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New Consensus on Financial Reform?
Gone are the days when global financial markets were driven by rules laid down in Washington and New York, declares Beijing-based American lawyer and political activist Laurence Brahm. An adviser to China’s ruling State Council, Brahm wants to see an overhaul of the global financial system that will take into account the interests of all trading nations. In his book The Anti-Globalization Breakfast Club, published last month by John Wiley & Sons, Brahm calls on all market players to embrace the movement behind anti-globalization by allowing opinions from all regions to be considered during the worldwide discussions on financial reforms, which began late last year among leaders of the Group of 20 nations.
What caused this crisis, and how can we avoid making the same mistakes again?
Our assumptions have all been wrong. The Washington Consensus, where the U.S. sets the rules, is built on the assumption that the primary motivation of people is greed. People are more than greed; they also have compassion. We need to reengineer our financial system to usher in an era of compassionate capitalism, to rethink the nature of shareholder value and replace it with stakeholder value and to ask the questions: Is a company responsible to its community? Is it taking measures to protect the environment? These are no longer philosophical questions — they are questions of urgency. The Washington Consensus is dead.
What do you mean?
The G-20 will likely replace the G-7, but that’s just part of the evolution. We are evolving into a multilateral world where regional solutions will be a response to the failure of globalized institutions. China is looking for a bigger role, and the yuan is already being used as a convertible currency with neighboring countries. China has a stake in the U.S. financial system because it is the largest holder of U.S. Treasury notes — the value of the dollar is dependent on the backing of the Chinese yuan — and it’s the world’s largest buyer of natural resources. The era of the International Monetary Fund and the World Bank as the dominant voices in determining the financial order is over. The financial crisis clearly demonstrated this. There need to be regional stabilization funds and a consensus on financial matters. Reforms can no longer be driven out of Washington.
What’s the next step?
I propose a consensus that would preserve ethnic identity through culturally sustainable economic programs. It follows three approaches: pragmatism, egalitarianism and governance. Globalization must be balanced to protect ethnic diversity and indigenous culture, which in turn protects the environment.
Why are you pressing so hard for a more regional approach?
The centralized approaches of the World Bank and the IMF don’t address problems in a meaningful way. One example of a better way is the regional stabilization fund in Asia known as the Chiang Mai Initiative, a pragmatic response to the failed policies of the IMF. It’s time to reengineer the World Trade Organization and bring it back to the fair concepts of the General Agreement on Tariffs and Trade, which were supposed to address the needs of the developing world, not be a tool of the developed world. We need democracy in global institutions.
Geithner's Crackdown on Derivatives Should Make Hedge Funds Nervous
In January, a week before the U.S. Senate confirmed Timothy
Geithner as a Treasure secretary, the 47-year-old former president of the
Federal Reserve Bank of New York vowed to regulate over-the-counter trading in
the vast global derivatives market and pursue mandatory registration for the
hedge fund managers if he got the job. Last month, he made good on his first
promise by sending a three-page letter to Congress calling for increased
oversight of derivatives traded in OTC markets to scale back risk in the
financial system. Yet despite the warning, the news an unpleasant reality check
for broker-dealers and all other market participants accustomed to trading
freely in the unregulated $592 trillion global OTC derivatives market – of
which credit-default swaps, as of December 2008, still constituted $41.9
trillion, according to Bank for International Settlements. Geithner wants to
make sure all firms whose activities create large market exposures adhere to “conservative
capital requirements, business-conduct standards, reporting requirements and
conservative requirements relating to initial margins on counterparty credit
exposures.”
Ultimately, he wants better visibility into potential sources of systemic financial risk, more efficiency and transparency in the markets, a clampdown on price manipulation and new rules ensuring that derivatives are not marked inappropriately to unsophisticated investors. The Treasury doesn’t want to shut down OTC derivatives markets but rather wants to give regulators the ability to limit the value of derivatives contracts that any company can sell or any institution can hold.
Although Geithner has yet to tackle the part of his pledge regarding hedge fund registration, his conservative, level-headed approach to derivatives offers insight into how he intends to deal wit that industry too. Still short on details, Geothner’s plan for derivatives regulation embraces some ideas that have been circulating on Capitol Hill in recent months – most telling, a call for mandatory centralized clearing of CDS’s the derivatives contracts used to insure against corporate defaults that contributed significantly to insurer American International Group’s record loss of $61.7 billion in the fourth quarter of 2008. But the proposal ultimately goes beyond any fear-driven focus on a single product by suggesting that securities laws be amended to require most OTC derivatives be cleared through internationally recognized and regulated central cleaning counterparties.
Derivatives markets that lend themselves readily to such standardization, such as that for equity-index-linked CDSs, would also have to be moved onto regulated exchanges to ensure market efficient and price transparency. Lets industry participants be tempted to skirt the regulators by simply creating customized derivatives contracts, so-called look-alike contracts would be prohibited. But market participants are still wondering how, exactly, existing OTC derivatives markets are going to be divvied up.
“The challenge is really where that line is going to be drawn between the customized world and the standardized world,” says Robert Pickel, executive director and CEO of the International Swaps and Derivatives Association. “That distinction has yet to be made.”
The board conceptual sweep of Geithner’s proposal to identify and root out sources of systemic risk contrasts sharply mark, and by 2012 those firms would have to comply or resist.
In drawing such a hard line, says Antonio Borges, chairman of London-based Hedge Fund Standards Board, the EC clearly aims to influence any discussion about the greater regulation of hedge funds among G-20 leaders at the next meeting, in November. But by challenging major regulators in key jurisdictions such as the U.S. to implement “a parallel initiative,” the EC may have overstepped its authority, some experts say.
“In certainly risks damaging the collaborative process,” says Andrew Shrimpton, a member of London-based investment advisory group Kinetic Partners and former head of alternative investments supervision at the FSA.
“This is an Anglo-American industry, which is yet another reason why it’s wrong for the EU to go off on it’s wrong for the EU to go off on its own with these regulations. In directive becomes law, U.S. managers could look to market funds in Asia and the Middle East and bypass the EU entirely.”
Geithner may not have wished to tackle hedge fund regulation quite so soon, but he is likely to have little choice: The financial crisis has provided an unparalleled opportunity for European politicians to clamp down on an industry they deeply distrust. Though the financial industry’s addiction to complex derivatives may pose a greater macroprudential risk to the markets than do hedge fund managers’ self-defensive hoards of cash, European politicians are more eager to castigate the alternative asset management industry than to force European banks to submit to independent regulatory stress tests and mark down the vast quantities of toxic, illiquid and now largely worthless derivatives that may still be lurking on their books.
