The busy banking bullies | Karen Maley | Commentary | Business Spectator 28/07/10 9:09 AM

Commentary Comment

The busy banking bullies

Karen Maley
Published 3:31 PM, 27 Jul 2010

Lobbyists for the powerful US and European banking industries are likely to be hard at work at
present, calculating the large success fees they’ll soon be charging their well-heeled clients in
the wake of the resounding successes they’ve chalked up recently.
The lobbyists will be slapping themselves on the back for their efforts in blocking President
Barack Obama’s plans to reform Wall Street and ensure that taxpayers were never again forced
to foot the bill for massive losses racked up by reckless bankers.
This was a particular insidious threat to Wall Street power, because Obama was being advised
by the highly regarded former head of the US Federal Reserve, Paul Volcker, who came up with
some strong recommendations for making the big US banks safer. The Volcker rules, as they
became known, would stop the big banks from making risky, speculative trades – a practice
known as proprietary trading – and from investing bank capital in hedge funds and private
equity funds.
Not surprisingly, the big US banks weren’t happy about being forced to relinquish some of their
potentially highly profitable trading activities. So bank chiefs, and their high paid lobbyists, set to
work on US politicians.
After extensive wrangling, the financial lobby was able to extract some significant concessions
in the final Dodd-Frank banking reform bill. Banks would be able to invest up to three per cent
of their capital in hedge funds and private equity vehicles. This sounds like a modest
concession, but the banks knew they could leverage this initial capital investment by borrowing
up to 40 or 50 times, which meant they could still make big bets on risky trades.
And, of course, the financial lobby had managed to head off other, potentially even more
dangerous, reform proposals (such as imposing limits imposed on bank leverage and breaking
up the biggest financial firms so that they were no longer too big to fail) even before the
legislation was drafted.
Having achieved a resounding success in the US, the financial lobby set its sights on the efforts
by the Basel Committee of global banking supervisors to force banks to hold more capital and
to increase their holdings of liquid assets for protection against future financial sector shocks.
And again the efforts of the financial lobby are bearing fruit. As my colleague, Stephen
Bartholomeusz has noted (A lucky break for banks, July 27), bankers around the world will be
quietly relieved that at new prudential regime won’t be as tough as had been originally
proposed, and the banks will be given a lot more time to prepare for the changes.
There is an argument that the latest changes were necessary to ensure that banks weren’t all
rushing to the market at once in a frenzied bid to replenish their capital, and that the latest
Basel recommendations will still promote financial market stability.
But the bankers’ success in modifying the Basel III recommendations are also likely to fuel
unease over the power of the financial lobby.
The German newspaper, Der Spiegel, has just published an extremely interesting article under
the heading The triumph of the financial world’s lobbyists.
The article begins by looking at the European stress tests, which, the article claims, were more
or less written by the banks themselves, and which revealed that only seven banks were under-
capitalised.
Importantly, Der Spiegel says, the stress tests failed to answer crucial questions, such as
whether the rest of Europe’s banks were in good shape, or whether Europe will be spared
future financial crisis. Nor do the tests answer the question of whether taxpayers' funds used to
bail out the banks were well-invested, or whether the level of risk in the financial system has
been reduced, or even whether bank executives have become more cautious after financial
crisis.
“No one can really answer any of these questions because the stress tests didn’t measure such
things,” it says.
Der Spiegel notes that in the midst of the financial crisis, politicians promised sweeping reforms
of the financial sector. “But, now, powerful lobbyists are trying to block everything. A whole army
of lawyers and PR professionals has thrown itself into the political fray on behalf of the
gamblers and speculators. They besiege parliamentarians and officials in Berlin and Paris and

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The busy banking bullies | Karen Maley | Commentary | Business Spectator 28/07/10 9:09 AM

the EU's headquarters in Brussels.”

In fact, Der Spiegel reports that the financial lobby is so powerful that the European
Parliament’s economic and monetary affairs committee last month called for help. The 22
elected politicians – of various political persuasions – who make up the committee warned that
"the asymmetry between the power of this lobbying activity and the lack of counter-expertise
poses a danger to democracy”. And they called on non-governmental organisations, trade
unions, academic researchers and think tanks to get together to counter the financial lobbyists.
The politicians – who are responsible for formulating the European Union’s banking and
financial regulation and are thus a magnet for financial lobbyists – warned that when it came to
issues relating to the environment or to public health, NGOs had developed counter-expertise to
balance the view of corporations. Similarly, when it came to social policies and industrial
relations, arguments from employers were balanced by those made by trade unions.
“But when it comes to finance, this is not the case. Neither trade unions nor NGOs have
developed an expertise capable of countering the banks’ expertise,“ the politicians warned.
Clearly, the politicians have a point. The lack of strong, countervailing arguments makes the
financial lobby all the more powerful, and makes the task of reforming the financial system much
more difficult.

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