The Wall Street Journal-20080128-breakingviews-com - Financial Insight- Is Anybody in Charge Here-- Repeated Shocks Show A Credibility Vacuum With Regulators and Banks
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breakingviews.com / Financial Insight: Is Anybody in Charge Here?; Repeated Shocks Show A Credibility Vacuum With Regulators and Banks
Full Text (701 words)The markets have breathed a huge collective sigh of relief. Despite the 4.9 billion euros ($7.2 billion) fraud unveiled by Societe Generale, global stock prices ended the week flat. But, the situation is still fragile.
The fact that it took five days for information about the fraud to pass from France to the Federal Reserve has exposed the lack of effective communication among global financial authorities. During those critical days, the Fed cut rates by 0.75 percentage point, using up a lot of its ammo.
What is more, the envisaged rescue of the U.S. bond insurers -- which have enabled such borrowers as municipal authorities to issue triple-A bonds -- isn't a done deal. If the insurers fail to keep their own triple-A corporate credit ratings, the game of skittles will start again.
Even if the bond insurers are rescued, the underlying problem of too much debt won't vanish. The U.S., United Kingdom and many other developed economies gorged themselves on credit in the good times. Digesting these excesses will be complex. It won't just create a drag on global growth. On the way, there will be more shocks. But who will ride to the rescue, given the credibility vacuum both in the banking industry and within the monetary, regulatory and political apparatus?
Look first at the banks. Their credibility has been savaged by their multibillion-dollar losses. Some -- such as Citigroup and Merrill Lynch -- have replaced their bosses. That is good. But the new chiefs, Vikram Pandit and John Thain, are going to be engaged in navel-gazing for the next few months. Other banks -- such as SocGen, UBS and Bear Stearns -- have kept their tarnished chairmen despite suffering financial cardiac arrests. They have little capacity to lead the industry.
That leaves those banks that have come through the crisis relatively unscathed, such as Goldman Sachs Group, Deutsche Bank and J.P. Morgan Chase. To date, they have shown little desire to speak for the industry. True, Deutsche Bank's Josef Ackermann has told his peers to come clean on their trading losses. But the opacity of their balance sheets is perhaps not the industry's biggest problem.
The much bigger question is whether Wall Street has run amok and, as a result, is dragging down the rest of the economy. Nicolas Sarkozy, France's president, hinted as much this past weekend in India when he said the industry was "out of its mind."
The inability of the industry's leaders to appreciate the obscenity of paying record aggregate bonuses at such a time is disturbing. Arguments about how individual departments that performed well shouldn't be made to pay for the errors of their subprime traders cut only a little ice. If Wall Street can't overhaul itself, it risks a backlash that could end up stifling the industry with red tape.
Now look at financial officialdom. Ben Bernanke's Fed has never had as much authority as Alan Greenspan's. It has seemed panicked by the markets. Meanwhile, Henry Paulson, the Treasury secretary, has seen his initiatives run into a swamp. For example, his "super-SIV" plan for helping banks unload their subprime exposures came to naught. This is unsurprising, given that President Bush's power is diminishing as his term in office nears an end, and there won't be a new face in the White House for nearly a year. But it is hardly comforting.
Across the Atlantic Ocean, things are no better. The credibility of British authorities has been damaged by their incapacity to resolve the Northern Rock fiasco rapidly. The European Central Bank had seemed above reproach, but the SocGen fraud has undermined the euro-zone authorities, too. Either the Banque de France didn't tell the ECB promptly or the ECB didn't tell the Fed. If they couldn't communicate effectively this time, what is the guarantee that they will or can do better next time?
Officials have struggled to cope with the forest fires that have flared up since August. With heavy debts still weighing down the financial system, more flames can be expected. If there are several simultaneously, policy mistakes are practically guaranteed -- potentially making bad situations even worse.
-- Hugo Dixon
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This column is by breakingviews.com, an online financial commentary site.
