The ECB-G30 conflict

In November 2011, Corporate Europe Observatory (CEO), a Brussels based lobby watchdog, asked Mario Draghi to withdraw from the group of G30 because it conflicts with his duties as ECB President. According to them the ECB's press office dodged their criticism and, in February 2012, they referred the matter to the ethics officer of the ECB.

This referral comes as it is uncovered that Draghi stated in writing that there were no relevant personal factors to be taken into account in considering his nomination in June 2011. It is  misleading because it fails to disclose a conflict of interest (Nouvel Observateur). Specifically, his son has been working for some years as an interest rate trader at Morgan Stanley (LinkedIn). The code of conduct of the ECB warns against "potential advantage for [the] families [of the Governing Council]". It's a real risk. In January 2012 the president of the Swiss National Bank was forced to resign after it was found his wife traded on insider knowledge, reported The Telegraph.

While CEO's criticism is purely based on principle, we point out that Mario Draghi is one of four members of the G30 who are connected to the Goldman-Greece (off-market currency swaps) affair.

The CEO complaint

Here's the response of the ECB to CEO's letter asking Draghi to leave the G30:

“part of the President's tasks to represent the ECB in international conferences, fora and groups to exchange views on international economic and financial issues and to communicate the ECB's positions and policies. When representing the ECB in such conferences, fora or groups, the President of the ECB acts in accordance with the principle of independence and integrity.”

CEO says that his answer is unsatisfactory because it does not specifically address the group in question, the G30, and it offers no guarantee as to the observance of the "principle of independence and integrity". In their complaint to the ECB, CEO lists multiple provisions of the code of conduct of the Governing Council and, more specifically, the Executive Board, that discourage this sort of affiliation.

 

The ECB President

He's our take on the problem: 

Would removing Draghi from the G30 shield him from influence from his peers and the international bankers that make the bulk of the G30? 

Everything else (such as meeting privately for golf outings etc.) equal, probably not. And some might argue the influence works both ways. But it would make a great deal of a difference this way : the ECB Presidency would not be lending its credibility/respect to that organization. Symbols matter, at that level of power.

 

The relevant question, therefore, is:

Should the ECB Presidency support the G30?

Some might answer that Draghi's British homologue (in active duty, that is, unlike Volcker), Mervin King, is also a member. But just because a practice is established doesn't make it right.

Admittedly, there are adversarial positions in the G30. Consider, for instance, this recent headline: "Goldman Sachs, Morgan Stanley say Volcker rule could raise risk". All three are represented (self, in the case of Volcker). But is the right balance struck between the parties?

 

Big finance

In a press release, CEO cites research that says that the G30 has the characteristics of a lobby group and has contributed to ineffective banking regulation, in association with the Institute of International Finance (see Simon Johnson's April fool take on them). In the last couple of years, the latter has gained prominence in its negotiations with the Troika and Greece on country's debt restructuring.  Perhaps related, Nobel prize laureate Joseph Stiglitz recently alleged in an op-ed that Draghi's ulterior motive for having pushed for a voluntary restructuring was to spare a "few banks" losses on the CDS they sold. In fact, it's perhaps wrong to call it an ulterior motive because it was openly claimed by Draghi at his nomination hearing, according to an MEP (interview at 1:40, English subtitles), albeit not a defensible one, thought the same MEP.

Big finance has quite a representation in the G30. For brevity, let's keep it to Goldman Sachs. It includes William C. Dudley, former Managing Director of the firm,  who replaces another a former MD of the same firm, Mario Draghi, as Chairman of the Financial Stability Board (FSB). E. Gerald Corrigan is currently Managing Director at, and could become the next chairman of, the same firm (NY Times). He is also chair of the Counterparty Risk Managment Policy Group (CRMPG). A former Commodity Futures Trading Commission (CFTC) official recalls in a PBS interview that the CRMPG was set up in the 1990s to lobby Clinton's administration to keep the OTC-derivatives market exempt of "all the fundamental templates that we learned from the Great Depression [in order to] have markets function smoothly", a.k.a as the Brooksley Born vs Summers, Greenspan & Rubin episode.

 

Central bankers and economists

The the allegedly less than prophetic Martin Feldstein and Larry Summers, whose alleged selective memory recently made headlines, were singled out in Inside job. According to The Telegraph, Phillip Hildebrand, former chairman of the Swiss National Bank, was forced to resign because his wife traded on insider knowledge about a market intervention of the SNB.

If Greenspan replaced Trichet as head of G30, would you think it's a viable organization for impulsing reform in banking regulation, at a time when we're grappling with the legacy of the financial crisis? If the answer is no, that is, it would be far from the best choice, then consider reading Greenspan vs Trichet, a tie? as a follow up to this article.

 

The Goldman-Greece connection

The Draghi connection is covered in Goldman-Greece-Draghi-Morgan-Stanley. E. Gerald Corrigan took a public role in defending Goldman Sachs in 2010. Jean Claude Trichet, now chairman of the G30, kept details of the transactions that were in the custody of the ECB confidential, against a legal proceeding by Bloomberg to release them. After Goldman Sachs' role in the US mortgage crisis was exposed, Gordon Brown, then UK prime minister, called for a special investigation of the firm's practices (BBC). The Goldman-Greece deal should have been on the radar of FSA, directed since 2008 by Lord Adair Turner, but it doesn't appear to have been the case. 

 


 

 

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