Page last updated at 14:17 GMT, Wednesday, 27 January 2010

Davos 2010: Soros calls for break-up of big banks

By Tim Weber
Business editor, BBC News website, in Davos

George Soros
Mr Soros called the current economic crisis a "super bubble"

Legendary investor George Soros has called for a radical break-up of banks that are "too big to fail".

He also backed US President Barack Obama's proposed reforms to limit the size of banks at the World Economic Forum in Davos.

Speaking at a private lunch, Mr Soros told journalists that Wall Street bankers opposing Mr Obama's plans were "tone-deaf".

Other bankers at the event, however, warned against more regulation.

The boss of Barclays Capital, Bob Diamond, said he had "seen no evidence ... to suggest that shrinking banks and making banks smaller and narrower is the answer."

Other bankers, like Jacob Frenkel of JPMorgan Chase, have said they were worried about "bad regulation".

'Goldman in Somalia'

Analysing attempts to overcome the crisis, Mr Soros had plenty of praise for Mr Obama's plan to split big banks - separating their commercial banking bits and their investment arms.

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Even after the break-up proposed by Mr Obama, most investment banks would "still be too big to fail," Mr Soros told the lunch guests.

To contain these banks, he said all major economies would have to agree on a common set of financial regulation that set strict limits for leverage - how much money the banks can borrow to invest.

Without a global agreement, capital would simply move to the least regulated country.

However, if all major economies participated, they could exercise the necessary controls over money flow to prevent rogue states from circumventing the system - or stop "Goldman Sachs from setting up shop in Somalia," as one of the participants called it.

Super bubble

Mr Soros called the current economic crisis a "super bubble" that had been "generated by the system itself," and was the culmination of 25 years of "smaller bubbles" and misguided attempts to tackle them.

These bubbles had been caused by easy credit and highly-leveraged deals, where investors borrow a multiple of their own money to finance an investment.

Both regulators and bankers had the "misconception" that markets are efficient, Mr Soros said, and had been blinded by their "ideology" of "market fundamentalism," assuming that markets should always be lightly regulated.

Whenever a bubble burst, governments and regulators made the situation even worse by cutting interest rates and making money even cheaper - until the subprime mortgage bubble brought the whole system down, he said.

Bank profits

Mr Soros praised two UK regulators - Lord Adair Turner of the Financial Services Authority and Bank of England governor Mervyn King - for understanding the crisis and developing good policies to prevent a repeat.

With the current easy money policies, "banks are allowed to earn their way out of a hole, and they do so with astonishing rapidity," Mr Soros said.

However, banks had made the mistake of treating these profits as if they had actually earned them themselves, and that had created a political storm that would be difficult to contain.

Mr Soros warned that politicians could easily find themselves pushed into hasty and ill-considered regulations.

It would also be wrong to impose high taxes on bank profits just yet. "We are not out of the woods yet," he said.

Mr Soros said it would be difficult to establish the correct ceiling for leverage that banks should have, but argued that governments had now enough time to develop a global regulatory system.

He compared any new system to Bretton Woods, the global economic system agreed at the end of World War II.

Mr Soros, a billionaire philanthropist, is most famous in the UK as the "the man who broke the Bank of England" for his role forcing the pound out of Europe's exchange-rate mechanism in 1992.

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Times Online Bank reform must be global to avoid hidden risk - 3 hrs ago
This is Money Lord Turner backs Obama crackdown - 7 hrs ago
The Scotsman Industry and politicians face off over bank reforms - 13 hrs ago
The Independent Bankers fight back against Obama - 13 hrs ago Darling to hold secret talks with bankers in Davos - 19 hrs ago

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