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Still needed: a global sheriff for finance

Still needed: a global sheriff for finance
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First Published: Tue, Jan 26 2010. 09 11 PM IST

Updated: Tue, Jan 26 2010. 09 11 PM IST
We need a global sheriff.” Those were the words of investor and philanthropist George Soros ahead of the World Economic Forum’s annual meeting—not this year, or last year, but in 2008, a little more than a month before Bear Stearns Companies Inc. neared collapse.
Two years on, as the world’s top regulators and bankers converge on the snowy alps of Davos, Switzerland, to discuss the state of the world economy, we are no closer to any sort of global financial regulator, let alone serious cooperation among countries about reform.
With the Obama administration now focused on Wall Street and hatching new measures almost by the week—such as the Volcker Rule last week, which would prevent commercial banks from trading on their own accounts, or the bailout tax the week before—the US’ efforts are colliding with reforms in other parts of the world.
UK Prime Minister Gordon Brown, for example, dismissed the Volcker idea on Monday. “In the American circumstances, it may be necessary for the private equity and hedge fund work to be separated,” he said in London. “We don't have that issue here.” (Why he believes his country doesn’t have “that issue” is unclear. Firms such as Barclays Plc, for instance, face the same risks as their American counterparts.)
Britain’s chancellor of the exchequer Alistair Darling argued for a more coordinated approach: “If everyone does their own thing, it will achieve absolutely nothing,” he told The Sunday Times. “The banks are global—they are quite capable of organizing themselves in such a way that if the regime is difficult in one country, they will go to another one, and that doesn’t do anyone any good.”
Darling’s point is perhaps the most significant, because it goes directly to this notion of money moving around the world to chase returns. So banks in the US may shrink because of the new rules, but will it matter if banks in China, so closely connected with ours, end up being twice the size?
After all, in an age of global banking, being too big to fail is not a national problem. Remember Iceland?
Indeed, within hours of Obama’s announcement of the Volcker Rule last week, Wall Street banks were looking for ways to skirt it and figure out which of their international rivals would fall under it. For example, Deutsche Bank AG, an increasingly powerful presence in the US, has a private equity arm called RREEF. Would Deutsche need to divest it?
At Goldman Sachs, there are questions about whether it can shed its bank holding firm status so it can continue to pursue proprietary trading, or whether it would still be allowed to do that abroad through a subsidiary.
“We now see single-country solutions being developed,” said Howard J. Davies, former chairman of the Financial Services Authority, who is now director of the London School of Economics and Political Science and a board member of Morgan Stanley. “They all have respectable rationales behind them, but are uncoordinated and bring risks of regulatory arbitrage.” Davies, who plans to be in Davos, may present a plan for a global regulator with real power—“A kind of financial WTO (World Trade Organization), if you like,” as he describes it.
He said he was particularly concerned that a patchwork of uncoordinated reforms could lead to over-regulation. “If we add all the new proposals together—levies, Basel 3, leverage ratios, macroprudential capital requirements, Volcker rules, transaction taxes, systemic risk charges, etc., we could move into an environment of reckless prudence,” he added.
Barney Frank, chairman of the House financial services committee, who is also planning to travel to Davos (thereby providing cover to all the Wall Street chiefs who might otherwise be derided for flying to Switzerland for a slope-side boondoggle), is worried that arguments like Davies’—taken to the extreme—will be used to stifle reform.
“The objections to tough restrictions in the US are that it will put American businesses in a disadvantaged position and financial companies will take their operations to friendlier shores,” he said. “I believe this is wrong, and, in fact, since becoming chairman of the financial services committee, I and other American officials have been working with others to prevent this situation from arising.” He added, “My major goal this week is to further our efforts at cooperation and work to prevent any national regulatory approaches that allow companies to dodge the kind of accountability and responsibility that is needed.”
There is one thing, though, that everyone in Davos can agree on: public outrage around the world is still palpable. That may give the regulators an important stick with which to push through reforms—even if they are temporary taxes on banks that are unlikely to lead to substantive changes.
“As a result of the advancement by US President Obama and financial secretary Tim Geithner about their levy on wholesale lending, I think the proposals that I made at St Andrews for an international levy,” Brown said, “are now gaining currency around the world.”
But getting at real reform that will reshape the underwriting of the global financial system will take more than chest-thumps and oneupmanship among heads of states. We may still need a global sheriff.
©2010/The New York Times
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First Published: Tue, Jan 26 2010. 09 11 PM IST