NEWSMAKERS

• Sheikh Nasser calls Greenspan’s advice “nonsensical”
• Turf war over sovereign wealth
• SWF roundup
• Sovereign Wealth – in London next week
• Politics as usual for Fed nominees
• Zhou to stay?
• Muto waits
• RBS Reserve Management Trends 2008
• A man’s world
• Code of conduct for ex-governors (or, how to avoid another Greenspan?)
• Mervyn King sent in to bat again
• - but has more work to do
• A sortie from Prague Castle
• Search for Indonesian governor
• Don't we all love a good old crisis?
• Why Volcker backs Obama
• Jesus for US treasury secretary?
• Monetarists get their teeth into Bernanke
• Will Bernanke be re-appointed?
• Quote of the week
  
  

Sheikh Nasser calls Greenspan’s advice “nonsensical”

The United Arab Emirates will keep the dirham pegged to the dollar despite calls from former Fed chairman, Alan Greenspan, to float its currency.

Sultan Bin Nasser Al-Suwaidi, the governor of the Central Bank of the United Arab Emirates (UAE), told Al-Ittihad, a local newspaper, that such a decision was nonsensical.

“The dollar is on its way to strengthening and it is not logical to speak now of de-pegging,” he said, adding that the peg had benefited the local economy, specifically the manufacturing and tourist industries.

page top^

Turf war over sovereign wealth

There is nothing less edifying that watching the international institutions, which ostensibly aim at promoting international cooperation, squabbling among each other for territory. That is what is happening over sovereign wealth funds (SWFs). Everybody wants a piece of the action. Everybody wants to be “coordinating” efforts – code for top dog.

What happens is this. A new challenge or theme comes along – recycling of oil money in the 1970s, the debt crisis of the 1980s, the current liquidity crisis and half a dozen major international crises in between. There is always a period when everything freezes up – while the international bureaucrats wait to see if this is something they should pounce on, or something best left to others.

They all want something to do. But they are all anxious not to put a foot wrong. And all the top bureaucrats are naturally trained to watch for the telltale signs that the new topic is here to stay. So naturally they always all decide to get in on the same act at the same time. No wonder it gets crowded. No wonder action is usually too late.

The EU and IMF both think they should be at the forefront of the effort to supervise sovereign wealth fund investments. Even the poor old OECD is saying: “Me too!” The European Commission has already rushed out its proposals for a voluntary code of conduct on Wednesday 27 February, and openly says it wants to be the “driving force furthering international work” on SWFs.

Oh really? The IMF and OECD have now secured mandates from the G7 to work on guidelines. According to Masood Ahmed, the Fund’s director of external relations, the Fund’s board will discuss a preliminary paper this month and prepare a draft set of best practices ahead of the annual meetings of the Fund and the World Bank in October.

Conscious of being left behind, the EU is moving much faster – the bloc’s finance ministers might even endorse the draft code during the Spring Council, held on 13-14 March.

However, not to be outdone, US lawmakers are said to be “exasperated” with the slow pace of progress at the international level and are threatening to come up with guidelines of their own.

Meanwhile Warren Buffet (among many others) has said there is absolutely nothing to worry about in the growth of the SWFs. He is surely right, but one fears it is too late to stop the international bodies dancing like elephants around this subject for years to come.

PS. One topic everybody shuns like the plague is anti money laundering. Regulators, central bankers and international bodies the world over go to great lengths to avoid taking on any more responsibility for policing this – it is one of those subjects with no upside and large downside political risks. No thank you. Give me SWFs any day.

page top^

Sovereign Wealth – in London next week

Central Banking's conference on the emerging force in international finance takes place in London, in just over a week on 13-14 March. Speakers include Knut Kjaer, formerly of Norges Bank Investment Management, Sir John Gieve, Bank of England, Konstantin Korishchenko, Central Bank of the Russian Federation, Toshio Idesawa, Bank of Japan and Khil-Jaeuk, Korea Investment Corporation. Full details of the programme can be found here: www.sovereign-wealth.com/

Politics as usual for Fed nominees

It’s been nine months since Betsy Duke and Larry Klane were nominated to fill the two empty seats on the Board of Governors of the Federal Reserve. Yet, at what is a critical juncture for Fed, the appointment process has stalled in the Senate Banking Committee.

To make matters worse, Randall Kroszner’s term has expired. Although Governor Kroszner can continue to serve on the Board – where he has been one of Chairman Bernanke’s key “point men” on mortgage finance, securitisation and off-balance-sheet activities – he too awaits confirmation of what will be a 14-year term.

At a time when Bernanke is issuing frank warnings that there “will probably be some bank failures” amongst “small and in many cases de novo banks that are heavily invested in real estate in localities where prices have fallen”, the Board has much to gain from Klane and Duke’s experience and inside knowledge.

Both are described as “Virginia-based community bankers”. Duke’s most recent job has been chief operating officer of TowneBank, while Klane is an executive of Capital One Financial. Both banks are heavily reliant on regionalised mortgage finance and consumer credit products – exactly the kind of outfits Bernanke apparently has his reservations over.

The Senate committee held hearings on all three nominations in August last year, but the process has ground to a halt in the wake of the subprime fiasco. Chris Dodd, the committee’s chairman, made his intentions clear in October: “The Fed nominations are not a high priority at this point. We've got some legislative stuff to get out.”

A likely cause for the delay is that Dodd found himself on the campaign trail in the latter half of last year, having joined the race for the Democratic ticket. One might have hoped that the senator’s attention would return to the urgent matters before the banking committee after he threw the towel in on 3 January.

But alas, he now finds himself back on the campaign trail in Texas – this time for Barack Obama, who Dodd endorsed on 26 February.

Some more Machiavellian rumours doing the rounds in Washington is that Dodd is merely playing for time in the hope that a Democratic candidate will be elected president in November this year, and will be able to choose his or her own nominees.

page top^

Zhou to stay?

Zhou Xiaochuan, the governor of the People’s Bank of China, could remain governor of the central bank according to local media reports.

The National People’s Congress, which announces key personnel decisions, meets in early March, and the current international financial tensions are thought to reinforce the need for an experienced hand at the helm of the central bank (Zhou has led the bank since 2003). Zhou has won plaudits in the west also for being behind the push to let the renminbi appreciate more quickly.

page top^

page top^

A man’s world

A few years ago in the UK there was a famous inquiry into the Metropolitan Police following the murder of a black teenager – Stephen Lawrence. It concluded by borrowing a phrase first coined by the US Black Panthers in the 1960s, accusing the police of “institutional racism”.

Nobody can fairly accuse the central banking community of being institutionally racist. Although a few years ago one governor commented to Newsmakers that the seating arrangements at BIS meetings and social occasions reminded him of colonial times, that was doubtless more in jest than anything else.

There would be much more substance in the charge that central banks are institutionally sexist. Of course women play a key role at many management levels in most central banks (with the Bank of Japan being a notable exception). However, at the most senior level they are still few and far between.

At the latest count, only ten central banks (6% of the total) have female governors. The roll of honour includes the Bahamas, Barbados, Botswana, El Salvador, Honduras, Malaysia, Pakistan, Thailand, Tonga and Guatemala.

In fact the trend if anything is downward; the peak year for women governors was 2004.

If one factors in the chaps who run the eurozone national central banks, the male percentage rises even further: of the 21 central bankers that make up the ECB’s governing council, Gertrude Tumpel-Gugerell is the only female and the 27-strong general council is an entirely all-male affair.

The Fed is doing somewhat better in the equality stakes with Sandra Pianalto and Janet Yellen heading the federal reserve banks of Cleveland and San Francisco, respectively; indeed, Ms Pianalto has a vote on the rate-setting FOMC this year.

page top^

Code of conduct for ex-governors (or, how to avoid another Greenspan?)

There is a move afoot, sponsored by Newsmakers, to require former governors of central banks to abide by a code of conduct. This would keep their lips zipped up, after retirement from their central bank, until the final whistle.

This initiative is gaining strong support from central bankers in countries on Alan Greenspan’s itinerary. Greenspan has watched his reputation slide, not only because more and more people blame him at least partly for creating the conditions for the current market turbulence, but also because he keeps commenting unhelpfully on current sensitive policy issues.

This is just not done. No other former chairman of the Federal Reserve has ever indulged himself in this way, and in Europe such a thing is (one hopes) unthinkable.

The story goes that a recent visitor to the Federal Reserve in Washington was spotted carrying a copy of Greenspan’s tome, The Age of Turbulence, through security and was taken aside: “I wouldn’t bring that in here if I were you, Sir”, he was told.

Newsmakers has pointed out before that governors of leading central banks who mistakenly thought they were close to him get hardly a mention in The Age of Turbulence, so anxious is Greenspan to associate himself with presidents and prime ministers.

But a reader has pointed out that even his former Fed colleagues get pretty short shrift, as a glance at the index will confirm.

page top^

Mervyn King sent in to bat again

Talking of how reputations rise and fall, Mervyn King was obviously delighted to be reappointed for another term – it would have been awful to become governor, do well, and then be knocked off your perch by a Northern Rock.

He had to fight for it, and he did. After some weeks of invisibility during the early stages of the Northern Crock crisis, a period which saw the Bank of England’s reputation crumble, along with that of the City of London, the Financial Services Authority and Gordon Brown (who put the flawed arrangements for supervision in place back in 1997), Mervyn suddenly put it all together, and started to hit fours and sixes all over the ground. He saw off most of his critics, except for a few dyspeptic academics and sour City folk who think the Bank owes them a living. He then duly got his second term. Sorry, innings.

page top^

- but has more work to do

Since then Newsmakers senses the pendulum has started to swing yet again. At recent City meetings, the Bank has come in for a pummeling from normally level-headed people. It is a pity that the Bank often seems unable or unwilling put in anybody to bat for it at such occasions.

The deputy governors, Rachel Lomax and Sir John Gieve, give many thoughtful speeches at set-piece occasions, but are very conscious of the risks of entering into debates at less formal occasions which can be so important in swinging opinion. True, remarks can be so easily misinterpreted. But the downside risk is the Bank’s case goes by default.

page top^

A sortie from Prague Castle

Vaclav Klaus, well known for his anti-euro stance and recently re-installed at Prague Castle as the country’s president, has been accused of compromising the Czech National Bank’s independence.

Jan Mladek, a member of parliament and former government minister, charged that Klaus was looking for central bank board members that share his anti-euro views so that rates would continue to be set in Prague, which have been below the rates set in Frankfurt of late, thus endearing him to the masses.

As president, appointments of central bank board members are one of the few “executive” powers Klaus enjoys. He named Mojmir Hampl, a board member of the Czech National Bank, as a vice-governor of the central bank, to replace the highly respected Ludek Niedermayer, and appointed Eva Zamrazilova, a senior economist at Komercni Banka, one of the country's leading commercial banks, to the board in March.

The CNB rallied to its defence – albeit two weeks later – with an article from Miroslav Singer, also a vice-governor at CNB. The central bank’s rate decisions had always been, he said, based on the central bank’s efforts to bring inflation close to its 3% target in the medium term. Differing views on the euro at the board didn’t matter as it was the government that made the decision on joining the euro, he added.

All this might seem like the sort of jousting that one expects in the central bank-government tourney, were it not for another possible appointment, this time beyond Klaus’s control.

Zdenek Tuma, the governor at the CNB, has three years left to run on his term and so the top job there won’t come up for some time as he can’t be fired. Unless of course he can be enticed away.

And so he may be. In February, Tuma was nominated by the government for EBRD president which comes up in May. It is by no means a done deal as there is plenty of competition for the post, not least from the incumbent, Jean Lemierre.

Yet the move certainly has its attractions. Tuma is no stranger to the bank where he was an an executive director in 1998-99. Having the first “non-Western” head would bring great kudos for the country, which is now a donor to the bank, and create a vacancy for a plumb job with a six-year term.

How convenient for Klaus that would be.

page top^

Search for Indonesian governor

Indonesia’s president, Susilo Bambang Yudhoyono, has named two candidates to replace Burhanuddin Abdullah as governor of Bank Indonesia when his term of office ends in May. These are Agus Martowardojo, the head of PT Bank Mandiri, the country’s biggest lender, and Raden Pardede, deputy head of PT Perusahaan Pengelola Aset, an agency responsible for selling government-held assets.

Abdullah, who was appointed as governor in 2003, has had a good record - successfully bringing inflation down from 18.4% in November 2005 to 7.4% last month.

Currently, Abdullah, together with two other officials, is under investigation by the country’s anti-corruption unit for alleged irregularities in payments. This is seen in many quarters as a politically driven charge.

It is well known that top positions in Indonesia are often “sponsored”. That is the system. But that is not at all the same as saying the person who gets appointed in this way is corrupt.

page top^

Don't we all love a good old crisis?

There was a palpable sense of excitement among the participants in an excellent conference held by the LSE's Financial Markets Group earlier this week. This brought together about 25 central bankers and regulators, another 20 or so academic experts, and many bankers including notably Josef Ackermann, chair of Deutsche Bank, which sponsored the event.

Gillian Tett from the Financial Times provided what she termed a "warm-up act" with a gorgeously gloomy talk predicting many more problems to come for the markets: would it last a mere six months, or rather six years? Charles Goodhart followed up with a magisterial survey of the issues, where he warned that financial regulation so far had made the crisis worse. Nor was there any comfort to be had from the efforts of central bankers and regulators to improve their "early warning systems". Observing that this crisis had been fully predicted, he declared: "What we do not need are any more early warning systems." What was missing was action. Hugo Banziger from Deutsche said there was no going back to older models of banking. Securitisation had many benefits and was here to stay: “So long as we have transparency we do not need any more regulation," he declared.

Then came a charge by the massed ranks of the supervisors, ably led by Danielle Nouy of the French Banking Commission, who told the bankers just how many new regulations were in the pipeline. The list went on and on. She also ended on a suitably pessimistic note: there was "no quick fix".

Not to be outdone, Charles Dallara of the Institute of International Finance compared the current crisis with the banking crisis of the 1980s cause by the default of Mexico and many other developing countries. That lasted a decade, and like this one was caused by bad risk management (the IIF, which now represents 375 banks, was established partly to help avoid such a repeat), but he found time to point the finger at central banks too for providing the ample liquidity and thus encouraging inappropriate risk-taking.

At lunch Philip Hildebrand of the Swiss National Bank helped the conference enjoy the gloom by predicting there could be a third wave hitting the money markets any time now – “and I am looking at Paul Tucker here”, pointing to the Bank of England's executive director for markets, who had been peacefully enjoying his meal.

He also put up a graph showing a scary-looking collapse in the capital ratios of leading Swiss banks. From the back of the hall it looked as if this had happened recently but closer up it was evident that the period covered was the last 100 years! He called for a higher capital charge on banks trading books and for banks to maintain higher liquidity.

What worried Peter Praet of the National Bank of Belgium is that problems have emerged in banks that were supposed to be shining examples of industry best practice – the kind of banks that regulators are supposed to learn from. The paper being produced by the Financial Stability Forum for the April Ecofin council will contain proposals for dealing with a possible future crisis affecting a major cross-border bank, and it will propose common principles for major crisis management.

All in all, a good time was had by all. The scale of this crisis is optimal. It is neither so small that it can be shrugged off, nor so large as to overwhelm all defences. It is bringing old friends together, and helping to form new ones. It is making regulators, central bankers and bankers huddle together. In this spirit Howard Davies, the only person who has held top positions at the Treasury, the Bank of England and the Financial Services Authority – the so called Tripartite Authorities – daringly recommended that the heads of these institutions should actually meet occasionally. He reported that in his day they never did.

page top^

Why Volcker backs Obama

Paul Volcker, former chairman of the Federal Reserve, gave a massive boost to Obama’s credibility when he endorsed the senator from Illinois. After all, Obama’s biggest challenge was to convince voters he is experienced enough to be president. So the endorsement from Volcker, a genuine American hero, was crucial. And it was unequivocal:

“After 30 years in government, serving under five Presidents of both parties and chairing two non-partisan commissions on the Public Service, I have been reluctant to engage in political campaigns. The time has come to overcome that reluctance,” Volcker said.

“However, it is not the current turmoil in markets or the economic uncertainties that have impelled my decision. Rather, it is the breadth and depth of challenges that face our nation at home and abroad. Those challenges demand a new leadership and a fresh approach.”

Volcker concluded: “It is only Barack Obama, in his person, in his ideas, in his ability to understand and to articulate both our needs and our hopes that provide the potential for strong and fresh leadership.

“That leadership must begin here in America but it can also restore needed confidence in our vision, our strength, and our purposes right around the world.”

page top^

Previous issues of Newsmakers can be found at
http://www.centralbanking.co.uk/newsmakers/index.htm