The European Parliament should be leading the development of financial regulation reform. According to MEP Dr Kay Swinburne, member of the Special Committee on the Financial, Economic and Social Crisis (CRIS), many MEPs have the belief that if the European Parliament creates good, workable legislation – and does so first – the United States will follow.
The subject of ‘regulatory arbitrage’ and it’s implications was one of the key themes at Deutsche Bank’s event on 4th May about OTC derivatives in Brussels.
An overriding fear for legislators is that should the new rules be much delayed, on either side of the Atlantic, it will provide an opportunity for financiers to move their operations or trades to the location with the weakest rules. Even if this only happens for a temporary period, it may add further systemic weaknesses to an already weak global financial system.
Dr Swinburne was keen to point out that while the level of understanding in these complex financial instuments was growing rapidly in the CRIS Committee and that much progress had been made, it was still too early to tell what direction their policies would take. She warned participants that second guessing the outcome was pointless at this stage.
Emil Paulis, Director of Financial Services Policy and Financial Markets for DG Internal Market and Services at the European Commission, explained his expectation of the path ahead. Regulating OTC derivatives is clearly a feasomely complex area and since this regulation must start from virtually the ground up, many steps will attempt to bring these contracts in line with other asset classes.
These steps have three main themes. These are:
Counterparty Risk to include the use of the Capital Requirments Directive to help assess counterparty risks and pricing, for central clearing houses to oversee or authorise transactions.
Transparency so that as much information as is possible is available to let regulators and clients see the full terms of contracts. Questions were obviously raised about the competitive nature of these markets and the implications to business models of full disclosure and the usefulness of publishing contracts that are so complex that only those involved will fully understand them.
Increased standards of Market Integrity and the prevention of market abuse. It is likely that corporations using derivatives to hedge the risks in their business will receive exemptions, but for financial firms, the rules currently in place for other asset classes should be applied.
As a part of these measures, a – very – short public consultation process is planned. With the first releases due before the summer break, the revision of market abuse rules planned for the fourth quarter of 2010, and the problems of trying to match rules and progress with the United States, the OTC arena is due for fast and important changes.
Your author was able to attend the 8th Annual European Financial Services Conference in Brussels earlier this week. There were certainly some interesting panelists and contributors, including European Commissioner Michel Barnier.
There were many different perspectives discussed, but as you may imagine, financial services regulations were high on the list.
In the main, these regulations would be aimed at investment banks – rather than retail banks – but ultimately, these guys are major influencers in the stock markets of the world. Even if you happen to be a North American reader, this is important. The US and EU are doing their best to make their legislation comparable. The potential situations are therefore important to any and every investor.
One element that was raised repeatedly was that of stopping ‘regulatory arbitrage‘. In other words, trying to find ways to stop big banks and hedge funds from shopping around to take advantage of the most suitable legal locations. It seems that those at the top of the EU and US financial regulatory agencies believe that this ability to sidestep many rules and responsibilities added to the scale of the financial crisis. They are almost certainly correct.
Another element that ought to make us all worry, was highlighted by David Wright, DG MARKT from the European Commission. Governments around the world do not have the appetite to fix things if they go wrong a second time. In other words, if the structural problems are not resolved, those considered too big to fail will be left to fail. The actual phrase was, “I have it on good authority from very high-level officials in governments around that world that if this happens a second time, all bets are off!”
The sudden resumption in fat bonuses could come back to haunt investment bankers!
These issues have implications for the entire global financial system. Take heed. Think carefully about your personal investments and just how liquid and real they are. Numbers on a screen are just that, numbers on a screen. You can’t eat them if times are tough…
Whilst at the event I arranged an interview with a speaker. Eddy Wymeersch is Chairman of the Committee of European Securities Regulators. I asked him about short selling and the steps required if bankers are to become more responsible.
I have had the pleasure of meeting Ann on a number of occassions and I can attest to her knowledge and commitment to seeing Europe become the economy that many of us hope it can be.
Greek default and the risk of contagion: Has the time finally come for Fiscal Sustainability?
What can I say? There isn’t a person I know who didn’t see the impending Greek default coming. It’s a country that has had no strategy for generating growth, unfunded pension liabilities en masse, a bloated, inefficient state sector, poor educational institutions, and an abysmal demographic outlook. For years, these developments could be softened by borrowing ever more and running up an unsustainable deficit, currently standing at 120% of GDP.
The only real surprise with what’s happening now is the speed with which events are unfolding and how visibly unprepared Europe is, despite the fact that experts have been warning that this would happen for years. It infuriates me that up until now fiscal sustainability has been the exclusive preoccupation of a handful of economists. I have argued for years that just as we taught citizens the need for environmental sustainability, the same can be done for fiscal sustainability. People deserve to know what happens when governments go on spending binges, driving up public debt and shouldering young people and future generations with the expense of today’s excesses. Just like no individual can permanently live beyond his or her means, no state can do so either. And you believe Argentina can’t happen in Europe? You better think again.
What is a mystery to me is why this looming and well-known threat was never communicated to a broader public; why this was never made an issue on par with environmental sustainability; why it had to remain the exclusive domain of academic economists, when the repercussions were so clearly to be felt by society-at-large.
Back in 2006, the Lisbon Council tried to kick off a fiscal sustainability initiative, attempting to broaden the widely accepted concept of sustainability to public finances. There was mild interest and encouragement from the European Commission’s DG Economic and Financial Affairs. We even got to host then-Economic Commissioner Almunia for a keynote speech but it was impossible to sustain any kind of momentum in the ensuing months in the absence of political leadership. None of the subsequent EU Presidencies or the European Commission highlighted the issue of unsustainable public finances in a concerted and ambitious manner. I guess after making the Stability and Growth Pact more “flexible” in 2005, ruining public finances was officially condoned and member states thought they could just go on with their reckless behaviour.
Reading some of my editorials from 2006, I feel angry and ashamed about the path of fiscal ruin that we in Europe subsequently embarked on, and which I back then warned of:
“The [Stability and Growth Pact] has utterly failed to explain to the average citizen the need for future-oriented budget priorities, fiscal discipline and long-term sustainability of public finances. The ultimate price for today’s lack of leadership will be borne by future generations, who – unless something is done now – will inherit a system so loaded with debt and so burdened by interest payments that political room to manoeuvre will be remembered as a luxury of the distant past.” (From ‘Europe must take an honest long-term fiscal view’, Financial Times, 6 November 2006)
“If Europe wants to be a responsible and respected global citizen again, as we were when we embraced and advanced the concept of environmental sustainability, we must urgently take action and kick off a second sustainability movement, one that will prepare our public finances and social security systems for the cataclysmic demographic changes on the horizon. How can we expect the world to listen to our calls for environmental sustainability while we squander the precious fiscal resources of our children and future generations? The time has come to abide by the values and principles we claim to possess.” (From ‘ Now What About Fiscal Sustainability?”, BusinessWeek, 22 November 2006)
Rather than feeling vindication because I knew this crisis would happen one day, I frankly feel anger and frustration at our policy makers and the economists who advise them. It is their closed-shop mentality – either trying to keep bad news from the public in the case of the former or simply believing that it’s not their job to communicate more broadly in the case of the latter – that is coming to haunt us now. Imagine if we had kept the threats of climate change to a closed, secluded group of decision makers and experts. What kind of public action and acceptance could we have expected? The people of Europe will now pay a heavy price for years of denial and acquiescence. And perhaps, just perhaps, we will see broader public movement towards fiscal sustainability after all. It is a pity that we were unable to do this in the mature, pro-active way that advanced democracies should be capable of, and that we are now faced instead with top-down, harsh austerity programmes that will impact our lives for years and decades to come.
– Today (28th April 2010) the Lisbon Council has released an e-brief about the financial situation and the actions required to rescue the situation. The paper has been written by Alessandro Leipold, economic adviser to the Lisbon Council and a former acting director of the European Department at the International Monetary Fund (IMF) and can be found here.
This story from CNN shows just what denail the United States is in when it comes to Wall Street, financial services, money and reputation.
According to the story, it seems that confidence in Wall Street is ‘on the line’. Which line would that be?
Perhaps it is the final line that an economy will not cross after being corrupted by personal and corporate greed, it has blown up it’s own residential property market, financial services and investment banking industries, borrowed trillions that it can never repay to the rest of the world, failed to regulate and govern and done it’s best to export this ‘business, economic and political model’ to the rest of the world!
Whew! Thank goodness there is a line after all…
When considering words like Enron, Madoff, WorldCom, Andersen, ratings agencies, NINJA loans, Bear Stearns, LTCM, Amaranth, financial crisis, bail out, unfunded liabilities, dollar weakness and many many more that your author cannot be bothered to list, there remains just two questions of interest:
1) Is there anywhere left in the world other than Wall Street where confidence remains in Wall Street?
2) How much of your pension fund, college fund for your kids education or investments in general that you own, are responsible for and can control, do you still have invested in the US dollar or United States?
I bet that feels like too much right now…
An odd question, I know. Isn’t the global financial centre New York? Why ask if it is changing?
My thoughts are becoming more and more based on the economic realities of life. The regions with the strongest economies have strong financial centres. People go to these places to access capital to help their company grow.
But isn’t that changing? If New York is the global financial centre, why do they have all the debt? Aren’t they meant to have all the money? Perhaps that money comes from an economy that, you know, produces something???
In addition, the US is gathering an ever greater reputation as being the place where wealth is transferred from investor to manager (Enron, WorldCom, Madoff, lots of hedge funds) and where wealth is turned from useable capital into funny money (US$).
Then there are the regulations. Sarbanes Oxley anyone???
For my money, the future of New York as the global financial centre is limited. It might take years for this to change, or if the Dow Jones and dollar collapse, it might take weeks. Who knows?
If this supposition is correct – which I admit it might not be (read probably will never happen) – then where will the money go to? London? Frankfurt? Singapore? Tokyo? Hong Kong? Shanghai?
It is, for now at least, a pretty short list of choices.
This is why I find the many recent pronouncements of new European Commissioner Michel Barnier (in charge of financial services) to be slightly bonkers. He likes the idea of banning prop trading (investment banks trading on their own accounts), fine. He likes the idea of a banking tax, fine. He likes the idea of a tax on financial trades, fine.
But all of them together?
Individually, each idea may prove to be a step towards reigning in the mismanagement of money as we have seen in the last decade. As a group, they would be a mortal wound to the financial services industry in Europe. That would be a disaster. And it would be a disaster that would almost certainly make many funds, fund managers and their ilk to flee to a friendlier part of the world.
It would happen at a time when America and New York’s dominance is waning. Somewhere will benefit if New York perishes.
It seems unlikely that a new centre would be Shanghai, Beijing, Tokyo or Hong Kong. Either would need to use English far more than is currently the case. In Hong Kong’s case, the city would also need to be able to house an extra million or so people…
That narrows the list down a little doesn’t it! And if Barnier’s plans get to be launched, then perhaps Europe would be off the list as well.
I think the post itself is pretty self-explanatory.
The reason for posting is simply that I have been a questioner of the Euro for many years. Politically, it was a masterstroke. Pure genius. But economically, it has always seemed like a flawed idea to me – why (for example) Ireland, Latvia and Germany might need the same interest rate policy still isn’t clear to me after all this time, and I have been able to ask some very knowledgeable people that really ought to know the answer.
But despite my confusion as to it’s strength and validity, I don’t remember seeing anyone predict that the euro would ‘blow up’ probably within one month. Time will tell if this is correct. I would presume not, most things take longer than might be imagined. But who knows?
What do you think? Can the Euro survive Greece? If it does, can it survive Portugal, Ireland and Spain as well?
That is a leading question, I know. But with the announcement of a general election being called by Gordon Brown for 6th May, the prospect of real financial change is looming.
Both major parties seem to have been pre-campaigning on spending cuts, fiscal restraint and responsibility. But only one of the parties is in power and could actually be doing those things right now.
I suspect that the reason for New Labour being so slow to get the scissors out to public spending is political. If things are slow in the economy now, how much slower could they be if they used some restraint? Slashing budgets and spending over the preceeding 12 months would probably have made the recession even deeper and would not have helped their re-election prospects.
So the political imperative has been winning over the economic. For now.
But if the Conservative Party are elected with any level of majority, they will need to start wielding the scissors – and be seen to be doing so – immediately. This could easily be the start of the next ‘leg’ down in this recession. With public sector borrowing so high, this needs to have started months ago, but better late than never.
This might sound ‘doom and gloom’ of me, but the prospect of a devaluation of sterling, substantially increased inflation or a full-blown default on sovereign debts are not that unreal. Somehow, the UK needs to start dealing with it’s huge financial deficit before things are too late. They might be too late already, but there probably still is time to act and have a meaningful influence.
The real problem scenario lies in a hung parliament. If that were the case, the Liberal Democrats would suddenly become the most important people in town!
Broadly speaking, I quite support the occassional hung parliament. One problem with government – to my own slightly libertarian eyes – is that it always feels the need to act. But often times, doing nothing would probably be just as effective. The level of action is merely to give the impression of being vital and to justify an existence.
So when a hung parliament slows down the level of action, that can be a good thing for individual liberties and responsibilities.
However, at a time like now, a hung parliament would be a financial disaster for the UK. The one silver lining would be that Vince Cable would be propelled into a front bench position. Otherwise, any delay on financial restraint could be crippling in the long-term.
What are your thoughts? Do you have any insight into how bad the UK economy really is?
In my post of last week, I argued that we don’t need more financial regulations, but instead need better enforcement of the existing regulations.
As if immediately demanded, arrests have been made in an insider trading ‘ring’ by the FSA and SOCA. The BBC reports here. It seems that the staff of three major firms have been arrested, suggesting that this was quite an organised group. But as recently discussed in this blog, there is a lot of money involved in insider deals, so why not be organised?
Hopefully, this will act as a deterrent to others, but that is difficult to imagine. Heavy punishment will act as the real deterrent…
It seems that a very real hope to clear up the problems in financial markets will be to clean up the standards of behaviour by the participants. This, of course, means cleaning up their personal and professional standards. By taking a much firmer line on insider deals and the way that bonus culture drives their greed, it may become possible to remove some of the systemic risk that haunts markets when short-term decisions put long-term survival in danger.
What do you think? Do you have opinions about the bonus culture in investment banks or insider trading and market regulation?
Over the last few days, the regulation of various types of financial operator and market have come in for attention. Everyone seems to agree, we need more financial regulations.
When I say everyone, I mean everyone in politics…
It is clear that when billions – many hundreds of them – have been used to ‘bail out’ major banks and financial companies, something is wrong and something needs to change. Great! Lets make changes.
However, not many months ago, it seemed clear to many commentators of the stock market that regulators had been too lax in enforcing rules. There was widespread agreement that a ‘blind eye’ had been turned while the profits rolled in. This seemed to be the situation in the UK, in the US and a number of other major economies.
But now, we need more regulations. Why?
As this article from the BBC suggests, the UK Financial Services Authority believes that ‘market abuse’ (things like insider trading) are out of control in The City of London. That isn’t a great thing for a regulator to have to admit…
As this story from last week showed, a conviction for some form of market abuse is rare enough that it actually warrants press attention. If it is so common, why are there so few convictions?
If you make it down to the last paragraph, you will see that while the convicted man was retired, it has not been possible to identify the source of his information.
If people at this level – he had retired 10 years ago and had made it to partner – feel the need for extra cash, what chance the rest? One must presume that having made it to partner status at Cazenove, Mr Calvert probably was not what we might think of as ‘poor’.
So why do we need so much extra regulation when we could simply start with much better enforcement of the current rules?
I have spoken to a couple of people recently – people that I would expect to be informed about such matters – and they really are not sure why the proposed regulations will make any real difference to hedge funds. Are these rules window dressing?
As may be obvious from the way I write, I have worked in the investment industry and hold a number of UK based qualifications from some years ago. In the dim recess of my mind, I seem to recall that the UK financial services legislation amounts to some 9,000 pages. If you don’t have enough rules to regulate a market in 9,000 pages, something must be very seriously wrong.
No. Instead I think that these proposals from the likes of Brown and Sarkozy are little more than election stunts to try and make themselves look busy, vibrant and vital. Is that what will fix financial markets?
It seems that the subject uppermost in the minds of Brits is back in the news. No, not the weather. The other one. Yes, property prices.
Bearing in mind the awful state of the UK economy currently, can it be much of a surprise that property prices have fallen again?
I would like to contend (and as someone that has worked in the UK property market for a few years, I know a little about this) that the UK residential property market is massively influenced by movements in London. I find it difficult to believe that whatever the numbers show, anywhere but London has been rising in prices recently.
I know, I know, the numbers say differently…
Just before Christmas, a member of my family was looking for a property in the South West of England. The house they found was on the market for (as I recall) 275,000 pounds. Under great pressure from me, they made what was an ‘insulting’ offer. From there they negotiated upwards. Finally, they agreed a price at 235,000 pounds.
Does that sound like a strong market to you?