Friday, December 9, 2011

BoE Financial Policy Committee member Robert Jenkins: Lessons in Lobbying

The Bank of England's Financial Policy Committee member Robert Jenkins gave a terrific speech titled Lessons in Lobbying.

Lobbyists are an important part of Wall Street's Opacity Protection Team.  As Mr. Jenkins discusses, they employ a number of tactics to defend the status quo.

One issue that Mr. Jenkins does not discuss, but needs to be mentioned is one of the skills that Wall Street is best known for is its ability to negotiate.  To be good at negotiating requires an ability to understand both what you want and what the other party wants or needs.

Lobbyists fulfill a role of addressing what the financial regulators want and need.

Before any regulation is enacted, the public is allowed to comment on it.  Who do you think provides the long, detailed comments?  Wall Street and its lobbyists.

For example, the Commission of European Bank Supervisors (CEBS) asked for public comments on the implementation of the 'know what you own' regulation for structured finance securities.  Of the 19 responses, only one did not come from a lobbyist or Wall Street firm.

Of the 19 responses, at least a dozen used 'cut and paste' for whole sections of their response - anyone who looked at these responses would know they were linked.

Did CEBS give any indication that they recognized that whole sections were 'cut and paste'.  Yes, they counted up the number of respondents to mention the issues in the 'cut and paste' section and declared it important.

My name is Robert Jenkins. Not long ago I was a lobbyist for the investment industry. 
I have now joined the ranks of the regulators I once tried to lobby. Specifically, I am a
member of the interim Financial Policy Committee of the Bank of England. The “FPC” is the focal point for macro-prudential policy. The objective is to identify, and to the extent possible mitigate, threats to the UK financial system. 
At the moment, you might say our priority is to protect the banks from the financial system,
and the financial system from the banks....
So before turning to the debate itself, allow me to pinch the podium to offer a few observations about short-termism (or more precisely short-sightedness) in lobbying. 
And for this, we need look no farther than the lobbying efforts of the banking industry in general and their campaign against banking reform in particular....
Ladies and gentlemen, up to a point, it has been amusing to watch big banking’s fight against financial reform. 
Actually, the banks fighting reform has proved extraordinarily expensive to the nations that host them.  By blocking utter transparency, the banks have driven up the cost of the financial crisis.

For example, imagine how much more efficient it would have been to recapitalize the banking system if bonuses paid to bankers were in stock until such time as the market value of the bank's assets exceeded the book value of its liabilities.
Remember their first response to the crisis? It was to deny the very need for reform. How dumb was that? They quickly regrouped. 
The next phase was to acknowledge that reform was necessary - but only if the rules could be agreed to globally. “Level playing field” was the rallying cry. “We will if they will.” 
This approach was less dumb – even clever. The lobby reasoned that global standards would be difficult to achieve and if achieved, would be set to the lowest common denominator of international consensus. 
The strategy was partially successful.  The standards agreed were modest. Initial proposals were watered down.  Best of all, the deadline for implementation was set for 2019 – a date so distant as to be irrelevant to any banker’s career and so extended as to be vulnerable to lots more lobbying.   
This strategy was very successful.  In the US, reform was significantly watered down as Treasury Secretary Geithner insisted that any shortcomings would be taken care of by the Basel capital and liquidity regulations.

If those regulations turn out to have been watered down to accommodate the lowest common denominator, then the strategy was a huge success.
But the champagne celebrations proved brief - because the markets accelerated the timetable. 
They have accelerated the timetable in two ways. 
First, the continued turmoil has reminded regulators of the need for banks to strengthen their balance sheets. Second, prospective bank creditors and shareholders have rediscovered risk adjusted returns and are now adjusting for the risks that banks have been taking and continue to take. 
Actually, the continued turmoil and the risks bank have been taking and continue to take are reminders of the need for utter transparency.  With utter transparency, banks have to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

With this data, market participants can assess the risk of each bank and adjust both the amount and pricing of their exposure to each bank.  The result is for the first time since the early 1930s market discipline is brought to the banking sector.
The banking lobby has responded by blaming Basel. Listen to the logic – albeit in my own words. 
“The Basel rules require safer banks. We were not supposed to have to be safer until 2019. Now because of you regulators, the markets want us to be safe now. To be safe now would require us to reduce our leverage. We can’t reduce our leverage by issuing equity because the markets are closed to new issuance. We can reduce leverage by curtailing intra-financial activity; or we can reduce leverage by reducing lending to the real economy. We will not do the former. We may well do the latter.  If we do, it will be all your fault.” 
In short the latest lobby tactic is to convince pundits, public and politicians that encouraging prudence too soon will hit the economy too hard. This is no longer amusing. This strategy is intellectually dishonest and potentially damaging. 
It is dishonest because it is untrue. Politicians could abandon Basel altogether and it would not change the market view of many banks. What you would achieve is further erosion of confidence in the banking system.
I am far from convinced that abandoning Basel would have any impact on confidence in the banking system.

Citing the NY Fed, this blog has shown that the only proven link between confidence in the banking system and financial stability is disclosure of all the useful, relevant information in an appropriate, timely manner.

What is entirely theoretical and has never been shown is the link between high capital and liquidity requirements and confidence in the banking system and financial stability.
And it is potentially damaging because it promotes fear for an economy which the banks are there to serve and from which they draw their livelihood. 
For the truth is that banks can strengthen their balance sheets without harming the economy. 
They can do so by cutting bonuses, by curtailing intra-financial risk-taking and by raising term debt and equity. The markets are not closed to viable banks. Their executives are closed to
the need to pay the price necessary to the raise the funds needed. For the sound, well run financial enterprise the money is there. It is just not there at yesterday’s price. Indeed it may well be that today’s prices discount to a large extent the need for more equity which the market requires and expects but which many bankers refuse to raise. 
Who would invest in a bank today without utter transparency and the ability to assess its risk?  The Bank of England's Andy Haldane refers to banks as 'black boxes'.  The last time the market invested in black boxes was structured finance securities.  We know how that movie ended.
Thus a profession which should stand for integrity and prudence now supports a lobbying strategy that exploits misunderstanding and fear.   
I know that not all bankers agree with these tactics. They should stand up and distance themselves quickly. For in pursuing its short-sighted approach the banking lobby is
unwittingly making the case for more intervention in an industry which refuses to reform. 
As a former lobbyist I understand that lobbies are there to lobby; but I also know that leaders are there to lead. Bank lobbies are winning the battles and losing the war. As for bank leaders, they need to lobby less and lead a lot more.  
What about the idea that regulators are there to lead?

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