Moral hazard in the financial system “looms larger than ever before”, even after the Dodd- Frank law gave US federal agencies tools to regulate institutions that might be deemed too big to fail, billionaire investor George Soros said yesterday.
“The evidence is overwhelming that the first priority of the authorities is to prevent a market collapse, and everything else has to take second place,” said Soros, the chairman of Soros Fund Management.
Former Federal Reserve chairman Paul Volcker challenged the notion that large financial institutions would not be allowed to collapse, and asked Soros whether the extra yield on Goldman Sachs bonds relative to US treasuries would widen if the firm gave up its bank licence.
“Probably currently it wouldn’t go up very much, but it would go up,” Soros said.
The Fed allowed investment banks Goldman Sachs and Morgan Stanley to convert to bank holding companies in September 2008. Dodd-Frank, the financial regulation law enacted in July last year, gave the Federal Deposit Insurance Corporation (FDIC) authority to wind down complex firms after the bankruptcy of Lehman Brothers exacerbated the credit crisis and forced the US to bail out companies including American International Group.
“So you’re not 100 percent sure. You want a tough administrator, you get Sheila Bair up here and she’ll tell you what will happen if you fail on her watch,” Volker replied.
Bair, the chairwoman of the FDIC, said last month that while the Dodd-Frank law was not “perfect”, it would give the agency tools to regulate “too-big-to-fail” institutions.
Volcker, 83, is known for taming inflation in the 1980s as Fed chairman and he provided advice on the rewriting of regulations for financial institutions. The law enacting those regulations included the so-called Volcker rule, which banned proprietary trading at banks and restricted their investments in hedge funds.
Soros, 80, reportedly made $1bn in a successful bet in 1992 that Britain would fail to keep the pound in the pre-euro European exchange-rate system.
He and Volcker spoke at a conference sponsored by the Institute for New Economic Thinking, which Soros helped found. – Bloomberg