By Dietmar Hawranek, Alexander Jung, Christoph Pauly, Christian Reiermann and Thomas Schulz
Activists holding photos of Goldman Sachs CEO Lloyd Blankfein during a demonstration in Washington -- the financial market is growing as if the crisis never happened.
On the evening of June 10, Josef Ackermann, the CEO of Deutsche Bank and chairman of the Institute of International Finance, and his wife were enjoying a performance of the famed Lipizzaner horses at the Spanish Riding School in Vienna. He was smiling and cracking jokes, acting every bit the amiable Herr Ackermann.
During the day, however, Mr. Ackermann had exhibited a different side of his personality. The presentation he had given at a conference of his institute could easily have been interpreted as a threat to the world's leaders. Ackermann said that if the stricter regulations for banks that are currently under discussion became reality, the euro zone, the United States and Japan would create 9.7 million fewer new jobs by 2015.
The argument Germany's most powerful banker was using -- the threat of fewer jobs in the future -- could easily have come from the operator of a waste incineration plant who has been told to expect stricter environmental regulations: he said future jobs were at stake. Although Ackermann wasn't saying that new banking regulations would jeopardize existing jobs, his statement that they could translate into about 10 million new jobs not being created was strong enough.
The tone of the debate is becoming more strident, and the fight that has been going on for the last year and a half is turning serious. The bankruptcy of investment bank Lehman Brothers on Sept. 15, 2008 led to a near-collapse of the global financial system. More recently, entire nations, like Greece, have threatened to collapse under the burden of their debts. The controversy over regulation pits bankers, hedge fund managers, lawyers and lobbyists against the world's most powerful politicians.
The key question revolves around how many new regulations lawmakers can impose on financial institutions to avoid a repeat of the disasters seen in recent years. At their meeting in Toronto later this week, the representatives of the leading industrialized nations and emerging economies, the so-called G-20 nations, will resume their efforts to tackle the supremacy of high finance. It will likely be their last attempt, and if they fail yet again, they will have missed a historic opportunity.
Until now, the politicians' victories in this duel have been nothing but a triumph of words. "Never again will the American taxpayer be held hostage by a bank that is 'too big to fail,'", US President Barack Obama thundered.
"We can no longer accept a capitalist system without rules, without order and without norms," French President Nicolas Sarkozy fumed. "A system in which most of the money is earned through speculation instead of production -- that is not the kind of system in which I want to live."
These are grand words. But virtually nothing has happened to diminish the business of speculating in stocks and currencies, in the ups and downs of financial markets, the banks' practice of gambling with the minimum possible stake.
There have been plenty of summit meetings since the Lehman Brothers bankruptcy. The G-20 governments have met in Washington, London and Pittsburgh. All of their meetings have ended with declarations of intent and announcements of their wishes, but no drastic measures have been implemented to date.
And when a single country does decide to press ahead on its own, as Germany recently did when it imposed a ban on especially speculative transactions, its efforts, as well-intentioned as they are, can have little effect given the global interconnectedness of markets. Speculators simply take their business elsewhere. Instead of betting against a bank or a government from an office in Frankfurt, they do so from London or New York.
In fact, such international solo efforts are nothing but helpless attempts to conceal the failures of politicians at the international level.
"In our hour of need, we decided that each financial product, every player and every financial center must be regulated in the future," German Chancellor Angela Merkel said recently. "That was the promise we made to people." Nevertheless, she admitted, it is a promise "we have yet to keep."
Investment Banks Setting up a new Casino
It is high time for something to be done about the problem. The markets are growing and thriving as if the near-collapse of the global financial system had never happened. In the first three months of this year alone, three major financial institutions, Goldman Sachs, JPMorgan Chase and Deutsche Bank, raked in $13.5 billion in profits. Soon afterwards, Europe had to set up a fund in the triple-digit billions to bail out cash-strapped member nations. And the investment banks are already in the process of opening a new casino in the commodities trading business.
They continue to benefit from a financial system characterized by few rules and many loopholes. Hedge funds are subject to scant regulation, even though they are the ones that engage in particularly risky transactions. Banks are not required to maintained sufficient capital reserves to cover the risks they are taking. Finally, rating agencies continue to do business with banks whose products they then assign top marks to.
Things are going the way they have been going for years. The big wheel is still turning as if nothing had happened. In fact, it is even being lubricated with the cheap money central banks pumped into the markets to minimize the consequences of the financial crisis. As a result, those who helped create the crisis are now benefiting from government efforts to resolve it.
If there is one lesson banks, investors and hedge funds have learned from the crisis, it is that nothing can happen to them, because governments are shouldering the risks.
Governments are approving one rescue package after another. The bailouts of struggling banks were followed by bailouts of beleaguered nations. This can't go on, because in the end the saviors themselves will go bankrupt.
This is why it is important to draw the right lessons from the crisis, to learn from past mistakes to safeguard the future. Financial markets were only able to develop their dangerous habits because they were largely freed from regulatory constraints. That is why it is clear how the monster that was created can be tamed.
Five Commandments for Taming the Monster:
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