Monday, February 27, 2012

Group of 30: not your dream team

In November 2011, a Brussels based lobby watchdog asked Mario Draghi to withdraw from the group of G30 because it conflicts with his duties as ECB President. In February 2012 they addressed a complaint to the ethics officer of the ECB claiming it had dodged their earlier criticism. This referral comes as it is uncovered that Draghi stated in writing that there were no relevant personal factors to be taken into account in considering his nomination in June 2011. It is misleading because it fails to disclose a conflict of interest, that is, his son working as an interest trader at Morgan Stanley (ECB-Watch). While the watchdog's criticism is purely based on principle, we point out a variety reasons why the Group of 30 does not inspire us very much. Among them, Mario Draghi is one of four members of the G30 who are connected to the Goldman-Greece (off-market currency swaps) affair.

The ECB Presidency

Our take on the problem isn't so much that the G30 influences Draghi directly (perhaps, it's hard to tell given he's cut from the same cloth as his peers anyway), but that the ECB Presidency (and those of Mervin King and William Dudley) legitimizes the G30 as some sort of public institution. The presence of active central bankers blurs the distinction between private and public. There are proper legal channels for the private sector to lobby EU institutions, and "international bankers" should get in line like everybody else. Let the G30 hire retired central bankers, but it shouldn't highjack the prestige that derives from being elected or serving in public office.

A bank lobby, seemingly legitimized by central bankers?

Admittedly, there are adversarial positions in the G30. Consider, for instance, this recent headline: "Goldman Sachs, Morgan Stanley say Volcker rule could raise risk". All three are represented (self, in the case of Volcker). But is the right balance struck between the parties?

Big finance has quite a representation in the G30. For brevity, let's keep it to Goldman Sachs. Former managing directors include William C. Dudley and Mario Draghi. Current managing director E. Gerald Corrigan could become the next chairman of the same firm (NY Times). He is also chair of the Counterparty Risk Managment Policy Group (CRMPG). A former Commodity Futures Trading Commission (CFTC) official recalls in an interview that the CRMPG was set up in the 1990s to lobby Clinton's administration to keep the OTC-derivatives market exempt of "all the fundamental templates that we learned from the Great Depression [in order to] have markets function smoothly". This episode is known as the Brooksley Born vs Summers, Greenspan & Rubin showdown (PBS). The outcome was Congress passing the Commodity Futures Modernization Act (CFMA) in 2000 (SEC).

The allegedly less than prophetic Martin Feldstein and Larry Summers, whose alleged selective memory recently made headlines, were singled out in Inside job. One of the main contentions of the  documentary is that influential economists were bought off by the financial industry.

Central bankers and regulators

The chief of the Swiss National Bank, Phillip Hildebrand, was forced to resign because his wife traded on insider knowledge about a market intervention of the SNB (Telegraph). He keeps his G30 membership (WRS).

Jacob Frenkel, Chairman of JP Morgan International and ex SEC enforcement lawyer dismissed the whistle blower who charged that the SEC destroyed thousands of investigations as a "disgruntled employee trying to gain attention" (GovExec). Yet, following the controversy, the SEC told the National Archives and Records Administration it would reverse its policy (WaPo). Matt Taibbi portrayed  Frenkel as exemplifying what is wrong about the revolving door between the agency and the financial industry (RollingStone).

If Greenspan replaced Trichet as head of G30, would you think it's a viable organization for impulsing reform in banking regulation, at a time when we're grappling with the legacy of the financial crisis? If the answer is no, that is, it would be far from the best choice, then consider reading Greenspan vs Trichet, a tie? as a follow up to this article.

Let's now get to the issue announced in the beginning, that of Greece's secret loan from Goldman Sachs. At the nomination hearing for ECB Presidency, in June 2011, Draghi failed to clear the air about his role (ECB-Watch). E. Gerald Corrigan represented Goldman Sachs at two parliamentary hearings (UK, EU) in 2010. Jean Claude Trichet, now chairman of the G30, derailed a legal proceeding by Bloomberg to release classified files in the custody of the ECB. After Goldman Sachs' role in the US mortgage crisis was exposed, Gordon Brown, then UK PM, called for an investigation (BBC). The Greek deal should have been on the radar of FSA, chaired since 2008 by Lord Adair Turner. That doesn't appear to have been the case (search). The four individuals just mentioned are members of the G30.

No comments:

Post a Comment