from Felix Salmon:
The negative-sum new reality
Remember those off-the record comments by "top executives from Goldman Sachs and Standard Chartered" which indicated that the era of contrition had come to an end? Well, they're on the record now, splashed all over the front page of this morning's FT. Goldman's Gary Cohn is coming out swinging, saying that the real danger to the global economy is now posed by unregulated non-banks, while Peter Sands of Standard Chartered reckons that most bank regulations will no more prevent another crisis than seatbelts on airplanes will prevent a plane crash.
It's true that bankers are not contrite these days: Bob Diamond is standing tall in the halls of Davos, seemingly emboldened by his performance in front of the UK parliament, at which he said that "there was a period of remorse and apology for banks and I think that period needs to be over".
Looking at the bankers as just one of the many species of plutocrats and power brokers in Davos, it seems to me that they're taking full advantage of their present profitability (thanks, Mr Bernanke) to consolidate their position as much as possible in a world which is evolving in a fast and unpredictable manner.
Nouriel Roubini had a nice little soundbite yesterday, which I think touches on something important:
“There is complete disagreement and disarray. That’s the sense of the G Zero,” Mr Roubini said, explaining the new buzzword at the World Economic Forum’s annual conference in the Swiss resort of Davos.
“There is no agreement on anything. We are in a world where there is no leadership,” he added.
This is bearish, yes, but it's also descriptive of an every-man-for-himself kind of world. There's a good number of heads of state floating around, but many of them seem more interested in selling their countries as a great place to do business -- just see Dmitry Medvedev's opening address last night -- than in trying to put together any kind of grand international coalition which could bring a measure of predictability or stability to a world filled with massive risks.
In that kind of world, it makes no sense for bankers to stay on the back foot or to try to work constructively on building what the World Economic Forum calls "shared norms for the new reality". There's been general puzzlement in Davos as to what that slogan is meant to mean and I was of the opinion, up to yesterday, that it was simply empty pablum. But I've changed my mind a bit, now, and I think that the WEF is, in its own weak and powerless way, making a desperate and doomed attempt to recreate the sense of global purpose that reached its high point at the G20 meeting in London in 2009.
Italian CEO says retail banks need time to adapt
Yesterday I spoke to Antonio Vigni, CEO of Siena-based Banca Monte dei Paschi di Siena, the world’s oldest bank. Below are two video clips of Vigni answering questions on lending in Italy and the hot topic of regulation.
In this first clip, Vigni says bank lending is holding up in Italy and he sees improvement.
In the next clip, Vigni says that retail banks may need more time to adapt to the brave new regulatory world.
George Osborne discusses banking
George Osborne, finance spokesman for the UK Conservative Party, relays his thoughts on the discussion of the banking system taking place at Davos.
Five themes for Davos
Top (L-R): Steve Clarke, Natsuko Waki, Gerard Wynn, Martin Howell Bottom (L-R): Peter Thal Larsen, Felix Salmon, Ben Hirschler, Krista Hughes
Reuters will have a multimedia team of 20 journalists plus editors and three columnists on site covering the Jan. 27-31 World Economic Forum annual meeting.
This year we are focusing our news coverage around five global themes that are shaping economics, politics and investment opportunities in 2010. Our in-depth reports will draw on the expertise of our specialist correspondents from around the world to help inform the Davos conversation. These reports will be complemented by on-the-ground coverage, exclusive text and TV interviews, as well as a live blog aggregating the best Davos coverage on the web and on Twitter. We’ll be exploring the probing questions behind efforts to rebuild the world economy and financial system two years after the credit crisis.
Look for these special reports:
China has emerged from the financial crisis emboldened with huge economic clout, vast FX reserves and growing diplomatic influence. To build its global presence, however, it needs brands, managerial expertise and technology. China Economics Editor Alan Wheatley asks – How will it muscle up? Will it be through internal growth or foreign acquisitions? And what are the political and industrial risks, rewards and pitfalls of each approach – for China and the world http://www.reuters.com/subjects/davos/china
My invitation must have gotten lost in the mail again this year…
from James Saft:
Save capitalism from the banks – Nassim Taleb
Nassim Nicholas Taleb, the author of "The Black Swan: The Impact of the Highly Improbable", has a simple proposal to as he puts it, "save capitalism and free markets from the banks."
Nationalise the banks, limit the rewards to those who work in what he calls the "utility" part of the system and have a completely uninsured second leg that can take all the risks it wants and lose its shirt, he said in an interview in Davos at the World Economic Forum.
"They rigged the game. We pay them for their profits, there is no clawback so their incentive is to hide the risk they are taking."
"Which is why eventually as someone who loves free markets, a total nationalisation of the part of the business that requires insurance and does clearing and payments needs to happen."
"I am angry with U.S. policy. What we had is exactly the opposite of socialism, they got TARP to pay their bonuses and to take more risk."
He describes his plan as Capitalism 2.0. It would have a barbell structure, with the insured utility-like part on one end and the free market bit with privatized risk on the other.
Absolute right on the nail!! And not only Bob Rubin but each and every one of the bankers who have got us into this mess should be made to pay back all the bonuses they received whilst doing so.
The Pepsi challenge: avoiding guilt by association
One theme emerging out of this year’s Davos meeting is the corporate world’s annoyance with bankers. They feel that they have been brought low not by their own sins but by an out of control finance industry beset by greed and skewed incentives.
Not only are they struggling to access the money necessary to keep their operations going, as banks withdraw lending facilities and refuse to provide reasonably priced trade finance. But they have been dragged into a supposed crisis of capitalism not of their own making.
Take Indra Nooyi, CEO of PepsiCo. The first thing she did when speaking on a panel entitled “the values behind capitalism” yesterday was to distance herself, her company and the rest of the corporate world from the financiers. The capitalism of “main street”, she said, was being declared guilty by association “with the other street” – Wall Street. Clearly, she felt that was an uncomfortable – and unfair ¬ place to be.
That is perhaps a little rich. The corporate world has provided its fair share of scandals – and is doing so at the moment – but the obvious anger of Nooyi and her counterparts might help explain the distinct shortage of bankers at Davos.
Clearly the financial folk want to avoid the perception of taxpayer-funded extravagance that turning up at Davos might give rise to. Just as importantly, perhaps, they don’t want to get stuck up a Swiss mountain surrounded by enraged clients.
from James Saft:
Shocker – Davosians vote against more regulation
Duncan Niederauer, chief exec of NYSE Euronext, told a panel here at Davos that rather than inventing a whole host of new regulations, we'd be better off focusing on existing means of bringing order to markets, specifically taking a page from the exchanges books by having central clearing and more price transparancy for derivatives and off-exchange structured products. I think he's actually got a great point about clearing and better price information, but I can't see this as being anywhere near bringing regulation up to scratch.
The response from others on the panel was similar.
Nourial Roubini of NYU - "The ideology of the last decade was self-regulation which means no regulation. Reliance on ratings agencies with massive conflicts of interest.
"If we don't want a backlash against trade we have to have prudential regulation of the financial system."
Obama economic advisor Laura Tyson -
"We need regulation, we've tried self regulation and it doesn't work. Psychology tells us that in a highly competitive game the insensitivity to risk grows. It's like a drug addiction problem. They got so much pleasure that they simply stopped paying attention to the risk."
At the end of the panel they held a vote on Niederauer's idea and it won 71 percent to 29. Whether that was a vote for the sensible parts of his idea or for making that the whole of the regulatory effort I leave you to decide.
from James Saft:
Stephen Schwarzman’s hair of the dog
So what is Blackstone Group chairman Stephen Schwarzman's prescription for solving the banking crisis?
More leverage and less transparency, apparently.
Schwarzman told a panel at Davos that you can't mandate higher levels of bank capital at the same time losses are mounting and that mark-to-market accounting needed to be changed.
"You need lower capital. Do something with fair value accounting which is exacerbating things . . . We have to add more leverage to the system." He further took issue with what he described as a "fixation on transparency" and said "We have to use regulators to schedule out losses." By that I presume he means keep the bank on life support until they can make enough to absorb their losses. It did work in the 1990s with some prominent U.S. banks, but...
Laura Tyson, an economic advisor to the Obama administration, didn't seem to be buying in to the more leverage less disclosure meme.
"Nobody trusts the private system, why should they trust them?" she said. She also mentioned the Swedish solution, which you may remember imposed some pretty tough conditions on bank shareholders. She said that voters would be watching who made money out of bailouts and would be concerned by "compensation and dividends."
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Resident Davos Expert
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In my opinion, the greatest economic failure of the last few years is the framing of issues as “us vs. them” rather than looking for win-win solutions to problems that affect us all. Too many carrots and sticks, too little bread and butter.
Economics works best when it isn’t coerced.