More Products Should Be Regulated - Soros

In times of financial crisis, job cuts seem the thing to do. Both Merrill Lynch (MER) and Lehman Brothers (LEH) may cut more employees than previously anticipated, and this time it seems they want to do it quietly without major announcements. The big question is whether these job cuts will help these companies by cutting costs or whether they will be too little too late and end up harming the company by getting rid of needed talent.

George Soros thinks the markets will fall further in the next year and that the current “bottom” is not the end of the fall. He thinks that financial institutions should be far better regulated and that many OTC products such as swaps should be conducted through regulated exchanges that have predetermined margin requirements and guarantee the credit-worthiness of the counterparties.

In many cases, it may be simply too complicated to set up an exchange for many of these products as there are so many ways of packaging them and each may not have enough daily volume to justify being listed. However, in a time like this where credit worthiness is of such importance, moving more products from OTC to exchanges may be something to look into.

Comments

[helplessobserver]

As I think about the derivatives market and leverage, I wonder what they teach in business school today. I guess these smart graduates become fools when they join an investment bank. For fools they are when 30 to 1 leverage is routinely employed and when mostly hope guarantees solvency of swap counterparties. When a non-fool, Warren Buffet, encountered credit default swaps in General Re's book, he ordered them cleared as fast a possible. At a cost of $400M over several years the swaps were cleared.

[phinsuntanning]

Soros is rigth, just listen Merrill Lynch & Co. John Thain: ``We have plenty of capital going forward and we don't need to come back into the equity market" , well, they have assets they need to sell to get capital:
March 31
Fiscal Year 2007: Capital/Assets
US
Bear Stearns 3,0%
Morgan Stanley 3,0%
Merril Lynch 3,1%
Lehman 3,3%
Goldman Sachs 4,5%
Citigroup 5,2%
JP Morgan 7,9%
Wells Fargo 8,3%
Bank of America 8,6%
Wachovia 10,2%

[algoa456]

The human palindrome never met a regulation he did not like - after he made his billions, however.

[JimHigginbottom]

Its easy to support more regulation when you earned a billion dollars by European Exchange Rate Mechanism regulation.

[luckylee]

Hey don't forget the Fed is bailing the banks, the poor homeowners, and me (because I own some bank shares so it will automatically go up). I'm safe because I'm with the Fed - unlike the shortists. The Fed isn't gonna bail out shortists like Soros.

Besides, discount window is open now. Rule FASB157 is delayed too. So stop the doom and gloom because Bernanke will not let anything falls further even though they're undercapitalized. Nothing will stop the bull run from now to November!

[chrism1962]

I do believe that Soros has a point on regulation, I think that the more opaque the product, the more regulated it should be. One of the main causes for the current situation is that people bought/sold products that they did not truly understand.

Regarding the gearing used recently, I think it was simply greed, by people looking for short term profits, to boost their bonuses. But with all types of gearing big profits can become big losses if the markets turn against you.

I also believe that the market has not hit bottom yet, as most bonds need to be re-rated. An example is the Deutsche Bank Bond from May 2006 which is still AAA, although 43% of the underlying mortgages are delinquent!

I still feel that another large institution will fail before this crisis plays out, and in some way I feel that this may be good in the long term. It may be necessary to show that not all institutions can be supported by the FED, or the same problems could occur again, in a few years time.