Moral hazard looms larger than ever before: Soros

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 may be deemed too big to fail, said billionaire investor George Soros.

“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,” Soros, chairman of Soros Fund Management LLC, said yesterday at a conference in Bretton Woods, New Hampshire.

Paul Volcker, former Federal Reserve Chairman, challenged the notion that large financial institutions wouldn’t be allowed to collapse, and asked Soros whether the extra yield on Goldman Sachs Group Inc bonds relative to Treasuries would widen if the firm gave up its bank license. “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, gave the Federal Deposit Insurance Corp authority to wind down complex firms after the bankruptcy of Lehman Brothers Holdings Inc exacerbated the credit crisis and forced the US to bail out companies including American International Group Inc. “So you’re not 100 per cent sure,” Volcker replied. “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.” Federal Deposit Insurance Corporation Chairman Bair told bankers last month that while the Dodd-Frank law is not “perfect,” it will strengthen the sector by giving the agency tools to regulate “too-big-to-fail” institutions.