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Financial summit
1-SUMMARY
2-RESTORING SOLVENCY
3-REGULATORY
4-CONCLUSION
G20-FINANCIAL SUMMIT
In a previous survey, the Free World Academy, acting as a global advisor, proposed emergency solutions for the G20 financial summit on November 15, which represents countries that account for 85% of the world’s economy: Go to www.freeworldacademy.com/globalleader/financialorder.htm
The present article systematically compares our proposals with the uneven results of the meeting (in italic). Globally, we may say that the Summit ignored our main proposal (the letter of guarantee for restoring the banking solvency). On the other hand, the G20 leaders partly adopted our five new regulatory requirements.
In their closing joint statement, the G20 set out a road map and assigned the work to experts. At the next meeting for April 30, the G20 leaders will debate specific proposals developed by those experts. In fact, the main accomplishment is the commitment to free market principles reported as follow in the joint closing statement:
We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. These principles are essential to economic growth and prosperity and have lifted millions out of poverty, and have significantly raised the global standard of living. Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.
We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.
It is a success to have so different countries such as the US, China, India, Brazil and Russia altogether committed to free market principles. Unfortunately, this broad declaration was out of the subject and the main financial decisions were below the expectations. As a result, the financial markets were disappointed.
Moreover, the critical importance of rejecting protectionism could be challenged by the expected bankruptcy of automakers.
1-SUMMARY 2-RESTORING SOLVENCY 3-REGULATORY 4-CONCLUSION
The actual problem is the potential insolvency of financial institutions. Just as lenders of last resort addressed the problem of illiquidity, an insurer of last resort, that is to say the State, can only solve the potential banking insolvency.
21- Our proposal: a letter of guarantee
The first task of the conference should be to list the 50 major banks, which cannot be allowed to fail. The delegates should write a common and unique letter of guarantee stating that any creditor’s losses regarding these banks should be fully insured by all the participating states. The letter would cover all the creditors, including the depositors, excepting the shareholders, the creditors not signaled in the financial statements and the creditors coming from tax havens (See below)
This solution does not need immediate cash from the taxpayers and would immediately restore both the underlying solvency of the major banks and the confidence in the financial markets. Its effectiveness needs ten minutes: the time of writing the letter.
22-Results
The summit did not bring any guideline to restore the bank solvency. The closing joint statement only recalls the measures already taken on a national basis and expresses some vague outlines confusing financial and economic measures such as the fiscal policy to stimulate domestic demand:
We have taken strong and significant actions to date to stimulate our economies, provide liquidity, strengthen the capital of financial institutions, protect savings and deposits, address regulatory deficiencies, unfreeze credit markets, and are working to ensure that international financial institutions (IFIs) can provide critical support for the global economy.
As immediate steps to achieve these objectives, as well as to address longer-term challenges, we will:
Continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system. Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions. Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.
23-Consequences
As we said in our previous survey, the measures already taken on a national basis are not effective. For example, Henry Paulson stated that it was impossible to buy troubled assets that could not be sold in the future. He said that the money would be used to raise the banks equities with government participation. Finally, he decided to suspend any payment before the time Obama is in office! All these uncertainties are pushing the financial markets downward and the G20 summit did not bring any new solution.
1-SUMMARY 2-RESTORING SOLVENCY 3-REGULATORY 4-CONCLUSION
Our previous survey proposed five express measures with immediate effectiveness
31-A unique task force of supervisors
311- Our proposals
The 50 major banks benefiting of the government guarantee should be subjected to close regulations. The conference should push for a single supervisor for the 50 major banks. Instead of created a new bureaucracy, we suggest a unique task force through a consortium of existing institutions under the monitoring of the IMF. Moreover, this task force will appoint a controller in each major bank. The controller will have extended investigations powers and a right of veto on the decision of the board and the heads of each bank.
The task force of supervisor will impose a standardized financial statement whatever the country including the disclosure of all off balance items.
312-Results
Nicolas Sarkozy favored our proposal for an international regulatory agency with cross-border authority. The Bush administration maintained the responsibility of national regulators. However, the declaration approved the “supervisory colleges” to improve global oversight of financial institutions. The specifics would not be known until April 2009.
Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability.
Immediate Actions by March 31, 2009: Supervisors should collaborate to establish supervisory colleges for all major cross-border financial institutions, as part of efforts to strengthen the surveillance of cross-border firms. Major global banks should meet regularly with their supervisory college for comprehensive discussions of the firm's activities and assessment of the risks it faces.
We may consider that our proposal was partly adopted
32-Containment of tax havens
321-Our proposal
The conference should impose the 50 major banks to close all their operations with the tax havens.
322-Results
According to the declaration, tax havens are designated as “uncooperative and non-transparent jurisdictions”:
Our national and regional authorities should work together to enhance regulatory cooperation between jurisdictions on a regional and international level. National and regional authorities should work to promote information sharing about domestic and cross-border threats to market stability and ensure that national (or regional, where applicable) legal provisions are adequate to address these threats. National and regional authorities should also review business conduct rules to protect markets and investors, especially against market manipulation and fraud and strengthen their cross-border cooperation to protect the international financial system from illicit actors. In case of misconduct, there should be an appropriate sanctions regime.
Medium -term actions : National and regional authorities should implement national and international measures that protect the global financial system from uncooperative and non-transparent jurisdictions that pose risks of illicit financial activity. The Financial Action Task Force should continue its important work against money laundering and terrorist financing, and we support the efforts of the World Bank - UN Stolen Asset Recovery (Star) Initiative. Tax authorities, drawing upon the work of relevant bodies such as the Organization for Economic Cooperation and Development (OECD), should continue efforts to promote tax information exchange. Lack of transparency and a failure to exchange tax information should be vigorously addressed.
Unfortunately, most of these measures have already been put in place with very few results. However, the only fact to mention tax havens represents a novelty and a progress.
33-Ban on loans to hedge funds.
331-Our proposal
The conference should order to the major banks to suppress and not renew any credit line for hedge funds .
332-Results
The statement did not single out hedge funds as needing regulation: which Germany has long advocated. However, the statement suggests that this issue would be addressed later.
Private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices. Finance Ministers should assess the adequacy of these proposals, drawing upon the analysis of regulators, the expanded FSF, and other relevant bodies.
34- Bring transparency in the derivative markets .
341-Our proposal
The conference should decide that the major banks have immediately to include the exposure of all the derivatives into their balances sheets. The conference should also institute a central clearinghouse for the derivatives market.
342-Results
The leaders took steps toward developing regulating credit derivatives with a substantive proposal about a clearinghouse for the $33 trillion market in credit default swaps. Indeed, we may consider that our proposal was partly adopted:
Strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks, including by improving the infrastructure of over-the-counter markets; The appropriate bodies should review the differentiated nature of regulation in the banking, securities, and insurance sectors and provide a report outlining the issue and making recommendations on needed improvements. A review of the scope of financial regulation, with a special emphasis on institutions, instruments, and markets that are currently unregulated, along with ensuring that all systemically-important institutions are appropriately regulated, should also be undertaken
Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes.
On the other hand, the G20 proposed that the Financial Accounting Standards Board (FASB) should work towards a single accounting standard. As we said in our previous survey, it is fruitless to decide some measures that would take effect within months or years such as the reform of the fair value accounting method. Moreover, the Summit recommended that Credit rating agencies should be better oversight. In fact, considering their scandalous behavior, the best guess was to empower the central banks or the IMF in establishing all the credit notations!
35- Enforce some ethical laws .
351-Our proposal
The conference should adopt the principle to curb all the executives’ benefits in the 50 major banks .
352-Results
The summit stated that : the Financial institutions should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking.
Thanks to regulatory action, this proposal sounds right.
1-SUMMARY 2-RESTORING SOLVENCY 3-REGULATORY 4-CONCLUSION
The G20 proposals provided with some broad lines but did not deal with emergency solutions. Sure, Nicolas Sarkozy and Gordon Brown knew the Free World Academy's proposals and were eager to enforce them. Unfortunately, President Bush was too much influenced by some out dated think tanks such as Hudson, American Enterprise Institute, Cato, Heritage, Adamsmith and so on. Since the beginning of the financial crisis, these think tanks have displayed a wrong analysis about its origins. They have discredited themselves by claiming “To do nothing”! Indeed, the Free World Academy is the only worldwide think tank in accordance with the new era of the globalization.
G20 leaders will meet again by 30 April 2009, to review progress. We only hope that the financial crisis will be stabilized before the time the G-20 meets again.
1-SUMMARY 2-RESTORING SOLVENCY 3-REGULATORY 4-CONCLUSION
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