philosophical ideas, Soros turned to money.

Now the 77-year-old billionaire is one of the richest men in the world and his books can no longer be ignored. However, his inconvenient habit of speaking out has made him some powerful enemies.

During a press conference at the World Economic Forum in Davos in 2003, he warned that the war on Iraq, which was just being prepared, would become an uncontrollable, bloody disaster. Soon after, he put money and energy into a campaign to fight the re-election of US President George Bush. Soros also warned about the sub-prime crisis and the current recession.

"I took a lot of heat, but I can take it," Soros told me during his Orwell Conference last November in New York. There was a right-wing campaign against him and it did hurt, and the re-election of Bush was his personal Waterloo.

But Soros does not quit. He continues to fights battles nobody else likes to take on. Those who benefit from his philanthropic network of Soros Foundations – established in countries in Central and eastern Europe to support the development of open societies – see him as a messianic figure. But others, such as former Malaysian prime minister Mahathir Mohamad, call him a devil because his unscrupulous bet against the Thai baht is believed to have caused the Asian financial crisis.

But his global status is unrivalled. In almost any country of the world (other than Malaysia and Thailand), the red carpets are unfurled for him. Due to his impact on financial markets, his high-calibre contacts and the work of his Open Society Institute, which has donated more than $5bn (£2.6bn) to highly efficient human rights projects, he could be described as a kind of secret world president.

And now, as his new book is released, his expertise might be drawn on to get the world out of what he describes as the worst market crisis in 60 years.

"We have to recognise that we are working with a false paradigm," Soros explains. "We have to change the paradigm, recognise the additional uncertainty and limit the amount of leverage in the system."

He describes the theory that markets are self correcting, by tending towards equilibrium , as "market fundamentalism" – or alibis for self-interest.

The current crisis is caused by two different bubbles, Soros explains – "the housing bubble in the US and a super bubble that has been brewing for 25 years."

These dangerous developments have been reinforced by new, synthetic financial products. "It was a shocking abdication of responsibility", Soros comments. "Everything that could go wrong, did."

New, practically uncontrolled synthetic products might be ticking time bombs. "Credit default swaps amount to $45 trillion, which is an amazing figure. It is equal to the total wealth of the United States' households. You don't know whether your counterpart will be able to meet their obligation if called upon," Soros warns – and he offers solutions.

"It is essential that these transactions should be put through a central clearing house – an exchange – and that there should be proper margin regulations." This could remove the uncertainty that overhangs the markets.

Of course he has been down this road before in tearing into the markets and challenging their conventions. "I would say I'm the boy who cried wolf three times," the financier says. Soros has never opted for the easy way.

He barely escaped the Holocaust and the Communist system and started in London with nothing. More than once he was in the depths of despair.

So what made him a billionaire while others failed? What turns desperation into gold? Courage.

This story was published in the 'Independent on Sunday' on Sunday, 18 May 2008