Billionaire hedge fund manager Paul Singer is worried about the government’s involvement in Wall Street and says big banks are still carrying tons of dangerous leverage.
Mr. Singer believes the big banks still carry too much leverage, and he doesn’t trust regulators to monitor them effectively.
And yet the government still lends to them at cheaper rates than it does to smaller banks, encouraging them to borrow more.
Singer invests in distressed debt and he admits that he owns no significant stake in any large bank, which would imply that he owns stakes in small and mid-size banks.
And smaller banks would be disadvantaged in a crisis, he says, because big banks are more likely to be determined “systemically important,” and thus bailout-able than small banks.
So his concerns might simply be self-interested.
He also brings up the topic of government being in bed with Wall Street, saying that whom the CEO is friends with in the government seems to be more important than anything:
“It’s a very important part of this equation that a few survivors exist in this peculiar relationship with government, having to kowtow to government, make relationships with regulators.”
“Are they puppets of the government? Are they cronies of the government? Will their lending be affected by the perceived whims or beliefs of the particular government regulators existing at a particular time? Yes.”
And he brought up another hot button issue – quantitative easing. Monetary policy “is extremely risky… the risk being massive inflation,” he told the Wall Street Journal.
Despite seemingly bringing up the other two issues first in his interview with the Wall Street Journal this weekend, the real issue that Singer seems to have wanted to discuss was the FDIC’s new plans to determine which banks are “systemically important,” and thus eligible to receive emergency lending.
He says the FDIC’s planned method is nonsense, that credit ratings “provide no real clue,” and that it’s hard to tell which banks are a threat.
“rumour and feeling is all you have. You don’t know the financial condition of [Citigroup], JPMorgan, Bank of America, any of them.”
And he doesn’t want his hedge fund to be exposed to them.
“If we could completely avoid being subject to the financial condition of any large financial institution, we would do so.”
Of course that implies that he believes that at least some banks are a threat, which is the reason the FDIC instituted a system to determine which banks are a systemic threat in the first place.
However Singer only suggests that the FDIC’s new system is a risk to the banking industry because the guarantee of a bailout will at some point disappear.
“[The system] is underwritten by the United States government and the governments of Europe. And the system is perceived as underwritten or guaranteed.”
“[But] at some point that guarantee, in some way that I can’t really visualise today, will go away.”
Singer is apparently upset that the banks he invested in are not likely to be considered a part of the “systemically important” club.
If the public that hates QE and bankers in bed with Wall Street rallies around criticising the FDIC’s new rules, maybe it could help Singer’s case.