woensdag 12 juli 2017

Don Quijones; Has Super Mario Draghi Met His Match?

And this might become a problem for the Fed. ECB President Mario Draghi wields more power than just about any other public official in Europe, perhaps even including Angela Merkel. The organization he heads not only controls the monetary policy levers of the entire Eurozone, it also supervises the region’s 130 biggest banks. As we’ve seen in recent weeks, it even has the power to decide which of Europe’s struggling banks get to live and which don’t. Yet it is answerable to virtually no one. Until now. Emily O‘Reilly, the EU Ombudsman, an arbiter for the public’s complaints about EU-institutions, has just sent Draghi a letter asking him to explain his role in the potentially compromising Group of Thirty (G30) and how he makes sure that he does not divulge insider information or runs into conflicts of interest. The tenor, tone and direction of O’Reilly’s inquiries make it clear that she means business. The Washington-based G30 was founded in the late seventies at the initiative of the Rockefeller Foundation, which also provided start-up funding for the organization. Its current membership reads like a Who’s Who of the world of global finance. It includes current and former central bankers, many of whom now work or worked in the past for major financial corporations, such as:
*Mario Draghi (ECB, Bank of Italy, Goldman Sachs)
*Ben Bernanke (former Chairman of the Federal Reserve)
*William Dudley (New York Fed, Goldman Sachs)
*Timothy Geithner (Warburg Pincus, former US Treasury Secretary, New York Fed)
*Mark Carney (Bank of England, Bank of Canada, Goldman Sachs)
*Axel Weber (UBS, ECB, Bundesbank) *Haruhiko Kuroda (Bank of Japan)
*Christian Noyer (Bank for International Settlements, Bank of France)
*Jaime Caruana (Bank for International Settlements)
*Jacob Frenkel (JP Morgan Chase, Bank of Israel)
*Philipp Hildebrand (BlackRock, Swiss National Bank)
It also includes senior representatives of financial corporations with subsidiaries supervised by the ECB, including:
*Gail Kelly (UBS)
*Tidjane Thiam (Crédit Suisse)
*Guillermo de la Dehesa (Santander)
*Gerald Corrigan (Goldman Sachs)
And it includes economists such as Lawrence Summers, Paul Krugman, and Kenneth Rogoff. This group of very important people meets twice yearly to (in the group’s own words) “deepen understanding of international economic and financial issues, and to explore the international repercussions of decisions taken in the public and private sectors by market practitioners and policymakers.” Given the outsized impact central bank policy has on the evolution of financial markets, a meeting between their senior representatives and top bank executives should raise eyebrows, particularly in light of the potential for insider information to change hands. The ECB has already been caught sharing privileged information with representatives of top banks and hedge funds.
At the last G30 meeting Draghi apparently met with representatives of Credit Suisse, Deutsche Bank, BridgeWater Associates, BlackRock, Morgan Stanley, Munich Re, and AXA. If they were given indicators of future ECB policy or actions, they have massive risk-free opportunities to enrich themselves as well as huge advantages over all other market participants, including their biggest rivals. This is what prompted the Brussels-based NGO Corporate Europe Observatory (CEO) to lodge a complaint with the EU Ombudsman against Mario Draghi’s membership of the Group of Thirty. In January the Ombudsman, O’Reilly, launched an investigation into the matter. In March her inquiry team sat down with representatives of the ECB to discuss the inquiry and inspect the relevant documents. Now she has sent a letter with pointed questions to Mario Draghi, who has until September to respond to them. As German financial journalist Norbert Häring notes, some of the questions will not be easy for Draghi to “answer satisfactorily.” Particularly difficult to dodge will be these questions:
*Question 5 asks how the ECB protects itself against the risk of conflicts of interest in fora like the G30.
*Question 13 questions the appropriateness of the chair of the ECB’s Ethics Committee, Jean Claude Trichet, also serving as the Honorary Chairman of the Group of 30.
*Question 16 raises the issue of ECB independence in light of its membership of deeply compromising fora like G30.
The most difficult question for Draghi to answer will be Question 9: Where ECB members attend meetings organised by the Group of 30, they must abide by Treaty transparency requirements. However, Group of 30 meetings are not transparent. Would the ECB consider proactively informing the public of the content of these meetings, providing agendas and non-confidential summaries?
# Such a reasonable, politely worded request will be difficult to reject out of hand, at least with anything remotely resembling a justifiable excuse. And saying yes would open a whole new can of worms for the ECB, as Häring points out: Saying yes would change the nature of the group and presumably make it less attractive to its commercial members. Many topics that the G30 has presumably been discussing cannot be discussed any more, if the agenda and a summary are provided. It would simply be too obvious to the public that information gained by representatives of commercial institutions during these discussions is valuable and that conflicts of interest can hardly be avoided. It could get even worse, though. If Draghi would have to pull out of the G30, this would put tremendous pressure on other central bankers to do the same.
That would include the most important central bank of all, the Federal Reserve. The seven members of the Fed’s Board of Governors are officials of the federal government and are forbidden from participating in closed-door meetings with bankers like those of the G30. But the Fed gets around this restriction by sending the president of the New York Fed, which as a private institution, owned and controlled by the banks it oversees, and thus not subject to the same rules governing public officials. Hence Dudley’s presence at the G30. Dudley is also the vice-chairman of the policy-setting Federal Open Market Committee (FOMC). But if the ECB were pressured to drop out of the G30, the NY Fed’s continued membership would be more or less untenable. Whatever its outcome, the EU’s Ombudsman’s inquiry into the ECB’s membership of the G30 is a welcome step in the right direction. At long last, the cozy relationship between central bankers and the banks they’re supposed to regulate is getting some of the attention it deserves. And even Super Mario and his army of lawyers and advisors will have their work cut out answering O’Reilly’s pointed questions without giving the game away completely. Only two things keep many European banks alive....