Soros: Financial Reforms Bound to Be Wrong

By: Julie Crawshaw
Friday, December 11, 2009

Famed hedge fund manager George Soros says new regulations for the financial industry are “bound to be wrong” initially, but necessary nonetheless if the global financial system is to survive.

“You need to build something that wasn’t there,” Soros told The Wall Street Journal.

“Regulations have to be global if you want to have global markets. That’s the big test. If not, then global markets will break down into national units.”

Soros says he believes that market bubbles should be controlled through margin and capital requirements, and perhaps even the slowdown in the issuance of a company’s shares in some cases, but adds that there could some errors along the way.

“While markets are imperfect, regulators are even more imperfect,” Soros notes. “(Regulators) will get feedback from the market . . . which will allow them to adjust it.”

He blames market “fundamentalists” for dismantling much regulation around the world, thereby contributing to the financial crisis.

However, he also notes that some of what caused the crisis caught him off guard.

Credit-default swaps, for example developed when Soros “wasn’t looking,” Soros says. After studying them, he decided they are toxic assets, akin to selling insurance that covers someone else and then selling them a gun to shoot that person.

Wall Street banks have agreed to create credit-default swap indexes tied to U.S. prime-mortgage securities, in a move that may risk driving down prices for the bonds after a record rally, Bloomberg reports.

The benchmark contracts, similar to the ABX index swaps linked to subprime loans, may begin trading as soon as the first quarter of 2010.

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