Still no sign of agreement on financial regulation by rich countries

Some three years after the crisis, there is still no consensus among the industrialised countries on financial reform, says Julio Godoy.

MORE than three years after the start of the financial crisis that brought the world economy to the brink of collapse, the governments of industrialised countries are still struggling to reach a consensus on the minimum regulation required for the operations of international banks and hedge funds.

This was confirmed just ahead of the meeting of the Group of Twenty (G20) in Toronto in June, a summit of the world's largest economies, including several developing countries like India, Brazil and Indonesia, and the European Union (EU).

Even though the EU agreed to propose at the summit the introduction of a tax on international financial transactions, also called the Tobin tax, this scheme was not approved at the meeting.

Canadian minister of finance Jim Flaherty told the press ahead of the meeting: 'I can assure you that the majority of the G20 is opposed to this tax.'

The German finance minister, Wolfgang Schaeuble, also excluded the possibility of Germany alone raising the tax. At a press conference in Berlin in late June, he contended that the EU collectively must raise the tax.

The German government is the main supporter of the Tobin tax in Europe. Most European countries except Britain support a tax on financial transactions. Britain opposes it vehemently, arguing that the tax would raise costs of financial operations, compelling operators to move their base of operation elsewhere.

The tax, as originally suggested by Nobel laureate economist James Tobin in 1972, was intended to put a penalty on short-term financial round-trip speculative transactions in foreign currencies. In its most modern version, a very small levy on all international financial transactions is supposed to persuade investment and hedge funds to reduce their speculative operations, which are blamed for the global financial crisis.

The lack of unity among the industrialised countries on the Tobin tax is mirrored in all other areas of international financial transactions. Stern regulations, experts say, are necessary to introduce transparency in the operations of investment banks and funds. But despite this, no regulations have been put into practice.

For instance, at the previous G20 summit in Pittsburgh a year ago, industrialised nations promised to 'make sure our regulatory system for banks and other financial firms reins in the excesses that led to the crisis. Where reckless behaviour and a lack of responsibility led to crisis, we will not allow a return to banking as usual.'

The G20 leaders also promised then 'to implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking, to improve the over-the-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take.'

But industrialised countries did not live up to these promises.

Investment banks in all the industrialised countries are again paying high dividends and extremely high bonuses to their shareholders and brokers, and independent investigations have shown that several international investment banks and funds are using illegal schemes in their operations.

The most common of them is frontrunning, an illegal stock exchange scheme in which a stockbroker operator executes orders on a security for its own account by taking advantage of advance knowledge of pending orders from its own customers.

Goldman Sachs, the world's leading investment fund, has repeatedly faced accusations of practising frontrunning and charges of deceiving its customers. Just in mid-July, it agreed to pay a penalty worth $550 million to avoid prosecution by the US financial authorities.

Last May, Deutsche Bank's CEO Josef Ackermann announced an equity return before taxes of 25% for the company for 2010. Such a return is unthinkable, analysts say, unless the bank engages in highly speculative transactions which involve major risks.

With the help of modern computer software, analysts say, investment banks and funds are able to carry out such frontrunning transactions within fractions of a second, thus duping their own customers.

In addition, there is a broad consensus among leading economists on the need to introduce five general operational rules into the financial markets.

The first two rules concern the operations of banks. 'Banks must operate only as saving banks,' Gerhard Leithaeuser, professor of international finance at the university of Bremen, near Berlin, told Inter Press Service (IPS). 'Or they must otherwise increase their own capital in such a way that they can pay for their own bailout in case of a collapse of their risky investments.'

A similar rule, he says, must be introduced for investment banks. 'It (is unacceptable to use) taxpayers' money again to rescue investment banks and funds from their own folly,' Leithaeuser said. Such bailouts lead to reckless investment behaviour of financial operators, who take it for granted that governments will bail them out in case of financial collapse.

A third rule should be the state approval of all financial products to reduce the scope of operations of investment banks and funds in order to forbid the most risky derivative instruments, such as credit default swaps, and short selling. Conversely, new regulations should only allow those financial products which correspond to transactions with real goods, experts say.

The fourth rule focuses on controlling the operations of hedge funds and tax havens, Sven Giegold, German member of the European Parliament, told IPS.

'State control upon hedge funds should go as far as to create an operating licence for them, based upon a strict leverage cap to reduce their ability to operate with borrowed money, tough limits to incentives for their brokers, and absolute transparency in the funds' operations,' said Giegold, who is also the founding member of the ATTAC group in Germany.

ATTAC has been promoting the introduction of a Tobin tax for speculative financial transactions since the late 1990s.

The fifth rule, analysts say, should aim at regulating the private rating agencies, also considered responsible for the financial crisis as a result of their wrong positive assessment of junk bonds and credits throughout the last decade. - IPS

*Third World Resurgence No. 238/239, June-July 2010, pp 32-33