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The Wall Street Journal reports from Davos that anger directed at bankers from all sides was palpable, acknowledged Donald Moore, chairman of Morgan Stanley in Europe, as he stood alone reading some charts amidst the hubbub at the World Economic Forum's Global Village café. Asked which other groups of people have been similarly unpopular in Davos in the past, he said: "terrorists."
Until the financial crash, bankers were the big spenders at Davos, lavishly entertaining clients. At this year's 40th forum, they were fighting a rearguard action to influence the avalanche of controls set to descend on them soon.
The Journal reports that on the fringes of one of the many showy events that host the real business of Davos, a senior London-based investment banker offered this wager: Lloyd Blankfein, CEO of Goldman Sachs Group Inc., would be out within two years, he said, and he was prepared to back up his bet with millions of pounds.
Blankfein isn't the only target of antibanker anger. But he presides over the world's most successful investment bank. Goldman has emerged from the financial crisis stronger than ever. And Blankfein has been among the most outspoken public defenders of banks and he has paid his bankers well, though the level of bonuses was cut in the last round.
Asked about the wager over Blankfein, Goldman spokesman Lucas van Praag said: "It is preposterous that The Wall Street Journal would even consider publishing such effluent."
Expect “tough regulation” from the Obama Administration on financial services this spring, as well as an energy package. Addressing participants in a session on “The US Legislative Agenda: A Global Perspective,” US congressmen and senators confirmed that despite bipartisan differences, there is agreement that financial regulation is imperative.
“There is a degree of bipartisanship, but I don’t think it will make a difference,” said Barney Frank, US Congressman from Massachusetts (Democrat), 4th District; Chairman, Financial Services Committee. “I expect the President to be signing a financial reform package this spring.” Frank noted that the proposed regulatory reform would be done in a coordinated manner. “There will be tough regulation but it will be sufficiently coordinated so that it will not create regulatory arbitrage,” he added.
“We cannot have reform of the system driven by what each country sees that it needs for itself,” Dominique Strauss-Kahn, head of the International Monetary Fund, told the Davos forum on Saturday. “We need to have co-ordination -- we cannot afford to have different solutions in different parts of the world.”
“At the end, it’s an interdependent system,” said Josef Ackermann, head of Deutsche Bank, Germany's biggest.“If you lose the support of society, you are not going to achieve your corporate objectives.”
A day after the confirmation of Federal Reserve Chairman Ben Bernanke's reappointment for a second term, Barney Frank, chairman of the House Financial Services Committee, told CNBC Bernanke has not been weakened and that President Obama's bank plans are death for bad financial institutions.
Citi's CEO Vikram Pandit said the drive by President Barack Obama to derisk the banks was in line with Citi’s existing plans.
“We are aligned with [those] principles. We’ve asked ourselves: ‘does this part of the group serve our core clients?’ and if the answer was no, we’ve sold it or plan to sell it,” he said
Swiss national, Josef Ackermann, is currently head of the big banks' lobby group, the Institute of International Finance (IIF) and held meetings with fellow bankers to seek to agree a common position on regulation and lobbied policymakers on emerging plans. He told the Financial Times on Friday : “To help solve the too-big-to-fail problem I’m advocating a European rescue and resolution fund for banks. Of course, the capital for this fund would have to come from banks to a large degree.”
Bob Diamond, president of Barclays , also supported the idea of a global levy, which could see banks contribute tens or even hundreds of billions of dollars over a period of years.
“I think every G-20 (Group of Twenty) country would like to have an insurance scheme that would help cover the cost of any future bank failure,” he told the FT in Davos. “A co-ordinated global system is preferable to an unlevel playing field.”
“If you say that large is bad and we move to narrow banks the impact on jobs and the global economy will be very negative,” Diamond, who also heads Barclays Capital (BarCap), the group’s booming investment banking arm, told a forum panel, in Davos, in a criticism of President Obama's proposed Volcker Rule, which would impose restrictions on the activities of big banks.“I have seen no evidence to suggest that shrinking banks and making banks smaller and more narrow [will help].”
The Lex column in the FT suggested that the numbers do not support Diamond's case.
It says BarCap, a typical European investment bank, generated a 0.08 per cent return on its £1,600bn of assets in 2008. Risk-weight those assets, and the return was still only 0.6 per cent. Even over the past year it will deliver less than 1 per cent. By comparison, European retail banks usually generate more than 1.5 per cent. Far from being Masters of the Universe, then, investment bankers are busy harvesters of crumbs.
Lex says the main way investment banks generate profit is via their huge balance sheets -- BarCap’s is 80 per cent of Barclays’ total -- and leveraging the return. Even after netting off £500bn of derivatives, BarCap is still about 25 times leveraged. This means a large amount of risk is embedded in investment bank profits, even among the best run. It’s also why investment banks cannot countenance being smaller.
Lex says all this illuminates a truth at the heart of Obama’s proposals, and also why bonuses have spurred politicians to act. Investment bankers typically feel entitled to at least half of net income -- which comes before the tax take of a levy. In other words, they capture the largest part of a profit stream in a way that takes little account of the risk required to generate it.
We will all be losers if governments clamp down on markets too zealously, according to Deutsche Bank CEO Josef Ackermann. He discusses the issue with CNBC's Maria Bartiromo at the World Economic Forum:
On Friday, President Barack Obama's top economic adviser told bankers to put their customers first and insisted the US government would push through new banking reforms despite pressure from lobbyists.
"Our challenge now is to put in place a new system," said Lawrence Summers who added that the reforms wouldn't last forever but should be able to protect a generation from banking excesses.
Summers stressed: "we are going to put in place a set of reforms that will make a real difference."
He said banks should be aware of their obligations to their communities in making lending decisions and to contain risk, especially when they benefit from taxpayer support after getting into trouble. He also questioned the bank's "paying out bonuses in large quantities."
Summers criticised the current situation in Washington where there are three banking lobbyists per member of Congress, saying it raises questions when some of them are even pushing for financial institutions to be able to jack up credit card rates without letting customers know.
Banks must accept new constraints on their activities, he said.
"They need to think very carefully about their obligations to their customers," Summers said.
Jaime Caruana, general manager of the Basel-based Bank for International Settlements (BIS), on Saturday praised the progress in international attempts to put the sector on a safer footing, and said the new initiative of President Obama to re-regulate US banks won't necessarily derail global efforts to make the system more sound.
The BIS hosts the Basel Committee, which coordinates global banking regulators' efforts on drawing up minimum international standards for capital and liquidity. Last year, it proposed that banks in future put aside extra capital in good times, over and above the capital reserves they must normally hold. It also suggested forcing banks to hold a greater proportion of liquid assets, to tide them over sudden seizures in short-term funding.
In addition, the Financial Stability Board (FSB), has a broader mandate from the G-20 leading industrialised and emerging nations to review bank governance worldwide.
Caruana told Dow Jones Newswires that the FSB's recent suggestions on capital had largely addressed the issue of how to reconcile remuneration and dividends with healthy balance sheets, and he urged banks not to be "fixated" on short-term issues.
"Concentrate on where we want to be...in a world with a more resilient financial system with more quality capital, more liquidity and a good resolution system for banks that are too big to fail."
Caruana said he expected the advanced economies' governments to have high borrowing needs "for a long time." The ratio of debt to gross domestic product among the members of the Organization for Economic Cooperation and Development (OECD) will rise by 30 percentage points between 2007 and 2017, even assuming some fiscal consolidation that hasn't even been implemented yet, he said.
"Debt reduction is a very long-term process, and it has to be started as soon as possible," Caruana urged."Banks may want to take more long-term funding to deal with the extra long-term assets they are holding and the duration risk."
