Transcript Slide 1

THE FINANCIAL CRISIS
AND
REFORMING GLOBAL FINANCE
Problem Statement, Recent Developments,
and Contours of a Reform Agenda
Leonardo Burlamaqui
[email protected]
Chennai, India, January 25-27 ,2010
THE VISION
“Public institutions need to be the
vehicles by which leaders take
public responsibility for the public
interest. Otherwise, markets
determine the public interest,
which manifestly does not work,
especially in finance.”
THE PROBLEM STATED PROPERLY
“I believe that the root cause of the
present crisis lies in the intellectual
failure of economics. It was the wrong
ideas of economists which legitimized
the deregulation of finance which led
to the credit explosion which collapsed
in the credit crunch”
( Lord Skidelsky, 2009 –
Keynes: The Return of the Master )
THE FAILURE EXPOSED…
“I found a flaw in the model I perceived as
the one explaining how the world works.
That’s precisely why I was shocked…I still
do not fully understand why it happened”
(A. Greenspan – Congressional testimony, October 2008)
ONE YEAR LATER…….
Banking regulators should consider
breaking up large financial institutions
considered "too big to fail." NYT: 10/16/09
!
THE PROBLEM STATED PROPERLY ONCE MORE
“At a deeper level, the crisis of 2008-09 and our continued
dangerous financial system are very much the fault of our
regulators. Bank executives are supposed to make money.
They pursues profits – and rent extraction from the
government.
“It is the government’s responsibility to prevent people
like Jamie Dimon from creating massive social costs. The
failures here – and they were colossal – were on the part
of the people who ran the Federal Reserve, the Treasury,
and associated agencies over the past 20 or so years.”
(S. Johnson . Jan/2010)
THE PROBLEM IN A NUTSHELL (1)
We’re facing a big trade-off
between corporate sponsored
globalization and democracy.
THE PROBLEM IN A NUTSHELL (2)
CAPABILITIES REQUIRED:
Unique knowledge of business
firms competences; strategies and
of their competitive ecology
Creative
destruction
Late 19th Century trough the end of Financial
Bretton-Woods
Schumpeterian
Long-term
Funding &
Venture Capital
innovation
financing
productive
Investment
Development/
Structural
Change
RETURNS
Sorosian
Hedge Funds,
Securitization &
Leverage
Post-Reagan
Financial
innovation
financing
Washington-Consensus
speculation
CAPABILITIES REQUIRED:
Knowledge about the regulatory/legal
loopholes and how to structure bets on
the formation & evolution of
prices in currency, commodities &
securities markets
PONZI/
MADOFF
CAPITALISM
Destructive
creation
THE CHANGING FINANCIAL
LANDSCAPE
Burlamaqui
The Global Financial System:
Multilateral and
Public
DC and Geneva
BIS
(G20 Central
Banks)
SEC
FED
IMF
OECD
WB
EUROPE
WTO
GATS
IOSCO
Int Fed of
Accountants
European
Central
Bank
IAIS
Int Ass of
Insurance
Supervisors
Board
Credit Rating
Agencies
BRICS
South
Bank
Fin
Stability
Mortgage
Funds
Chang
Mai
Init
WFE
World
Fed of
Exchanges
Banking
System
Credit card
Companies
Export
Credit
Agencies
Fiscal
Shelters
Hedge and
Private Equity
Funds
RMBS
National
Fin Reg
Agencies
Reg
Dev
Banks
IASC
Int Acc
Standards
Board
Insurance
Companies
LAW
FIRMS
ACC
FIRMS
Bilateral
Int.
Trade &
Arbitration
Investment
Tribunals
Treaties
SWFs
FSB
Int Org of
Sec Comm.
IFAC
Multilateral and Public
Asia, Russia, Middle
East and Latin America
SIVs
Global
Corporations
GLOBAL PRIVATE
Pension
Funds
COUNTRIES
&
NATIONAL
STATES
The financial landscape: new developments in 2009
The G20 leaders’ summit in November 2008 urged
that the FSB “must expand to a broader membership
of emerging economies, and that other major
standard setting bodies should promptly review their
membership”.
In January 2009, the IASB expanded its members and
guaranteed geographical diversity on its Board for the
first time.
In February 2009, IOSCO invited securities regulatory
authorities from Brazil, India and China to join a body
that previously included mostly G7 countries.
The financial landscape: new developments in 2009
In March, the BASEL COMMITTEE expanded its membership by
inviting Australia, Brazil, China, India, Korea, Mexico, and Russia
to join the existing members (who had previously all been from
developed countries).
Most dramatic of all was the announcement that same month to
expand the FSB to include all G20 countries.
The American Recovery and Reinvestment Act (5.8 % GDP)
starts to impact the non financial sector. Depression avoided (?)
The financial landscape: new developments in 2009
Aggressive calls from European regulators for a comprehensive
Mr. Turner is daring to ask the very question that many Britons,
overhaul
of the financial system. Will it last (?)
and indeed, many Americans, are asking themselves:
What good are banks if all they do is push money around
and enrich themselves? As he sees it, the City takes too much
The Chinese stimulus package kicks in (13.5 % of GDP). Asian
from British society and gives back too little.
growth reassured
(?) too big and too powerful.
It has grown
And, he contends, the bankers have co-opted many of the regulators
who watch over them
Asian and Latin American
emerging economies surface as better
( A. Turner: Chief British Financial Regulator, quoted in NYT 9/24/2009)
equipped the weather the financial storm than Europe or the US.
A structural change (?)
The “Return of the State”: Public ownership of financial assets
“ Banks should be split into separate utility companies and risky ventures….
and financial institutions skyrockets. A new form of capitalism
It’s a delusion to think tougher regulation [alone] would
shaping up (?) prevent future financial crises”
( Mervyn King. Governor of the Bank of England, quoted in FT 10/21/2009)
ON THE DOMESTIC FRONT (US):
The underlying roots of the crisis remain




Toxic assets are still in hidden in bank’s balance
sheets (which the Fed refuses to disclose).
A year after Washington rescued the banks
considered too big to fail, the ones deemed too small
to save are approaching a grim milestone: the 100th
bank failure of 2009 (NYT – October 10, 2009).
Economic conditions in the real economy continue to
deteriorate – unemployment has climbed to almost
10 % (not seen since 1983) and could reach 11% in
2010.
The mortgage crisis far from solved:
Serious Delinquency among Mortgagors
40
35
30
25
20
15
10
5
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Prime FRM
Subprime FRM
Prime ARM
Subprime ARM
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Number of Foreclosures Started
650000
600000
550000
500000
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
ON THE DOMESTIC FRONT:
The underlying roots of the crisis remain

Financial concentration has increased: the top 3 US banks
"And
– hard (up
to believe
now control 30 %
of the
all banks
deposits,
from 20 %).
in a time when we're facing a banking crisis that many of the banks created
- are
still the most big
powerful
lobbygot
on Capitol
Hill. And they frankly own the place.“
 Or…“Too
to fail”
worse…
-Senator Dick Durbin (D-IL), April 27, 2009 .

Investment banks are back in business ( JP Morgan: +11.9
B in 09), but credit is not flowing…
“Lobbyists Mass to Try to Shape Financial Reform”
“The
financial
services
industry
has
poured
than ropes
$220 million
into lobbying
 And
other
jumbo
banks
are
stillmore
on the
(BOFA:
-5.9
in 2009”
B in 4th Q, Citigroup:-NYT,
-1.6
B in 09).
October 15, 2009.


The “Volcker Plan” (1/2010). Will it succeed? Is it enough ?
“The Obama administration’s proposal for a new Consumer Financial
Protection Agency risks being watered down by lawmakers in Congress after
lobbying from banks”
The elephant in the room:
the political influence of finance.
-FT, October 16, 2009.
THE COUNTOURS OF A
REFORM AGENDA
THE COUNTOURS OF A REFORM AGENDA - GLOBAL
Re-regulate the financial system: a Glass-Steagall for
the 21st Century



Establish a new division of labor among banks and
financial institutions in general: traders should not be
deposit takers and vice versa.
Credit and liquidity: limit leverage and raise capital
requirements (Banking and non-banking institutions).
Subject OTC custom made derivatives to preapproval (like prescription drugs…). Begin with a
“positive list” for new derivatives.
THE COUNTOURS OF A REFORM AGENDA - GLOBAL




Access best regulatory practices outside the US and
UK and incorporate them.
Bring all bank assets and liabilities onto bank balance
sheets, subject to reserve & capital requirements.
After a “grace period”, all off-balance sheet assets
and liabilities declared null and void, unenforceable
contracts.
Create an adequate incentive system for regulators.
THE COUNTOURS OF A REFORM AGENDA - GLOBAL
Reform the BIS/BCBS: make it transparent assure
broad representation and coordination capabilities.
Replace Basel II in the direction of more intense
macro-prudential regulation and an early-warnings risk
assessments system.
Make rating agencies a public utility.
Prevent “too big to fail”: restore the distinction among
financial institutions and regulate by functions.
Use competition policies to prevent excessive
concentration.
THE COUNTOURS OF A REFORM AGENDA - GLOBAL
Develop a global financial governance for development
agenda based on regional financial cooperation and
enhanced representation by non- G20 countries (The
UN back at the negotiating table) .
Create a “global financial governance body” (GFGB)
where national regulation would prevail, but would be
supplemented by international supervision, regulatory
coordination and enforcement power (Housed where?).
Establish a mechanism for coordinated capital account
control under this GFGB.
Reform the GATS agreement under the WTO.
THE COUNTOURS OF A REFORM AGENDA - US
Resolve the mortgage crisis through the homeowners
side – not the banks - & demand complete transparency
of mortgage lending,
Rationalize the regulatory “maze” (ex. Dodd proposal),
Establish a broad Financial Products Safety Agency,
Realign compensation schemes to ensure “skin in the
game” for fund-managers, traders, and CEO’s,
Address financial industry political influence peddling –
stop revolving door and reform campaign finance.
Thank you
Appendix
THE SYSTEM IN MOTION
MINSKY’S MODEL AND THE NEW FINANCIAL SYSTEM : MAD MONEY
INSTITUTIONAL FRAMEWORK: MARKETS AS WEBS OF CREDIT AND DEBT CONTRACTS
Long
Expansion:
Δ credit +
Fin innov.
Lax
monetary
policy
Δ Debt
financing
PONZI FINANCE
Bad debt/
Losses
Asset price
deflation
Derivatives ,&
Securitization
Reckless
finance
Trade
Imbalances
(Δ liquidity)
Asset price
inflation
Financial
fragilization
Exc rate
fluctuations
∆ interest
rates
PONZI SQUARE FINANCE
Financial
meltdown
Liquidity &
solvency
problems
Δ Profits
Hedge &
Private Eq
Funds
Policy
Change
Δ Leverage
∆ Debt
Exc rate
volatility
∆
Overshooted
expectations
SIVs,
∆
Fin
Deregulation:
Δ liquidity +
Opaqueness
Profits
interest
rates
MADOFF FINANCE
A few interesting books on the crisis, Keynes and Minsky
Governance Failure : Financial Regulation in the US:A Very Inefficient Maze
Commercial banks
Thrifts
Industrial Loan Companies
Bank Holding Companies
Securities and Exchange
Insurance
Credit Unions
Futures
The Fin Governance Grant’s Cluster:
Burlamaqui
Multilateral and
Public
LEVY
DC and Geneva
LEVY
SEC
FED
NEW
RULES
WB
BIC
IMF
OXFORD
(GEG)
PUBLIC
CITIZEN
WTO
TWN
GATS
IOSCO
Int Org of
Sec Comm.
IFAC
Int Fed of
Accountants
FORUM
DEM
Center.
Bilateral
Int.
Investment Arbitration
Treaties
Tribunals
Multilateral and Public
Asia, Russia, Middle
East and Latin America
BIS
(G7 Central
Reg
OXFORD
Banks)
Dev
BRICS
(GEG)
SWFs
IBASE European
Banks
EURODAD
CEDES ERF/
OECD
Central
IDEAS
Bank
National
Chang
EUROPE IPD
SIENA
CEPR
Fin Reg
South
Mai
Agencies TWN
Init
Bank
FSF
South
IAIS
Fin
Int Ass of
Center
Credit Rating
Stability
Insurance
IASC
Supervisors
Forum
Agencies
Int Acc
Standards
LEVY
WFE
Board
World
Fed of
Insurance
Companies
LAW
FIRMS
ACC
FIRMS
IPD
CEPR
Mortgage
Funds
Banking
North
System South
Exchanges
CUUS
LEVY
Hedge and
Private Equity
Funds
RMBS
Fiscal
CFISheltersTJN
SIVs
Global
De
Corporations
Justicia
Export
Credit
Agencies
Credit card
Companies
GLOBAL PRIVATE
Pension
Funds
IPD
COUNTRIES
&
NATIONAL
STATES