Regulators (and public) are missing the point

Global Solution?
UK Prime Minister Gordon Brown talked a lot about global problem and global solution, but have they solved it now?

Today, G20 Leaders announced a deal, which is very impressive by the standards of their previous meetings. They have pledged an extra $750bn to IMF, $250bn to boost the world trade, and $100bn for the poorest nations. They also put forward to introduce a new and stricter financial regulations at both internaional and domestic levels.

Of course, the world leaders didn't fail to talk about bankers' pay and bonuses and tax havens, as they have been a hot topic, especially in US and UK. But I think the regulators are missing the point, largely because of an immense pressure from public. Tax havens and bankers' pay and bonuses are not the source of the global meltdown, and even if it were it is insignificant. Yes, it is disgusting to take millions of dollars home, while taxpayers have to bail-out your bank. But, it is small, let me give you an example: AIG, the once-mighty-giant-insurer of the world, now the biggest loser in history (breaking the record loss of $98.7bn made by AOL Time Warner in 2002). Its loss for the last quarter of 2008 amounted to more than $60bn and it paid out bonuses of worth $218 million since accepting the government bail-out in September 2008. I don't think it is right for the top executives to take bonuses when they are responsible for the group as a whole, but individuals deserve to be paid bonuses for the long extra hours they work for, especially if their divisions are turning a good profit.
Even if all the bonuses were to be returned, the group's loss remains at more than $60bn, and possibly those profitable divisions will no longer be profitable as the individuals may leave the group.
From what I see on the report, there is $12bn interest expense, to me that's a concern and not $218mn paid bonuses. Why should we spending all our times on a single lost dollar out of almost lost $300? The same goes with tax havens, the "missing" money is not as huge as many believes, probably smaller than "forgotten" taxes as the US Treasury Secratary himself had forgotten to pay more than $40'000 in taxes (but before taking the job).

Then, there are bigger problems with the deal: now they want early warnings from IMF about macro-economic and financial risks as they have not been told about the risks of possible breakdown in the banking and financial sector. Also authorites want to be able to identify macro-prudential risks, to me that is a big big question mark, HOW? I am guessing they will set up a group of so-called professionals or experts to calculate those risks, which will lead certainly fail without a doubt, provided those professionals will be using their-good-old models, which have worked in good times, but failed every now and then. But I applause for the extension of regulatory sight on rating agencies (as well as hedge funds).

Volume 09 (2009, Week 13)

G20 Leaders agree on $1.1 trillion deal
Is it over for all the gloom and doom?



For the past 3 weeks, the leaders and press as well as investors have been very optimistic despite some further bad economic news, for example, further fall in the industrial output of Japan, the second largest economy in the world. Last Monday (23rd March), the US Secretary Timothy Geithner announced a plan to buy toxic assets of up to $1 trillion, so the the mess of bankers can be cleaned. As a result, stock markets around the world have been on a bull-ish mood.

Today (2nd April), investors cheered once again on the news that G20 Leaders have agreed on a dreal worth $1.1 trillion. It was uncertain, whether G20 meeting would result in any significant agreement, and earlier this week French Finance Minister Christine Lagarde was threatening to walk away from the table if its demand for stricter financial regulations are met. While, German Chancellor Angela Merkel was not prepared for any more fiscal stimulus package as Germans protested that "We will not pay for your mess", meaning it was not Germany who got the world into economic crisis, but US and UK.

As it stands for now, all the fiscal package is worth $5 trillion till the end of next year, according to BBC estimate. That is equal to 5% of the world GDP on annual base (or 3.2% if we use higher approximation for the World GDP: $78 trillion by CIA). However, by Bloomberg estimate, US alone have pledged a stimulus package of worth $11.6 trillion, which is more than 4 fifth of its own entire annual output and more than one seventh of the world annual output. Whichever way you look at it, all these stimulus packages are absolutely enormous, and one has to ask all these money because of 2 dozen huge international banks difficulties? I ask if all these money was available, could not they have spent it on developing nations before, so they could have got developed and got richer and the world economy could have been ridden on the back of those-could-have-been-new-middle-class consumption.

Even though not a head of state, Dominique Strauss-Kahn, the head of IMF saw his importance and influence increased as a result of G20 deal. IMF is so-much-hated amongst developing nations, especially among Asian nations and less so by Latin American nations, yet now its reserve is tripled to $750bn and has a new "overdraft facility" worth $250bn in its own currency, Special Drawing Rights. However, this currency is not what Chinese were hoping, when its chief economists called for a new world reserve currency. At the moment, China has little choice, but to buy Treasury Bonds as US dollar is the world reserve currency and it is desperate to get out of that position and keep providing the money US so much needs now.

As I am not a fan of IMF, I am not really happy that $750bn of the deal actually goes to under the control of IMF. Another $250bn is pledged to boost the world trade, although I am not sure exactly how they are going to spend it and how they are going to achieve it. The only one, yet small, part of the deal, which may actually bring fruit in the long term is extra $100bn for international development banks to be lent to the poorest nations.

That's all for the quantity of the deal. Now, to the non-quantifiable part of the deal - the part French and German leaders were interested in the most. I quote from the statement:

We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:

· to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;

· that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;

· to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;

· to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;

· to endorse and implement the FSF's tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;

· to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;

· to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;

· to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and

· to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.

It's quite an impressive list and it seems after all regulators have heard the voice of many critics.