George Soros urges governments to outlaw ''toxic' credit default swaps
Credit default swaps are “instruments of destruction” that should be outlawed as the world looks to re-regulate the global financial system in the wake of last year’s credit crisis, the billionaire investor and philanthropist George Soros said on Friday.
By Peter Foster in Beijing
Telegraph, 12 Jun 2009
Mr Soros, the Hungarian-born US fund manager, said that the swaps were ‘truly toxic’, grossly distorting risk, encouraging speculation and with the potential bring ruin on financial institutions and companies.
Citing the recent bankruptcy of General Motors in America, Mr Soros said that some bondholders had stood to gain more from bankruptcy than re-organisation as a result of their CDS positions.
“It’s like buying life insurance on someone else’s life and owning a licence to kill him,” he said of the swaps, which pay the buyer face value if a borrower defaults, in exchange for the underlying securities or the cash equivalent.
In remarks to a meeting of international bankers and financiers in Beijing, Mr Soros set out his vision for a new regulatory system for global finance that would require regulators to intervene to stop the kind of credit and asset bubbles which precipitated last year’s banking crisis.
The crisis had forced governments to put the global banking system on ‘life support’ in a crisis whose nearest parallel was the Great Depression of the 1930s, he told the Institute of International Finance, an association representing 370 international financial institutions.
Although warning against the tendency to over-regulate markets in the wake of the crisis, Mr Soros proposed three principles that should guide regulators as they seek to build systems that will prevent a repetition of events.
Firstly, regulators must overcome their previous tendencies to what Mr Soros called ‘market fundamentalism’ and take responsibility for identifying and correcting asset, credit and equity bubbles before they caused undue damage.
He acknowledged that regulators must accept this assignment “knowing full well that they are bound to get it wrong” but that once engaged in the process they would learn from their mistakes and get better through a ‘process of trial and error’.
Secondly Mr Soros argued for flexible credit controls that would react to market mood-swings, requiring, for example, requiring mortgage lenders to adjust loan-to-value ratios on residential mortgages in order to forestall property bubbles.
Mr Soros cited the 2001 dotcom equities bubble as an example of where, in his vision for a re-regulated global financial system, regulators would have stepped in to cool the market by freezing new share issues.
Lastly Mr Soros said that the practice of securitizing bank assets had greatly added to systemic risk and must now come under tighter controls, including requiring banks to limit proprietary trading to their own assets in order to protect depositors.
“Banks must use less leveraging and accept risk on their investments, they should not be allowed to speculate on their own account with other people’s money,” he added.
“This may push proprietary trading out of banks and into hedge funds which is probably where they belong.”
Earlier in the week while on a tour of Shanghai, Mr Soros, chairman of Soros Fund Management, told the Chinese state news agency Xinhua, that he believed China would grow faster than many analysts were predicting.
“Generally speaking, I think that we have a bad market era. But I think China could be an exception. I am not in the position to say, but I think in some ways, China is better situated than most of the countries to have a last state recovery. So I have more optimism in China than about other markets."
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