Wednesday, December 9, 2009

Paul Volcker Body Slams World Bankers

It wasn’t the kind of genteel discussion the world’s highest-level bankers probably expected when a large group of them gathered at a posh Surrey country house hotel in England this week for a conference under the cosy auspices of the very friendly Wall Street Journal and billed as the “Future of Finance Initiative.”

I’ve covered this sort of conference in the past and, other than the topic, they’re all basically the same: A group of mostly-men, nearly all very white, all very wealthy, typically in their late 50s and early 60s, wearing very expensive suits sitting in a comfy room somewhere plush listening to what they want to hear. The meals are lavish, golf outings plentiful, the time convivial and private jets wait at a nearby strip to ferry them home when it’s over.

So they must have been dumbstruck when Paul Volcker, head of Pres. Obama’s Economic Recovery Advisory Board and former chair of the Federal Reserve, rose to his considerable full height to deliver one body slam after another. He scolded them like they were school boys who got caught being naughty and are sloughing off what they did as a harmless prank.

First, he took after the billions in salaries and bonuses bankers in the room are still hauling in, even in the wake of the financial sector meltdown that almost ruined the global economy. Volcker fumed, “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response … has been inadequate.”

The colour must have drained from the assembled faces and pink may not have had time to return to the well-fed cheeks when he delivered another round-house punch. He attacked the rise of incomprehensible products such as credit default swaps, the instrument that brought down AIG and Lehman Bros., and almost took a half-dozen major banks along with it.

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” Volcker slapped.

No Real Innovation

According to a report at TimesOn-Line, no one in the audience disputed him, instead arguing that “innovation” was a necessity for bankers while claiming re-regulating the sector would sound a death knell for any new clever products. A clearly irritated Volcker shot back that the biggest innovation in the banking industry over the past 20 years was the cash machine.

Why didn’t Pres. Obama deliver this speech when he spoke to bankers on Wall St. a few months ago? Better late than never, I suppose, and bankers are slightly more likely to pay attention to Volcker than to Obama as evidenced by the fact that several major US bank CEOs turned down the invitation to hear the president speak.

Volcker went on to note that financial services in the US increased its share of value to 6.5% from 2%, demanding to know whether it’s “a reflection of your financial innovation, or just a reflection of what you’re paid?”

A mighty sigh of relief must have filled the chamber when Volcker sat down. Little did they know that another chilling contribution from Sir Deryck Maughan, a partner in private equity firm Kohlberg Kravis Roberts and a former head of investment bank Salomon Bros., was awaiting them.

Sir Deryck took after bank’s risk management techniques, warning delegates that many of the flawed mathematical models underpinning the banks failed approaches are still being used, saying that the industry had not “faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors.”

He also questioned whether taxpayers should continue to underwrite many of those risks.

“There’s something wrong about large proprietary risks being taken at the risk of taxpayers,” he insisted.

Earlier Baroness Vadera, an adviser to the G20 and British Prime Minister Gordon Brown during the banking crisis — warned that European lenders had yet to acknowledge the scale of their losses and bad debts, something the Obama administration has been quietly admonishing senior government officials in France and Germany about. She said, “… some of the continental banks still have (serious) issues.”

She said she continues to have nightmares about how close the banking system came to total collapse last year.

Meanwhile, US multi-billionaire investor George Soros told the group the same thing he told Congress earlier this year: Credit default swaps should be banned. The billionaire investor likened them to buying life insurance and then giving someone a licence to shoot the insured person.

A Teachable Moment

It’s too bad that Volcker’s speech wasn’t webcast into the office of every Senator and member of Congress back in Washington. They needed to hear the message as much as did the bankers.

The fact is that while many Democrats in Congress struggle to come up with some kind of meaningful re-regulation of banks and the financial services sector generally, the very same people who were rebuked by Volcker at the conference flew home to the States to lobby on behalf of keeping the status quo. Helped by Republicans and “conservative” Democrats who receive more-than-generous campaign contributions from the very institutions that sunk the economy and millions of individuals, it’s likely that Volcker’s words will be ignored at best, forgotten at worst.

If that happens, then what Pres. Obama likes to call “a teachable moment” will be lost.