Queen Rania of Jordan listens intently in Davos

DAVOS, Switzerland — World Economic Forum: Upbeat bankers clashed with pessimistic economists on the opening day of the World Economic Forum, where the movers and shakers of global politics and business argued over whether to move forward with financial reforms – or to abandon what some claim would be a ruinous path toward over-regulation.

Just hours ahead of President Barack Obama’s first State of the Union address, bosses from Deutsche Bank, Lloyd’s and other financial giants warned Wednesday that a flood of new regulations risked choking off a global economy recovery. Others urged Obama, who has proposed restricting bank risk-taking, to push forward with stronger reforms.

The discussions in the rarefied air of this Swiss Alpine resort reflected the broader debate and anxiety over the global economy, and how to address an uneven recovery powered by a booming China and held back by high unemployment in the United States and other wealthy nations. “Let’s get good regulation, better regulation, but not more regulation,” said Peter Levene, chairman of British bank Lloyd’s. [But his argument misses the point that financial innovation has rendered depression-era regulations irrelelvant in today's casino-royale atmosphere of modern finance, and products like credit default swaps that Warren Buffett referred to as 'financial instruments of mass destruction.']

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FT: Davos WEC 2010 Update

Peter Sands, the CEO of Britain’s Standard Chartered Bank, added that his industry already has been “fundamentally changed” by tighter regulations and supervision, while Deutsche Bank Chairman Josef Ackermann said “we will all be losers” if governments clamp down on markets too zealously. “The pendulum might have swung too far,” Ackermann warned. “Consistent and global rules, and a level playing field is absolutely key to the global economy.”

Obama is expected to push Wednesday evening for greater regulation of Wall Street, and there are calls in the United States and Europe for tougher taxation on financial institutions to recoup the billions governments have doled out in rescue packages since 2008.

Coupled with the high unemployment much of the rich world is experiencing, there is strong public pressure for action against the sectors that were so deeply involved in leading the world into recession. Some economists said more needed to be done.

Read more from HuffPo here.  And from the Financial Times here. 

Sources:    HuffPo.com; FT.com        Photo:  Zimbio.com

Top executives and world leaders discuss global economy in Davos

The World’s leading banking and finance executives, industry regulators, and billionaire investors like Warren Buffet and George Soros – the Wall Street crowd writ large – will head to the annual World Economic Forum held in Davos, Switzerland this week.  This little mid-winter get-away traditionally coincides with the banking sector’s year-end bonus season and their requisite winter ski vacation.  This comes just days after US President Barack Obama unveiled plans for the most stringent rules on financial institutions in decades as he seeks to prevent a repeat of the global financial crisis that prompted costly government bailouts of banks. President Obama is expected to repeat his newly aggressive stance toward the financial industry in a populist message in his annual State of the Union address on Wednesday.

Over 2,500 leaders from more than 90 nations representing business, finance, government and philanthropy will address pressing global issues in discussion format, often followed by Q&A from the audience. According to a number of sources, industry executives are planning to use the Swiss ski resort’s annual global economics jamboree to surreptitiously lobby against President Obama’s reinvigorated restrictions on casino-like proprietary trading, mergers, and too big to fail financial institutions who’s operations benefit from FDIC (i.e., taxpayer insured) protection or federal bailout funds (e.g., TARP).  In my opinion, this unintended role by the government prompted by taxpayer funded bailouts establishes both a legal, as well as a legitimate public role as an equity shareholder in the sector, and as such a say in how the  banks ought to be governed.  Interestingly, many financial quarters in the Euro zone have emrbaced President Obama’s firmer stance and have been calling on their regulators to follow suit.  Read more on that here.

And based on various reports I have read, bank chiefs braving the media spotlight at the glitzy Davos summit – who will include Citigroup’s Vikram Pandit, JP Morgan Chase’s Jamie Dimon, among others  – will make their own case to regulators while also networking with well-heeled clients and C-suite colleagues. Their focus will largely be on Obama’s proposals for stopping banks from taking risky bets with their own capital to make money on the financial markets – a practice known as “proprietary trading.”  According to a report in this morning’s Financial Times, some senior bankers will argue that banks’ proprietary activity was not a key source of the credit crisis – and so should not be stamped out. 

The Davos summit is also likely to be used by international regulators to try to forge a common front. A crucial plank in the strategy of the global financial lobby will be to shift the debate, as well as shifting the the burdens resulting from the financial meltdown, to regulators and international bodies such as the G-20 or Basel committees, and to argue that regulators need to take a more coordinated approach to curbing systemic risk.

Some senior private equity and hedge fund managers will argue that banks’ proprietary activity was not a key source of the credit crisis - and so should not be stamped out. They will also argue vociferously against the idea of breaking up so-called ‘too big to fail’ financial institutions. By contrast, many notable voices in the debate, myself included, have argued that institution that are considered too big to fail are, in fact, too big to exist by the sheer threat and risk that they pose to the global financial architecture. Read more on that here.

Source:  FT.com,  HuffPo.com, The Guardian (UK)      Photo: WEC.org

Washington: support the public welfare over Big Business lobby

Really interesting editorial in today’s New York Times that hits the mark with the threat that an un-check and powerful bank lobby poses to achieving much needed bank and financial industry reform to protect consumers against industry collusion, predatory and price-gauging practices, as well as disproportionate risk-taking that threatens a sustained economic recovery.  These practices have reached crisis proportions and is pervasive in Washington.  The tactics of the bank lobby also subverts the U.S. Congress’s Constitutionally-ordained obligation to protect the ‘public welfare’ against all enemies, foreign AND domestic.  The “Big Business” lobby constitutes a clear and present threat to our citizens Republic. And “Big Government” represents the only realistic check against “Big Business.”  It is time to demand that “Big Business” be good “corporate citizens” to act in the public’s interest, and to show ‘corporate patriotism’ to their country and government for coming to their rescue.  It is also time for Washington lawmakers to take heed to public needs, as well as the public mood: something must be done.

(NYT) New York - Pretty much everyone agrees on the causes for the country’s desperate financial mess: predatory lenders, weak regulations, even weaker regulators, and risky nigh unto incomprehensible financial instruments.

Congress’s willingness to address those problems will have its first real test on Wednesday when the House Financial Services Committee puts finishing touches on what could be essential reform legislation — or a major disappointment, depending on what they do.

At the top of the committee’s agenda is regulation of the largely unregulated and dangerously opaque multitrillion-dollar derivatives’ market. Next on the agenda is the creation of a new Consumer Financial Protection Agency to oversee the consumer-credit offerings of banks and other financial firms — including mortgages, credit cards, overdraft “protection” and payday loans. Both reforms are crucial, and we fear both are in danger of being irreparably weakened. Derivatives are supposed to help investors and businesses manage risk, but their unchecked and unregulated use led — directly and indirectly — to the financial crash and subsequent trillions of dollars in taxpayer interventions.

Traitors to the public will

 Congress should require that all derivatives’ dealers and users — including banks, hedge funds and corporations — conduct their trades on exchanges where they would be subject to considerable regulation and public scrutiny. Regulators could create exceptions for customized contracts that are negotiated one on one for truly complex and unique circumstances. But most derivatives contracts are highly standardized and can be, and should be, exchange-traded.

The threats to the consumer protection agency are even more blatant. To curry favor with the banks, several lawmakers are intent on amending the proposed legislation so that no state could impose its own — tougher — consumer protection laws on banks. That would be a mistake because in the past, many states have demonstrated the will and the expertise to protect consumers. But federal rules were issued in 2004 that basically barred states from enforcing their laws over national banks and their subsidiaries. That short-circuited state efforts to control, among other things, the subprime lending that sparked the financial crisis. Some lawmakers are also intent on weakening the proposed power of the new agency to examine the books of the banks and firms that it would regulate. Current bank regulators have that power, but they have not used it with a sole focus on protecting the best interests of consumers.  Read more here.

Unfortunately, the proposed legislation has too many loopholes and exemptions. For example, many corporations and hedge funds would still be able to trade standardized derivatives privately. That may protect bank profits — without transparency, there is no chance for comparison shopping — but it would put taxpayers at risk of a repeat calamity. Like the banks, some corporate investors in derivatives resist exchange trading. They argue that more regulation would raise their transaction costs to hedge any given risk. That’s debatable because greater transparency is likely to reduce costs. But even if true, somewhat higher costs would be a small price to pay for systemwide stability. Still, there is reason for hope and the Obama administration seems to be taking the lead on this.

Such growing sentiment about the odious nature of Wall Street was also echoed by administration officials on the Sunday morning talk circuit. “The bonuses are offensive,” said the President’s senior adviser David Axelrod on ABC’s “This Week,” adding that banks must do more to support lending across the country and should stop their lobbying efforts aimed at blocking the passage of new consumer financial protections and needed industry regulations currently being considered in Congress.

“They ought to think through what they are doing, and they ought to understand that a year ago a lot of these institutions were teetering on the brink, and the United States government and taxpayers came to their rescue” Axelrod said. “They have responsibilities, and they ought to meet those responsibilities” by displaying good corporate citizenship, playing fair, and by supporting American business and responsible citizens by making loans. They also have a public duty as corporate citizens to their government as well as to the American taxpayers for coming to their rescue. Read more here.

Bank lobby aims to kill consumer protection agency

WASHINGTON — If you doubt that U.S. banks long to return to the days of impotent regulation, you need only look at one of the financial sector’s top legislative priorities: killing a proposed new agency with generous help from Congressional Republicans that would be dedicated solely to protecting consumers’ financial interests.

The Obama administration is asking Congress to create a new Consumer Financial Protection Agency to regulate consumer financial products ranging from credit cards to auto loans to home mortgages, and to simplify full and fair disclosures about them. Though virtually every cause of the nation’s recent financial crisis was rooted in weak consumer protection [and anti-government deregulation], the pro-business U.S. Chamber of Commerce and their powerful lobby is leading the fight against the proposed agency on grounds that it would make credit less available and more costly. The American Bankers Association, the Independent Community Bankers of America, and the Financial Services Roundtable also oppose the measure.

“We have no argument that regulation failed. Consumer protection is just one of the many areas where it fell down,” said David Hirschmann, the president of the U.S. Chamber of Commerce’s Center for Capital Markets, which opposes the panel. “It just simply adds a new layer of regulation without fixing . . . our outdated, broken regulatory structure that was a contributing factor in our crisis.”

The Chamber said it’s spending about $2 million on ads, educational efforts and a grassroots campaign to kill the agency. It said that the grassroots effort has led to more than 23,000 letters sent to Congress to date. The Center for Responsive Politics said that for the 2010 election cycle, commercial banks have donated almost $3.7 million to lawmakers — 54 percent of it to Republicans. Companies that provide credit have given about $1.4 million, 59 percent to Democrats. Mortgage bankers and brokers have given $581,423. “Maybe instead of making government BIGGER, we should focus on making government BETTER,” reads one Chamber ad. The Chamber warns that the agency could morph into a monster regulator.

“If you look at this actual bill, the powers are so broad and so ill-defined that the scope of who is covered is incredible. They’ve managed to create a proposed new regulator for anyone who directly or indirectly provides credit to consumers,” Hirschmann said. “If you allow people to give gift cards for your store . . . you’ve got a new regulator. It’s amazingly broad in scope, scale and power.”

The administration scoffs at those charges as a disingenuous rouse by the powerful pro-business and finance lobby. “Contrary to some advertisements you may have seen, we have no desire to interfere with Main Street retailers’ ability to provide credit to their customers. That argument is to the financial regulation debate what the Death Panel argument is to the health insurance debate,” Lawrence Summers, the chief economic adviser to President Barack Obama, said in a recent speech. “We have become convinced that it is essential that consumer financial regulation be carried on by an independent body whose mandate is uniquely and exclusively consumer and investor protection.”

Until the current crisis, responsibility for these consumer protections fell to several separate regulators, who made consumer protection subservient to their core mission of regulating institutions for safety and soundness. Predatory lending and no-documentation loans helped spawn the housing crisis. Weak oversight by federal regulators allowed mortgage bonds to be sold to investors as the safest of investments when they were far from it. When economic times got tough last year, banks began padding their balance sheets by socking surprised consumers with new credit card fees that were hidden in contractual fine print. Read more here.   

Source: McClatchy News Service; Cartoon: www.ablueview.com/economics/