Currency trade billionaire and chairman of Soros Funds Management, George Soros, opens up his mind about how to put right the banking sector, which has become a symbol of failure and recession. He told the BBC that being tough on banks at this juncture may not be such a good idea.
Now that the worst of the recession phase is over, due to think that key reforms have been made to make banking sector safe?
No, not at all. Because what happened in 2008 is not going to be repeated in the next 50 years or so. So, we have time to redesign the system. Correcting the collapse is a two way manoeuvre. Like when a car is skidding you have to first turn the wheel in same direction and then you turn it back. So we have time because we have yet not completed the first stage.
Now, during this stage we have to rebuild the capital of the banking sector. We are doing it the wrong way. That’s something that we can talks about later. So, that’s the stage we are in. Right now, to limit them is counter-productive. Even taxing them is counter productive.
The banks which were earning phenomenal money pretended that they were making profits, but actually it was a gift from the government. Because the government made money available at zero cost. Then distributed the earnings as bonuses and that created a political storm in every country, which is unfortunate. Because it’s should be well considered out and well balanced programme.
Will you be of the view that paying bonuses from 2009 profits would be wrong?
Yes, definitely. They should not be given bonuses because of the hidden gifts that the banks have received.
President Obama last week announced some radical proposals on banking reform. He wants then out of propriety trading, using capital to speculate on their account and also wants to limit their size. Are they constructive measures in your view?
Very much so. He is taking steps in right direction. In my opinion, though, it does not go far enough. It still leaves the problem of too big to fail. For example even if Goldman Sachs gave up its baking licence to be an investment bank to escape high interest rates, it would still be too big to fail.
So, how do you resolve the problem that tax payers don’t have to bail them out?
It’s mainly through acquiring adequate capital requirements for speculation. Effectively investment banks have been acting as hedge funds. Whereas hedge funds leverage large amounts of capital or 25 times of their investments, while investment banks would require 30-40 times which would not be sound and cannot be allowed.
So your view would be that if you want to make banks safe, they would have to raise colossal amounts of investment capital?
Or do less recreation. The other possibility is that we could bail them out. Because there is a problem of contagion, where the participants are engaged in number of markets. And the problem spreads from one market to the other and that is exactly what happened. Because institutions are engaged in every market. But that was not the case earlier where commodity trading houses were different from investment banks. Maybe they should be separated.
First Published: Friday, January 29, 2010, 13:54