Capitalism as we know it is at risk, said Pimco founder and co-chief investment officer Bill Gross at a recent summit in San Francisco. The economy's over-reliance on risk-taking, growth and an abundance of leverage are making for a particularly volatile market place thatmay not be sustained by the finance sector.
Accordingly, Gross argues, banking institutions need further capitalization to hedge against excessive risk, debt insolvency and general market turbulence. Gross pointed to this week's bankruptcy of futures broker MF Global as a precise example of this, adding that the market needs to return to a disparate system of retail and investment banking. "Do we have a better example today than MF Global in terms of the mingling of those two particular aspects of capital allocation?" Reuters quotes Gross as asking at the Charles Schwab IMPACT conference on Tuesday. "So the closer we get back to separating the two, I suppose the better from the standpoint of reform." Investor confidence has been shaken in recent years by trends signified by the MF Global crisis. Investment banking became a function not of properly allocating capital, Gross pointed out, but of levering capital and returns instead of transferring funds to productive industries.