Felix Salmon

I could really do with a lot more transparency from the Fed on why exactly it’s decided to almost double the maximum permitted debit interchange fee. The bank lobby certainly had a lot to do with it — but the bank lobby always said that the Fed was simply doing what it was forced to do under the Durbin amendment to Dodd-Frank, and that therefore Dodd-Frank itself had to be changed.

When the Durbin amendment survived, however, suddenly the banks realized they had a Plan B — to lobby the Fed. And the Fed, it turns out, is even more susceptible to such lobbying efforts than Congress is. The sole dissent among the Fed governors was from Elizabeth Duke, who said that the new fee was too low.

Clearly the facts on the ground didn’t change between December, when the Fed came up with its 12-cent figure, and today. And now the Fed has proved itself susceptible to intense lobbying, you can be sure that the banks will keep their lobbyists active on all manner of rules and regulations which have to be promulgated under Dodd-Frank. Never mind what the law says, just make sure the regulators do what you want!

The optics of this are terrible — the Fed hasn’t even attempted to justify the hike, and indeed no matter how many times you read its press release, you’ll never be able to see that there was any hike at all. There’s talk only of the final fees, and no talk at all of the fact that they were raised substantially from the initial 12-cent proposal. The closest that we get is this, from Ben Bernanke:

We received input from more than 11,000 commenters on our proposed rule. We have taken the time needed to review these comments carefully; they have been very helpful to us and the final rule reflects changes suggested by commenters.

The message, here, is clear: keep on lobbying us! The more you lobby us, the more we’ll listen!

Why Bernanke’s sending that message, on the other hand, I have no idea.

A quick reply to Matthew Bishop and Michael Green, which with luck will bring this exchange to an end: I’m not saying that they make the case for the status quo. But when Davos Young Global Leaders, like Bishop, intone importantly about how “there is an urgent need to tackle fundamental flaws in the economic system” and how CEOs need to concentrate on long-term enlightened self-interest rather than “short-termist behavior”, the very corporate chieftains they’re trying to reach are going to nod in serious agreement and claim in all sincerity to be part of the solution rather than part of the problem.

Never in the history of Davos has a CEO got up on stage and said “I’m trying to make as much money as I can before the board finds me out and fires me”. Which is precisely why CEOs don’t think that Bishop and Green are talking to them. And on top of that, the Philanthrocapitalists are happy reducing the pressure on any individual CEO even further with rhetoric like this:

A capitalism that is more responsible is not going to come from a few enlightened CEOs choosing to do good – it will only come from an overhaul of the way business is run.

That’s not a call to action, it’s a call to sermonize. And it will achieve nothing beyond getting Bishop and Green a few more speaking fees from companies which like to pat themselves on the back for being socially conscious. Which is why I say that Philanthrocapitalism is ultimately friendly to the status quo.

Bishop and Green don’t explicitly say that the status quo is a good thing: in fact, they explicitly say that it is profoundly broken. But they say that in an extremely CEO-friendly way, designed to allow leaders who think of themselves as long-term visionaries to also consider themselves to be downright philanthropic simply by dint of their enlightened strategic thought. It’s always other CEOs who are the problem. Or it’s not even CEOs at all: it’s the whole system.

The message of Philanthrocapitalism, then, is one which allows leaders to wriggle all too easily out of having to do anything. Which is why it’s not going to make the slightest bit of difference to the way the world is run, no matter how many important people read it.

Stan Fischer’s quixotic decision to throw his hat into the ring as a candidate for managing director of the IMF has been lauded by Mohamed El-Erian, who reckons that “he would likely prevail in an open, transparent and merit-based selection process.” Insofar as this is true, it’s a bit depressing.

I’m no great partisan for Christine Lagarde, whose main qualification for the job is that she’s French. But she’s smart, she’s tough, she’s an able politician — as the latest endorsements of her candidacy attest — and she has the ear of the European heads of state who are going to be forced to make some very tough decisions during her inevitable tenure at the Fund.

The job of IMF managing director is a particularly tough one. Everybody else at the Fund can kid themselves that they’re working for the managing director — the boss. But the managing director himself works for a fractious and highly opinionated board of directors which can be counted on to micromanage and second-guess every important decision. As such, the main skill needed in a managing director is to be able to manage those delicate relationships with great finesse, while at the same time projecting enough power and authority that any interference is kept to a minimum in the first place. It also helps to be respected by key heads of state, who ultimately direct the board.

This is where Fischer’s interview with the WSJ is revealing, and not in a particularly flattering way. Remember, here, that Fischer was number two at the IMF during the Asian financial crisis:

“There are serious economic issues” that need to be addressed, Mr. Fischer said, and IMF staffers often offer conflicting advice. “Without having that [economic] training, it’s very hard to know who’s right and who’s wrong,” he said…

Since the global financial crisis of 2008, the IMF has eased up on some of the requirements it once imposed on countries that accept emergency loans. Mr. Fischer said he approved of those changes and had tried to do something similar when he was at the IMF a decade ago but couldn’t win sufficient support from the IMF’s board.

This is the view of someone who sees the biggest issues facing the IMF managing director to be technocratic, rather than political. I have no doubt that Fischer is better at adjudicating economic questions than Lagarde — this is the man, remember, who co-authored a hugely respected economics textbook (now in its 11th edition) with none other than Rudi Dornbusch. But Fischer by his own admission is bad at winning support from the board. Either that, or in fact he was perfectly happy with the IMF’s economic orthodoxies in 1998-9. Which is quite likely, given that he quite literally wrote the book when it comes to economic orthodoxy. I remember those days reasonably well, and I certainly didn’t get any impression from Fischer at the time that he had any issues at all with the policies he was espousing.

One other thing is worth remembering about Fischer’s role as first deputy managing director: the job is always held by an American, and he got the job by dint of his US citizenship. It’s therefore a little rich for him to turn around and start complaining that he’s up against the very same set of conventions which allowed him that job in the first place.

It’s also worth remembering, while we’re on the subject of failed economic orthodoxies of the recent past, that Fischer spent three years, from 2002 to 2005, at Citigroup, working very closely with Bob Rubin. Indeed, he’s the only person I can think of who actually formally reported to Rubin, whose reputation has been comprehensively demolished by the financial crisis. As the co-author of an incredibly lucrative economics textbook, Fischer didn’t need the money; it’s fair to say that he saw no particular problem with taking the contacts he built up over a long public-sector career and turning them into profits for Citi shareholders, just so long as he got paid millions of dollars for doing so.

My feeling about Fischer is that he would be a managing director not dissimilar to the French technocrats who ran the shop during the 80s and 90s, Jacques de Larosière and Michel Camdessus. He’s not an agent of change; he’s a throwback to the past. And although he claims to be “full of vigor” at the age of 67, he’s probably a one-term MD at best, in an institution which has had altogether too much turnover in that role since Camdessus stepped down in 2000.

Of course it is high time that a non-European became managing director of the IMF. But Fischer is not the kind of break with tradition that the Fund needs — by non-European nobody means American, and Fischer would have a very hard time trying to present himself as an African, even if he was born in what is now Zambia.

So when Lagarde inevitably gets the job, let’s not shed too many tears that Fischer didn’t get it instead. In some kind of technocratic utopia, he’d be perfect. But in the messy real world, with his age and his US citizenship and his Citigroup years and his actions during the Asian financial crisis all counting against him, his candidacy is a non-starter. I’d be surprised if anyone at all, bar Israel, ended up voting for him.

I’ve just noticed that Jamie Dimon’s little speech to Ben Bernanke last Tuesday recapitulated many of the points that Tim Geithner made in his own speech the previous day. Let’s play Dimon or Geithner:

1. “We have a very complicated regulatory structure with multiple agencies, with closely related and sometimes overlapping missions and roles.”
2. “It has been more than three years since the start of the financial crisis that led to those reforms.  And we are now in the midst of a fundamental reshaping of the financial system.”
3. “Most of the bad actors are gone. They were thrifts, all the mortgage brokers, and some banks.”
4. “The firms that took the most risk – no longer exist or have been significantly restructured.  That list includes Lehman Brothers, Bear Stearns, Merrill Lynch, Washington Mutual, Wachovia, GMAC, Countrywide, and AIG.”
5. “We had a crisis, and it entailed need to do a lot of things to fix it and reduce risk.”
6. “Higher capital and liquidity are already in the marketplace, we estimate more than double what it was before.”
7. “19 firms have together increased common equity by more than $300 billion since 2008. The average level of common equity to risk weighted assets across these institutions is now 10 percent, much higher than before the crisis.”
8. “Debt maturing in one year or less, as a share of total liabilities, has declined dramatically to roughly 40 percent of the pre-crisis level.”
9. “Regulators are tougher in every way possible.”
10. “It’s a good thing that there’s no more subprime.”
11. “There’s far more transparent accounting.”
12. “The US banking system today is less concentrated than that of any other major economy.”
13. “Central banks and supervisors need a balance between setting capital requirements high enough to provide strong cushions against loss but not so high to drive the re-emergence of a risky shadow banking system.”
14. “Capital requirements cannot bear the full burden of protecting the system against risk, and they should be considered in the context of the reinforcement provided by these other reforms.”
15. “We need to improve the chances of promoting a uniform global approach that does not damage US firms.”

Simon Johnson has responded to these arguments with a post entitled “The Banking Emperor Has No Clothes”:

Big banks in almost all other major countries have run into serious trouble, including the UK and Switzerland – where policymakers are now open about the scope for further potential disaster…

Mr. Geithner’s thinking is completely flawed on bank size. The right lesson should be: big banks have gotten themselves into trouble almost everywhere; U.S. banks are very big; these banks have an incentive to become even bigger; one or more of these banks will reach the brink of failure soon.

But the fact is that Geithner won’t think that way, not least because of the fact that he arrived at Treasury from the New York Fed, an institution which is literally owned by the big banks such as JP Morgan.

Dimon will always push as hard as he can to have as little regulation as possible and to have no restraints at all on the size of his bank. That’s his job — you can’t really blame him for it. What’s more worrying is that Geithner seems to be very close to Dimon’s way of thinking.

(The answers, by the way: 1, 2, 4, 7, 8, 12, 13, 14, 15 are Geithner; 3, 5, 6, 9, 10, 11 are Dimon.)

The U.S. Congress only has two choices. It can raise the debt ceiling, or it can abolish the debt ceiling. The latter option isn’t realistic, sadly. Which means that the debt ceiling is going to be raised. Yet somehow the House of Representatives contrived today to vote 318-97 against raising the ceiling, in an idiotic political stunt which makes all 318 Nay votes look like complete morons. Not a single Republican voted in favor of the bill, while the Democrats were pretty evenly divided between the sane and the bonkers; even the likes of Nancy Pelosi and Charlie Rangel voted nay.

Faced with a Congress of such monumental doltishness, what is the White House to do? It can stick to its guns and try to put in place the very best policies for America that it can. Or it can randomly detonate various such policies, even if doing so would achieve precisely nothing, on some kind of inchoate principle that the occasional public sacrifice might somehow mollify an unknown number of lamebrained legislators.

That seems to be the philosophy of Bill Cohan, who has decided that Elizabeth Warren must resign from the nascent Consumer Financial Protection Bureau, on the grounds that Congress won’t confirm her. But Cohan’s argument doesn’t even make internal sense:

The inconvenient truth facing Elizabeth Warren, the controversial Harvard Law School professor President Obama would like to run the newly created Consumer Financial Protection Bureau, is that she has made herself so bloody disagreeable on Capitol Hill that she has obliterated her chance of winning the Senate votes she needs to be confirmed…

In the Senate — the body that actually confirms appointees — Warren is faring little better. In early May, 44 Republican senators sent the president a letter saying they would oppose any nominee of either party to head the bureau until “the lack of accountability in the structure” of it is “reformed.”…

This reeks of a political ploy by the Republican senators to gut an agency despised by their financial backers on Wall Street.

By Cohan’s own account, then, any nominee would face exactly the same fate as Warren — even a Republican. It’s the bureau that these senators don’t like, and they’re not going to confirm anybody to run it unless and until they also get the authority to hobble it. Throwing Warren to the sharks would just give them a taste for blood, and make them even more optimistic about their chances of getting exactly what they want.

Cohan says that the Warren nomination fight “is not a fight that Obama can win”. But it’s the first principle of any game that you don’t give something up without getting something in return — especially when your opponent is crazy. Unless and until the Republicans show Obama a way that he can get a nominee approved in line with Dodd-Frank’s vision for the agency, it’s a no-brainer that Warren must stay. Otherwise Obama would just be sacrificing a great public servant for no purpose at all.

Christine Lagarde’s international campaign to become the next head of the IMF is an attempt to maximize her credentials as the choice not only of Europe but of the rest of the world as well. The job is hers, at this point: once the US falls in behind Lagarde there’s no question that Lagarde will get the job, and with Hillary Clinton now waxing enthusiastic about how “we welcome women who are well qualified and experienced to head major organizations such as the IMF”, it’s going to be hard for the US to support anybody else. So Lagarde’s latest world tour should be seen as maneuvering to make her life as easy as possible when it comes to dealing with increasingly-powerful shareholders such as China and Brazil, after she starts in her new role.

Meanwhile, Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, took it upon himself to come out in public and say just how bad the Greece situation has become. The key date we’re counting down to is June 29 — that’s the day on which the IMF is due to disburse its next tranche of aid to Greece. But before that can happen, the “troika” — the IMF, the ECB, and the EU — have to agree that all of Greece’s funding needs for the next 12 months have been covered or guaranteed by someone. Which they haven’t. “I don’t think that the troika will come to this result,” said Juncker.

If the IMF doesn’t come up with the money, Greece is in real trouble:

“If the Europeans have to acknowledge that the disbursement from the IMF on 29 June cannot be operationally implemented, then the expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF’s portion of the financing,” Juncker said.

“That won’t work, because in certain parliaments — Germany, Finland and the Netherlands and others too — there is no preparedness to do so,” he said.

Why is Juncker saying this? Neil Hume quotes David Mackie of JP Morgan, who reckons that Juncker is twisting the arms of various Eurocrats to ensure that Greece gets access to the European Financial Stability Fund sooner rather than later. If EFSF terms get agreed before June 29, then that’s exactly the guarantee that the IMF is looking for, and the IMF’s funds can get disbursed.

But there’s another possibility: maybe Juncker is pressuring the euro zone to install Lagarde as IMF managing director before June 29. Lagarde has “earned a reputation as the most uncompromising opponent of a Greek debt restructuring among euro zone ministers,” according to Daniel Flynn, and it’s pretty much impossible to imagine that her very first act as managing director would be to throw the euro zone into crisis by denying Greece its scheduled tranche of IMF aid. After all, the tougher that the IMF becomes on conditionality, the more likely a Greek restructuring becomes.

The deadline for installing a new managing director at the IMF is June 30; I’m sure that a lot of Europe would like to see Lagarde get the job a few days earlier than that. And so maybe that’s what Lagarde’s jet-setting is all about: shoring up enough global support that she can sail through the nomination process very quickly. The G20 countries will be asking her about a possible double standard: why should the IMF be generous to Greece, when it’s been so tough on many other countries in the past? Lagarde, I imagine, will give an answer along the lines of Daniel Davies’s comment here:

The purpose of defaulting on the debt would be to improve Greece’s access to credit? And by putting its deficit funding at the caprice of international capital markets rather than other EU governments, Greece gains political independence? I suppose it is the land of the Pyrrhic victory, but even so; I am unconvinced that gaining the sort of freedom to set its own fiscal policy enjoyed by, say, Ecuador is really worth all that much.

btw, I don’t really know what the difference is between a liquidity problem and a solvency problem in this context, and I don’t believe anyone else does either.

What Davies misses here is the distinction that the markets make between ability to pay and willingness to pay. Once a country has defaulted on its debt, its ability to pay on new debts naturally goes up — it becomes more creditworthy, not less. But just as your credit score goes down rather than up after you declare bankruptcy, so do the markets tend to punish countries which have recently defaulted, on the grounds that if a country is prone to default, it’s not a good idea to lend to that country.

In the case of Greece, the markets would be utterly unconvinced by a “soft restructuring” which left the country’s debt-to-GDP ratios looking unsustainably large for the foreseeable future, and which kept alive the risk of a second restructuring — or even devaluation — down the road. And there’s no realistic chance of a coercive “hard restructuring” which would involve outright default on existing debt — not in the next year or so, anyway.

But still, I do think that there’s a difference between a liquidity problem and a solvency problem in Greece. The solvency problem has been apparent ever since this Greek government came into power and came clean on the country’s finances; the liquidity problem is the kind of thing which Juncker is talking about. Defaults are generally caused by liquidity issues rather than solvency issues, which is why Greek bond yields are so much higher now than they were at the beginning of 2010. But solvency is still important, and Lagarde faces a stark choice the minute that she becomes head of the IMF.

Either Lagarde will attempt to persuade both her shareholders and the markets that Greece’s debt burden is actually sustainable, or else she’ll have a Nixon-in-China moment and announce that in order to bring Greek debt down to a manageable level, there will need to be a broad restructuring of its liabilities. My guess is that by the time she’s finished her current tour, Lagarde will have a very clear idea of whether Plan A — the muddle-through-and-hope approach — has any chance of success at all. And if I were the Chinese, or the Brazilians, or the South Africans, I’d be trying to impress upon her in the starkest possible terms that it doesn’t. It’s not the job of the IMF to facilitate a state of denial in Europe and Greece. Indeed, that’s one reason why I’m uncomfortable with Lagarde getting the job in the first place. Despite the fact that she seems certain to get it.

Would Mohamed El-Erian have moved from Harvard to Pimco in 2007 if he was only offered the job for less than 18 months, at which point he would have to reapply for his job under a different system? Because that’s the offer that El-Erian thinks the IMF should make to Christine Lagarde:

Instead of a new five-year term, Lagarde should be appointed just to complete Strauss-Kahn’s term that runs until 2012. During this period, Lagarde would be charged to lead the IMF’s Executive Board to put in place a selection process that is open to all nationalities, transparent and merit-based — or the minimum standard of governance for an institution that is owned by 187 member countries and charged to serve them under the principle of “uniformity of treatment.”

Of course, come next year, Lagarde would be eligible to stand for a full term in an election that is open to all; and one that is based on merit rather than misplaced notions of national prestige and harmful political horse-trading. 

If my assessment of her qualifications is correct, she would be well placed to secure the necessary global support under a process that is credible and long, long overdue.

I can see where El-Erian is coming from here, but this idea would hobble Lagarde’s effectiveness from day one, making her something of a lame duck even before she formally started. Yes, there would be a good chance that she would get a proper five-year term starting in 2012. But right now the IMF needs all the leadership it can get, and having a managing director serving out a deliberately-truncated term, as though she was just filling in for DSK rather than taking over in her own right, would not help in that regard.

If Lagarde is like previous European IMF MDs, she’ll pay lip service to the idea of implementing a transparent and merit-based selection process, but won’t actually do anything about it. That’s why El-Erian wants to force the issue now. But realistically, change on this front can only come from the Europeans themselves, probably in conjunction with a US decision that it would be willing to give up the top job at the World Bank. That will take a lot of delicate jostling and international negotiation. It’s not something which can be pushed through in the space of a week or two while the IMF is leaderless.

Christine Lagarde is going to be the next managing director of the IMF. European consensus is clearly coalescing around her: she has been endorsed by Germany, France, Italy, and the UK, not to mention Jean-Claude Juncker, who chairs the euro zone finance ministers. And the only other front-runner for the job, Kemal Dervis, has now ruled himself out after the NYT published an article about an extramarital affair he had many years ago. (The woman, I understand, still works at the IMF.)

The only thing standing in Lagarde’s way at this point is a French public prosecutor and the ongoing investigation into whether she abused her authority by pushing for an arbitration settlement in a case involving Bernard Tapie. We don’t yet know whether she will face a full inquiry — and we won’t know that until mid-June, which is far too late to decide on a nominee for the IMF job.

The past three IMF managing directors — Horst Köhler, Rodrigo de Rato, and Dominique Strauss-Kahn — have all failed to finish their five-year term in the job, leaving unexpectedly for various reasons. It’s pretty important that the next person in the role not suffer the same fate.

But it’s even more important, in the eyes of the Europeans, that they nominate a consensus candidate and push that person through. At this point Lagarde is the consensus candidate; it seems inconceivable that the consensus could shift to someone else in a short space of time. So while the Belgians and others might have misgivings about nominating someone who’s under a legal cloud, that’s not going to be enough to prevent Lagarde’s nomination.

It takes Mohamed El-Erian until the very last paragraph of his FT op-ed to rule himself out of the running for managing director of the IMF: “I will not be part of this process,” he says, adding that “I already have a great job, here in California.”

But it’s clear what process he wants:

It is therefore critical that, in the coming weeks, the IMF Executive Board finalise and publicise a process that would be used, should Mr. Strauss-Kahn be forced to resign. Specifically, the post of Managing Director should be open to all nationalities, with candidates assessed on the basis of transparent job qualifications.

It should also involve an internationally balanced committee to evaluate applicants and put forward 2-3 finalists for Executive Board consideration, and the final choice should emerge from a fair vote of the Board.

The first problem with this is that Strauss-Kahn will and should resign much sooner than that. But that problem isn’t insurmountable: he should just say that Lipsky is the new interim managing director, and that one of Lipsky’s main jobs will be to put together a transparent, qualifications-based process for choosing his permanent successor.

More generally, the international community can no more ignore a candidate’s nationality when it comes to running the IMF than can FIFA when it comes to choosing a referee for the World Cup final. Since it’s the board and shareholders who are going to be choosing the IMF’s next managing director, it’s the board and shareholders who are going to be nominating candidates. And when a country nominates a candidate, that candidate is always going to be considered a partisan of that country.

Which is the main reason, in fact, why Christine Lagarde might not end up getting the job. Taimur Ahmad, the editor of Emerging Markets — the very magazine which helped cement Lagarde’s status as front-runner back in April — has an interesting theory on this front. Essentially, Lagarde is Sarkozy’s finance minister, and while she might make sense as IMF managing director with DSK as president, it seems a bit much to have her at the IMF when Sarkozy has a real chance of retaining the presidency.

If it’s not Lagarde, then, who will emerge as the consensus candidate of the EU? Lorenzo Bini Smaghi? It’s all, still, very murky.

It now seems more likely that Dominique Strauss-Kahn will end up in a prison cell than that he will be elected president of France. Either way, his career at the IMF is over, which means that the race to succeed him is on.

Gordon Brown would love the job, but he’s not going to get it, which is great. The front-runner is Christine Lagarde, who would be better than Brown. But France has held the top job at the IMF for 26 of the past 33 years. It’s time for a change, on that front.

Historically, the IMF managing director has always come from Europe; if Lagarde doesn’t get the nod and the tradition is continued, then the obvious name is Italy’s Mario Draghi. But there are very good reasons why the head of the IMF, at least this time round, should not be a European — not least that Strauss-Kahn himself, along with various European finance ministers, said when he was nominated in 2007 that this was the last time Europe would get to railroad its own candidate into the job.

The competition was tougher in 2004, when two serious heavyweights were nominated to contest the election of a European — Stanley Fischer and Mohamed El-Erian. I suspect that El-Erian’s far too happy at Pimco (and in California) to throw his hat in the ring this time round, but he’s been so vocal on public-policy issues of late that it’s just conceivable he could allow his arm to be twisted. Fischer is still a contender, but he’s 67 years old now — as is Montek Singh Ahluwalia, another potential nominee. The age limit on IMF managing directors is 65 for a reason, and although it can be changed by a vote of the Fund’s member countries, that extra hurdle is likely to be enough to prevent either of those two men from getting the job. And Fischer has other counts against him — he was vice chairman of Citigroup during the bubble years of 2002-2005, for starters.

What’s more, there would be something a bit weird about the first African managing director of the IMF being a white Jew — culturally, Fischer is closer to Strauss-Kahn than he is to, say Trevor Manuel, whose elevation to IMF managing director would be a very visible and welcome change in the way the international financial architecture is run. Manuel is pretty light-skinned, but he grew up on the wrong side of the color line in apartheid South Africa, and has the years in South African detention during the 1980s to prove it. The men who have run the IMF to date are the heirs to Europe’s colonizers; Manuel very much counts as one of the colonized.

If the IMF is looking for an international technocrat, rather than a politician, then Mexico’s Agustín Carstens is likely to be in contention — but I very much doubt that he’ll get the job, if only because the head of the World Bank is (as ever) an American, and the rest of the world would not stand for both institutions being run by North Americans.

South Americans, by contrast, would be fine: one dark-horse candidate might be Brazil’s Arminio Fraga.

The top name on Alan Beattie’s list, however, and the most likely non-EU head of the IMF, is Turkey’s Kemal Derviş. Richard Adams says that he “ticks all the boxes”, but the IMF has more power than ever these days, and is going to be called on to make incredibly important decisions with respect to troubled European sovereigns over the course of the next managing director’s tenure. Whether Derviş is up to such a task is very much open to question:

Dervis carries limited political weight. He was his country’s economic affairs minister for just two years and his career has been spent mostly with the World Bank (20 years) and five years as head of the UN Development Program — not an organization that inspires achievement.

Add it all up, and my guess is that the French are going to do it again: Christine Lagarde will become the first female managing director of the IMF. She has the political skills and the economic credentials to get the job, and Europe will feel much more comfortable with a European in the role over the next few turbulent years. The US won’t object, and the Asians will go along with the choice since they don’t really have a candidate of their own. As ever, there will be some pro-forma gnashing of teeth about how a non-European should really get the job next time. But I’m not holding my breath.

Serena Ng has been keeping an eye on AIG’s share price, which is far below where it was trading at the beginning of the year — and below even where it was in October, when Treasury’s Jim Millstein told me that Treasury was going to make a profit of roughly $13 billion on the money it used to bail out AIG. That’s looking increasingly unlikely: Treasury’s break-even price on its AIG stake is about $28.70 per share, and at current prices it’s going to have to accept less than that if it wants to sell $20 billion of stock into the market.

There are three issues at stake here. First, should Treasury have converted its AIG debt into equity just so that it could exit its position more quickly? Second, will Treasury manage to disentangle itself from AIG at a profit? And third, does that matter?

Governments care very much about the 0% return level on their investments in private companies. If they make more than that, the investment/bailout is considered a success; if they make less, it’s a failure. That’s a bit silly, but the psychology is at least easy to understand.

But if Treasury wanted to end up extracting more money from AIG than it put in, the safe and sure way of doing that would have been to keep its investment as debt, rather than converting it to volatile equity. The problem with that strategy is that the stake couldn’t be sold quite as quickly: for reasons I don’t fully understand, it’s easier to sell $20 billion of AIG stock than $20 billion of AIG bonds.

And one thing that the Obama administration shares with its predecessor is a deep disinclination to have any kind of stake — equity, debt, warrants, anything — in private companies. Treasury hates such things so much that it’s willing to take a higher risk of taking a loss, if that means it can extract itself from companies like AIG more quickly.

That’s an intellectually honest position: after all, the 0% return level is mathematically as arbitrary as any other, and shouldn’t drive government policy. A similar philosophy exists at the New York Fed, as well, which turned down AIG’s offer of a guaranteed positive return on its Maiden Lane II assets, in favor of running a slightly riskier auction which was likely to make more money, ultimately, for Treasury. (Interestingly, Treasury, as the owner of AIG, was the one pushing the Fed to just sell the assets to AIG at a modest profit.)

The big question, of course, is whether the government will really have extricated itself from AIG even once it sells all its shares in the company. One thing missing from Dodd-Frank was a proper federal insurance regulator: the insurance industry is still regulated on a state-by-state basis, and the NYT this morning has a rather alarming story of the way in which various states are competing with each other to see who can be the most lax on that front.

Insurance companies in general, and AIG in particular, are still too big to fail: no government is likely to turn around and tell policyholders that they’re simply unlucky that their insurer ran out of money and went bust. So AIG, along with all other insurers, represents a significant contingent liability for the government. Treasury might be trying to get out of its formal stake in the company as fast as possible. But it can’t get out of its informal links.

Gordon Brown is very comfortable at the IMF. He chaired its most important committee, the IMFC, for many years, and he would love to take the top job of managing director. There might be a vacancy soon, if the incumbent, Dominique Strauss Kahn, steps down to run for president of France. But it won’t be filled by Brown, now that UK prime minister David Cameron has made his opinions crystal clear.

Mr. Cameron told BBC Radio 4′s Today program: “I haven’t spent a huge amount of time thinking about this. But it does seem to me that, if you have someone who didn’t think we had a debt problem in the UK, when we self-evidently do, they might not be the best person to work out whether other countries around the world have a debt and deficit problem”.

He added: “Above all what matters is the person running the IMF someone who understands the dangers of excessive debt, excessive deficit, and it really must be someone who gets that rather than someone who says that they don’t see a problem.”

Mr. Cameron also said: “I certainly don’t want a washed-up politician from another country. It’s important that the IMF is led by someone extraordinarily competent.”

He suggested that the next IMF head could come from “another part of the world”, such as China or India. By convention they are usually chosen from European countries.

All of this is exactly right. Brown comes with way too much baggage: he’ll never be able to admit that enormous chunks of what he did as Chancellor turned out, in hindsight, to be disastrous.

The head of the IMF has to deliver tough news about debt and deficits to heads of state around the world — and Brown simply has no credibility on that front. And his diplomatic skills leave something to be desired as well.

More generally, it would be crazy to appoint a European to head the IMF right now, just as the biggest sovereign crises in the world look set to take place in Europe. If the IMF itself wants credibility, it must appoint a non-European to provide independent leadership in an era when the IMF will surely be asked to help bail out troubled European sovereigns.

It long since time that the head of the IMF stopped being a European. If and when DSK leaves, let’s replace him with someone highly qualified — someone who wasn’t a partial cause of the last financial crisis — from elsewhere in the world. It doesn’t really matter where, just so long as it’s not Europe or the U.S. Gordon Brown should be disqualified on both counts.

After the Financial Crisis Inquiry Commission fractured into bipartisan incommensurability, I had little hope for the Senate’s report into the financial collapse. But my initial impression is that it’s a great piece of work — almost incredibly so, given that it’s got bipartisan support.

The whole 5.9 MB, 650-page report can be found here, and there are another 5,800 pages of appended documents which can be found from the links at the bottom of this PDF press release. Given the enormous amount of work which went into collating and writing this report, I have to say I’m disappointed in the way in which it doesn’t even have its own web page — this material should all be online, easily indexable and searchable.

I’m going to take my time with this report. But to get a flavor of its tone, take a look at the list of recommendations which are summarized on pages 12-14 (or pages 20-22 of the PDF). They basically take the armature of Dodd-Frank and toughen it up substantially: Carl Levin and his colleagues clearly reckon that Dodd-Frank is a good start, rather than a response which is sufficient in and of itself.

I’m particularly taken with the way in which the report sees the Volcker Rule as an ethical issue, rather than as a moral-hazard issue. As I recall, the stated justification for the Volcker Rule was that it’s ridiculous for the Federal Reserve to give valuable access to its discount window to banks who can just take that money and gamble it on proprietary trades. If people want to gamble, that’s fine, but they shouldn’t do so with taxpayer dollars.

But Levin’s report puts the Volcker Rule in a different light. It quotes Jeremy Grantham:

Proprietary trading by banks has become by degrees over recent years an egregious conflict of interest with their clients. Most if not all banks that prop trade now gather information from their institutional clients and exploit it. In complete contrast, 30 years ago, Goldman Sachs, for example, would never, ever have traded against its clients. How quaint that scrupulousness now seems. Indeed, from, say, 1935 to 1980, any banker who suggested such behavior would have been fired as both unprincipled and a threat to the partners’ money.

It then goes on to say that “the Dodd-Frank Act contains two conflict of interest prohibitions to restore the ethical bar against investment banks and other financial institutions profiting at the expense of their clients”.

The Volcker Rule has yet to be nailed down, of course — and there are serious questions over whether it will ever be enforceable. But if it’s written in a principle-based way, then I think this is a very useful principle to include. Is an investment bank profiting at the expense of its clients? If so, it’s probably violating the Volcker Rule.

In the case of something like the Abacus transaction, of course, the answer is clearly yes. Goldman Sachs said over and over again that IKB, one of its clients in that transaction, was “sophisticated”, as though that in and of itself absolved Goldman of any responsibility to the German bank. But a conflict-centered Volcker Rule would not include carve-outs for sophisticated clients, and might well prevent such transactions in future.

Levin’s report says hopefully that just such a rule can be “well implemented”, and would “protect market participants from the self-dealing that contributed to the financial crisis”. I’m not convinced. But it’s certainly worth a try.

The financial crisis? Regrettable, obviously. But let’s not rush to judgment here. Our financial system, pre-crisis, worked pretty well. Let’s not break it just because there was a crisis.

That’s the message being peddled by Alan Greenspan, predictably, sadly, and hilariously. And now he has a high-profile bedfellow from the other side of the aisle: Larry Summers, who was hanging out in Bretton Woods this weekend. Stephen Gandel Rana Foroohar summarizes:

One of the other big questions was what, if anything, Summers would have done differently in terms of regulating the banking system. The answer – not much. “I’ve been more cautious than many about constraining financial innovation,” he said, adding that he didn’t believe the financial crisis had its roots in “new-fangled financial instruments” but rather in a simple real estate bubble. Hmmm—tell that to Iceland. One thing Summers said that most of the crowd could agree with is that “anger and dissatisfaction with the financial system doesn’t constitute a [coherent regulatory] policy.”

There’s much more where that came from. This, for instance, is classic Larry:

It’s common in a moment like this to go into a general bash on economics. And everyone who hates economics because they don’t like markets in any context, or because they don’t do math, and so if you do a subject with math you have a bias towards believing that math is useless — everyone who doesn’t like economics has piled on at this moment to regard this crisis as a repudiation of economics. And I don’t think that’s right…

How we think about the design of regulatory institutions… the public choice school has taken that very seriously, but they have driven it relentlessly towards nihilism.

Larry’s keen on saying that “we’d make a serious mistake if we threw the baby out with the bathwater here.” But it seems to me that most people talking about babies and bathwater — and Summers is a prime example here — tend to be much more keen to protect their precious babies than they are constructive when it comes to the big questions of how to drain away the poisonous bathwater. In this case, Summers has gone so far as to launch ad hominem attacks on reformers, calling them angry people who hate economics and don’t do math. At one point in his talk, Summers explains that people who want to regulate the financial system are very much like the smart people who became communists and who went on to create the Soviet Union.

Today, of course, the angry people who hate economics and don’t do math are mostly on the other side of the debate, hanging out at Tea Party rallies and trying to dismantle just about any kind of government financial regulation. Meanwhile, it’s generally unhelpful to characterize the people asking important questions about regulatory capture as nihilists or communists.

Summers, of course, has made very good money for himself from financial innovation — over $5 million for one day’s work per week from hedge fund DE Shaw in 2008 alone. And he has lost vast amounts of other people’s money using financial innovation: $1 billion of Harvard’s cash, to be precise, lost in misadventures with things called forward-start interest rate swaps. (A trade which TED called “either rank hubris or free money for Wall Street swap desks.”)

So it seems to me that Summers should be demonstrating substantially more humility here on the subject of encouraging financial innovation, when countries which constrained it did pretty well during the crisis compared to those with a deregulatory philosophy — and when very wise minds like Paul Volcker are credibly arguing that financial innovation almost never adds real economic value. Instead, he seems to have decided that insofar as any reform is warranted, Dodd-Frank did everything that was necessary, and the basic philosophy from here on in should be much the same as it was pre-crisis: that at the margin, having too much regulatory activity is worse than having too little.

This is astonishing, given that Summers actually conceded, during his talk, that the biggest economic successes in the world over the past couple of decades, China foremost among them, owe essentially nothing of their success to financial innovation or deregulation.

In the Ireland vs Iceland debate, Summers is decidedly Irish: “I don’t think any country is likely to allow the complete implosion of its financial system,” he said, effectively saying that Iceland isn’t even a country, or perhaps simply forgetting that it exists.

This seems to me to be a recipe for boom and bust — where the fruits of the boom accrue to a tiny handful of financial engineers and executives, while the costs of the bust are borne by citizens who never really participated in the boom in the first place. if you’re a multimillionaire technocrat with tenure at Harvard, you don’t feel recessions in the way that people do who are losing their homes and jobs, and who are running out of unemployment insurance. It’s worth remembering that, when you dismiss such people as ignorant and uneducated folks who hate economics and math. Because if there’s one thing we’ve learned from this crisis, it’s that what’s good for Larry Summers is not necessarily good for the rest of us.

Update: Brad DeLong puts Summers’s quotes into broader context, and points out that it was actually Rana Foroohar writing for Time, not Stephen Gandel (whose name is on the RSS entry). There’s no doubt that Summers endorsed Dodd-Frank — but at the same time he does seem worried about some of the regulation which comes with it, and he evinces no particular appetite for further regulation on top of Dodd-Frank. I don’t think he’s calling for deregulation, necessarily. But he does seem opposed to having more regulation.

Ian McGugan has a good review of Bill Cohan’s huge new book on Goldman Sachs which includes an intriguing quote about how Bob Rubin “encouraged a culture of undisciplined risk taking” — something which goes directly against the reputation he’s spent many years cultivating. It comes from Chapter 15, which starts in the dangerous year of 1994 and which is full of juicy gossip about the very human frailties of the people running Goldman. Here’s more of it:

“For a long time he just sort of sat in his office,” one partner said of Corzine. “He would sit in his office breaking out in tears at various times while the firm was losing all this money.”…

As the losses in 1994 mounted, many partners became increasingly nervous that the firm was at risk… Some forty partners left Goldman at the end of 1994, the first time anything like that many partners had voted with their feet. “People resigned out of fear,” one partner said. “That should tell you something.”… Howard Silverstein, the partner in charge of Goldman’s Financial Institutions Group, left. “He was perceived as being an expert,” one partner on the Management Committee said. “And all he did was just do a simple calculation if this continues. You know: wiped out.”…

Paulson cut people, travel expenses, allowances for overseas living, and many of Goldman’s vaunted perks. He even cut back on the use of a corporate jet and recalled grueling overseas trips flying around Europe and Asia on commercial flights…

Goldman’s problems at that time weren’t only ones of cost and bad bets. A culture of undisciplined risk taking had built up over many years. “A lot of these practices were set up when [Rubin] was there,” one top partner said. “Okay? The lack of a risk committee, trusting individual partners, model-based analytics — that by God you can be smart and figure it all out — and letting traders become too important and being afraid to confront them if they’ve been big moneymakers. All that sort of stuff built up.” …

Aside from why Friedman had seemingly botched his departure, the other lingering question that remained among many of the Goldman partners was how Corzine could have emerged as the firm’s leader when he was leading the very division — fixed- income — that had lost hundreds of millions of dollars in 1994…

Goldman had selected as its new leader the very person who had just presided over a complete meltdown in Goldman’s fixed- income business and who, as a result, never fully had the trust and faith of the firm’s investment bankers. “That is one good question,” one Goldman trading partner said. “At a normal place, it would be discordant. You couldn’t imagine it. And I guess at this place, somehow you could.”

This, remember, is the world’s best investment bank. It’s worth bearing in mind when you see those eight-figure salaries and wonder whether they’re earned. And when you hear politicians bellyaching about the importance of keeping US banks “competitive” on the international stage. If this is competitive, it might well be best to just drop out of the competition all together.