Tags: george | soros | derivatives | us

Soros: Tame Derivatives or Risk Yet Another Crash

Friday, 23 Apr 2010 02:11 PM

Billionaire George Soros says the derivatives behind the Securities and Exchange Commissions’ case against Goldman Sachs “merely cloned existing mortgage-backed securities into imaginary units that mimicked the originals.”

"Whether or not Goldman is guilty, the transaction in question clearly had no social benefit,” Soros writes in the Financial Times. "The primary purpose of the transaction was to generate fees and commissions."

"This synthetic collateralized debt obligation did not finance the ownership of any additional homes or allocate capital more efficiently; it merely swelled the volume of mortgage-backed securities that lost value when the housing bubble burst.”

Requiring derivatives and synthetic securities to be registered would be simple and effective, Soros says, but the legislation currently under consideration won’t accomplish it.

Derivatives traded on exchanges should be registered as a class, Soros says. Tailor-made derivatives would have to be registered individually, with regulators obliged to understand the risks involved.

“Registration is laborious and time-consuming, and would discourage the use of over-the-counter derivatives," Soros notes. “Tailor-made products could be put together from exchange-traded instruments,” he says.

“This would prevent a recurrence of the abuses which contributed to the 2008 crash.”

The full U.S. Senate could move ahead with formal debate on the Obama administration’s financial regulation bill early next week. Key members of both parties say they are close to agreeing on the main elements of the bill.

Senate Majority Leader Harry Reid is planning a test vote before debate begins, and the Congressional Quarterly reports that, if Republicans object, Reid will file to limit debate on the motion to proceed.

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