Soros, Stiglitz and Wolf Find (Gaping) Holes in New Financial 'Reform'

On Friday, The FT's chief economics commentator, Martin Wolf and U.S. managing editor Gillian Tett joined me to discuss the highlight of the conference, including a panel moderated by Wolf, featuring George Soros, Joseph Stiglitz and Jaime Caruana, General Manager of the Bank for International Settlements (BIS). The panel turned into a referendum on the new Basel III accords, which impose higher capital requirements on banks as well as tighter regulatory oversight on systemic risk. With Wolf in agreement, Soros and Stiglitz cited several concerns about whether the financial system is any safer today.

Soros asked Caruana a seemingly simple question, which led to a heated discussion: "How do you deal with risk?" The capital requirements in Basel 3 are "more proportionate to the risk" on the banks' balance sheets vs. in Basel 2, Caruana responded.

"But you're still relying on the financial models of the financial institutions which is problematic," Wolf chimed in, a point to which Caruana conceded. "I would've thought letting banks make their own risk models would have been a non-starter" after the bursting of the credit bubble, Stiglitz added. Repeating a familiar critique of the "perverse incentives" on Wall Street, the Columbia professor and Nobel-prize winner said the "widespread misunderstanding of risk...creates an opportunity for Wall Street to exploit [regulatory loopholes] and dump risk on the taxpayer."

Piling on further, Soros and Stiglitz warned of the risk of firms being not only too big to fail, but too interconnected. "Things have gotten out of control, have not been brought under control by what has been done" on the regulatory front, Soros said. After several minutes of this, Wolf gave Caruana an opportunity to respond and, in essence, defend the new regulatory regime. "There were a lot of points," he said to laughter. "I would like to find an alternative that's better [than] risk-weighting, but I haven't. Basel 3 is much better, but" it's not perfect.

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