Bankers Splinter on Remedy for European Debt as Tension Pervades Meetings
By Christine Harper, Dawn Kopecki and Simon Kennedy – Sep 25, 2011 10:03 PM ET
Wall Street leaders, urging coordinated action from world governments to solve the European sovereign-debt crisis, struggled themselves during four days of meetings in Washington to agree on what’s needed to end it.
The chiefs of firms including JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK) and Societe Generale (GLE) SA met for three hours at the National Archives on Sept. 23. They differed on which government and private solutions may restore confidence in European debt and banks, and on some elements of regulation, said two participants who spoke on condition of anonymity because the meeting wasn’t public.
“It was a big group there, they’re going to differ about stuff; there’s a lot of tension in the air because of the world we live in,” Morgan Stanley (MS) Chief Executive Officer James Gorman, 53, said as he left the event, which coincided with weekend meetings of the International Monetary Fund and Institute of International Finance. “There’s no one solution. It’s going to be 25 different things.”
Bank-stock indexes in Europe and the U.S. have dropped more than 30 percent this year and borrowing costs for European lenders have climbed amid concern that Greece and other European countries may default. The level of disagreement between bankers and government officials who gathered for the annual IMF meeting was matched only by their shared sense that the stakes have rarely been higher.
“There’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy,” said Lawrence Summers, a former U.S. Treasury secretary and White House economic adviser, who said it was his 20th annual IMF meeting.
Asian stocks fell today amid concern the European debt crisis may weaken economic growth. The MSCI Asia Pacific Index slid 1.2 percent to 110.38 at 11 a.m. in Tokyo, set for its lowest close since June 2010.
Discussion of European governments’ options, including how to use their 440 billion-euro ($596 billion) rescue fund, dominated the policy meetings. Most European parliaments, including Germany’s, still haven’t voted on a July 21 plan to endow the fund with more powers, including the ability to buy bonds and inject money into banks.
U.S. Treasury Secretary Timothy F. Geithner urged governments to unite with the European Central Bank to increase the firepower of the fund, known as the European Financial Stability Facility.
Failure to act carries the “threat of cascading default, bank runs and catastrophic risk,” Geithner said in a Sept. 24 statement to the IMF, his strongest public lobbying yet. Bank of Canada Governor Mark Carney said 1 trillion euros may be needed and U.K. Chancellor of the Exchequer George Osborne set a Nov. 3-4 Group of 20 summit as the deadline for a solution.
European policy makers indicated they may use leverage, or borrowed money, to increase the spending strength of the EFSF. Klaus Regling, its CEO, and German Finance Minister Wolfgang Schaeuble downplayed speculation that the fund might borrow from the European Central Bank or provide insurance on loans provided by the ECB directly to the private sector.
Finance officials this week will also discuss accelerating the establishment of a permanent rescue to July 2012, a year earlier than planned, according to a document prepared for the meetings and obtained by Bloomberg News. ECB Governing Council members Ewald Nowotny and Luc Coene said in interviews in Washington that the bank may step up its own response next week.
The Institute of International Finance, an organization of more than 400 financial companies worldwide, holds its annual meetings in parallel with the IMF’s. In normal times, the private-sector bankers use the weekend to mingle with one another, and with government ministers and central bankers, trying to win business and get policy insight.
In some ways, this time was no different as bankers hunkered down in hotels around Washington for meetings with government clients and executives of other banks. JPMorgan and Citigroup Inc. (C), both based in New York, held cocktail parties. Even UBS AG (UBSN) feted guests with champagne and dance music on Sept. 24, the same day CEO Oswald Gruebel, 67, resigned following the bank’s announcement that it lost $2.3 billion on what it said were “unauthorized” trades.
Compares With 1930s
Yet in private discussions, bankers said the environment was exceptional. A senior European banker said he sees policy makers’ decisions as being as momentous as those in the 1930s. A senior U.S. bank executive said he’s more worried than he was at any point during the financial crisis of 2008 and 2009.
About 1,000 people attended a Sept. 24 IIF dinner, which featured a tribute to ECB President Jean-Claude Trichet, who’s stepping down Oct. 31 and will be succeeded by Mario Draghi, the governor of Italy’s central bank.
Guests dined on beef tenderloin stuffed with red chard, dates and pine nuts, and truffled potato crepes. They heard speeches about Trichet’s career and accomplishments from IIF Chairman Josef Ackermann, who’s also CEO of Frankfurt-based Deutsche Bank, as well as former Federal Reserve Chairman Paul Volcker and Carney, the Bank of Canada governor.
The ECB’s policies in recent years, such as buying bonds issued by weaker European nations and providing cash loans in return for banks’ bond holdings, have helped provide support for both governments and lenders. The policies also have stirred discontent as two German members of the ECB’s governing council resigned this year amid signs of growing disagreement about the central bank’s efforts.
IIF Chief Economist Philip Suttle told conference attendees on Sept. 24 that solving the European crisis will require the ECB to reduce interest rates to boost growth.
“You need the ECB to ease significantly, and that probably means the euro needs to come down,” Suttle said.
Schaeuble, the German finance minister, addressed the same room hours later with a contrasting message: “We won’t come to grips with economies deleveraging by having governments and central banks throwing — literally — even more money at the problem,” he said.
At a panel discussion yesterday titled “Systemic Stability and Global Financial Firms,” bank executives including Goldman Sachs President Gary D. Cohn and Barclays Plc (BARC) CEO Robert E. Diamond, 60, discussed risk management and regulation without addressing the European crisis directly.
After the discussion, Cohn was asked what he thinks European leaders must do to restore investor confidence.
“The market needs to hear that they understand the depth and breadth of the problem,” said Cohn, 51. “They just need to convey to them that what they’re doing is big enough and powerful enough to get the market’s attention.”
Modeling a European rescue after the U.S. Treasury Department’s Troubled Asset Relief Program, which started injecting capital into banks in 2008, “would be a good solution,” he said.
Frederic Janbon, global head of fixed income at Paris-based BNP Paribas (BNP) SA, said he hopes policy makers stick with implementing the plan agreed to on July 21.
“Before we go to what we do after, we start by doing what we promised before,” he said in an interview.
Deutsche Bank’s Ackermann urged European nations to approve the 440 billion-euro rescue fund and to implement a bailout plan for Greece that are part of an agreement reached on July 21.
‘Seal the Deal’
“Our strong advice is to move on and seal the deal which was agreed on in Brussels at the end of July,” Ackermann, 63, said during a press conference yesterday. “To re-open that debate would not be productive and definitely not stabilize the turbulent situation we’re in.
JPMorgan Chief Economist Bruce Kasman, speaking a day earlier, said the July 21 bailout plan for Greece isn’t going to be enough to contain the crisis.
“Greece is insolvent and the European Monetary Union, the European Union as a whole, needs to deal with that,” Kasman said at a Sept. 24 panel discussion hosted by the IIF. “It hasn’t yet come to terms with that.”
At the private gathering of bank CEOs on Sept. 23, which was the first joint meeting of the IIF and the Financial Services Forum, the executives spent part of the session getting Carney’s views on the regulatory outlook. JPMorgan CEO Jamie Dimon, 55, criticized regulators’ plans to require the biggest banks to hold extra capital and got into a dispute with Carney, said three people with knowledge of the encounter.
“More generally, we have been engaged in constructive dialogue with a range of stakeholders, both domestic and international, as we move forward through this financial-sector reform process,” Harrison said in an e-mailed statement.
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