ANALYSIS:President Obama's go-it-alone approach upset the choreography of global co-operation, writes SIMON CARSWELLin Davos, Switzerland
DAVOS 2010 wrapped up yesterday after five days of yet more soul-searching on how to regulate banking and stop the global financial world creating another crisis.
The economic summit concluded with much the same message as last year – governments need to co-operate.
What’s different this year is that Davos, with all its aspirations for global agreement, was faced with governments wanting to go it alone.
The contentious issue is US president Barack Obama’s planned banking reforms, unveiled just six days before Davos.
The US wants to prevent future problems by stopping large banks operating risky hedge funds or private equity divisions as well as blocking any speculating on their own accounts through proprietary trading. The plans have the potential to break up the largest US banks so it was little surprise that senior bankers were lobbying heavily against it.
The fear at Davos is the US was diverging from the global fix-it plan agreed by the G20 in London last April, potentially creating patchwork global regulation. Deutsche Bank chief executive Josef Ackermann warned about “the costs of cacophony”, while head of the International Monetary Fund, Dominique Strauss-Kahn, said: “We cannot have reform of the system driven by what each country sees that it needs for itself.”
Co-ordinated global financial regulation was “key”, he said, “and I’m afraid we’re not going in that direction”.
Senior political figures also rowed in. UK chancellor Alistair Darling said: “What would be disastrous is America has one regime, Europe has another, there is something else going on in the Far East and there are a whole lot of places in the middle where you can do what you want.”
European Central Bank president Jean-Claude Trichet, speaking on a Davosian theme of “redesigning financial regulation”, said that failing to agree a co-ordinated global response to a financial system overhaul would be “a recipe for catastrophe”.
“We have to be careful that we are not constructing a house of cards,” he said, adding that the global economy could not twice afford the crisis already experienced. All ideas must be assessed but this must happen within the G20, he said.
The banking industry moved quickly at Davos to respond to the US plans, offering something of an olive branch. Led by Dr Ackermann, senior bankers at Davos proposed a global tax on banks to cover the cost of future banking collapse, responding to Obama’s plan to levy a $90 billion (€65 billion) tax on the banks.
Ackermann wanted “a European rescue and resolution fund for banks”. Barclay’s president Bob Diamond said: “Every G20 country would like to have an insurance scheme that would help cover the cost of any future bank failure. A co-ordinated global system is preferable to an unlevel playing field.”
Their proposal pushed the right buttons. US Congressman Barney Frank, the chairman of the US House Financial Services Committee who will play a crucial role in deciding whether Obama’s plan will work, praised the bankers’ dropping the objection to the levy as “a major recognition of reality”.
So-called “banker bashing” over the return to paying exorbitant bonuses was as popular as the skiing at the Swiss Alpine resort.
The US president’s economic adviser Larry Summers pointed out that bankers were insisting that their bonuses were not hindering their lending, yet they were complaining that Obama’s levy would.
Darling, who has put a 50 per cent tax on bankers’ bonuses for 2009, said, in a pointed reference to their pay, that it was in the interest of bankers “to get off the front pages and do what they’re supposed to do – provide credit to the economy”.
The world of private business always produces lively performers at Davos. Davide Serra, founding partner of long-term investor Algebris in London, threw it out that regulators should be elected. “I know who I would vote for,” he said.
Serra shot from the hip – when bank equity is worthless, the debt becomes equity; capital was fat and banks could survive long diets, but liquidity was oxygen and without it they would choke – therefore, regulators needed to focus first on liquidity. The world needed fewer but smarter and better-paid regulators, he said.
All this is grist to the ideas mill, but decisions must be made in June when Canada hosts the G20 summit. Ironically for a country lauded for its fiscally conservative banking system and sharp financial regulation, Canada’s prime minister Stephen Harper warned against excessive regulation in his keynote speech.
Hitting what would appear to be an ever-moving target on banking reform and regulation will be the G20’s challenge post-Davos.
