Necessary to “maintain a dialogue” with external actors, says ECB
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Just months after chastising former European Commission President Jose Manuel Barroso for accepting an “advisory” role with Goldman Sachs, EU Ombudsman Emily O’Reilly has a new job on her hands: investigating the close ties ECB President Mario Draghi and aides have with private banks. The inquiry, launched after a complaint lodged by the NGO Corporate Europe Observatory (CEO), will delve into Draghi’s membership of the Group of Thirty, a secretive forum of influential finance executives, academics, and policy makers.
“CEO research has exposed a severe lack of critical distance between the ECB’s decision-making bodies and corporate bankers in the G30,” the NGO said. “Our study shows that high-level employees of the ECB are far too close to the representatives of the banks they supervise and that the information they transmit at the G30 meetings is out of control,” asserted Kenneth Haar, a member of CEO.
The Washington-based Group of Thirty (often shortened to G-30) was founded in the late seventies at the initiative of the Rockefeller Foundation, which also provided start-up funding for the organization. Its current chairman is Tharman Shanmugaratnam, the deputy prime minister of Singapore. The chairman of its Board of Trustees is Jacob Frenkel, a former governor of the Bank of Israel and current chairman of JP Morgan Chase International.
The Group of Thirty’s membership reads like a Who’s Who of the world of global finance. It includes establishment economists such as Lawrence Summers, Paul Krugman, and Kenneth Rogoff, as well as current and former central bankers like Haruhiko Kuroda (Bank of Japan), Mark Carney (Bank of England), Mario Draghi (ECB), Christian Noyer (Banque de France), and Jaime Caruana (Bank for International Settlements). It also comprises senior representatives of financial corporations with subsidiaries supervised by the ECB, including Axel A. Weber (UBS), Gail Kelly (UBS), Tidjane Thiam (Crédit Suisse), Guillermo de la Dehesa (Santander), and E. Gerald Corrigan (Goldman Sachs).
This cozy little forum meets twice a year to “deepen understanding of international economic and financial issues, and to explore the international repercussions of decisions taken in the public and private sectors by market practitioners and policymakers.”
It all sounds innocent enough. According to the ECB, its active role on the G30 is necessary to “maintain a dialogue” with external actors. “We consider the G30 as a relevant forum to discuss, always reminding ourselves that we have a set of rules and instruments to avoid conflicts of interest, apparent or potential,” it said.
Those “instruments” apparently include an ethics committee headed by Jean Claude Trichet, Mario Draghi’s predecessor as ECB Chairman and, as luck would have it, G30’s honorary chairman.
This is not the the first time the EU Ombudsman has carried out an investigation of the ECB’s ties to G30. It conducted a similar inquiry at CEO’s behest in 2012 and 2013, concluding that “the allegation that the ECB president’s membership of the Group of Thirty is incompatible with the independence, reputation and integrity of the ECB is not justified.” CEO has called for a fresh investigation in light of the ECB’s much larger role in European finance.
Since 2014, the ECB has become the Eurozone’s sole banking supervisor. In the absence of a genuine European central or federal government with direct fiscal powers, it is now arguably Europe’s most powerful institution. As we saw in its standoff with Greece in the summer of 2015, when things get serious the central bank is not afraid to mobilize its full arsenal of weapons against a Member State, even if that means sparking the early stages of a run on its banks.
Just two days ago, the ECB fired another shot across the bow, warning that Italy would face an unpayable bill if the country’s citizens dared to take the democratic decision to quit the troubled euro. “If a country were to leave the Eurosystem, its national central bank’s claims on or liabilities to the ECB would need to be settled in full,” Draghi wrote in a letter to two Italian lawmakers. In other words, abandoning the Eurozone is an unaffordable luxury for countries with large Target 2 liabilities like Spain, Greece, Ireland or Italy, which owes the ECB a staggering €358 billion.
But it’s not just the vast power with which the ECB holds sway over Europe’s economies that’s cause for mounting concern; it’s the complete lack of transparency and accountability with which it yields that power. In 2015, a member of the ECB’s highly influential Governing Council, Benoît Cœuré, was caught sharing confidential, privileged information about the ECB’s imminent bond purchases at a meeting of academics, bankers, and hedge funders to allow them to front-run the program.
In the wake of the scandal, Cœuré was given the daintiest of slaps on the wrist and the ECB adopted new rules on how and when to associate with financial lobbyists and representatives of financial corporations, none of which has stopped it from intensifying its involvement with G30, which includes senior representatives of some of the world’s biggest banks and investment firms.
Its agents have also been buying up bonds from companies behind closed doors via “private placements” — a common enough practice for private investors but one which raises serious ethical concerns when it’s being done by Europe’s newfound “debt buyer of first resort,” with billions of euros of public funds.
There’s also plenty of opportunity for the ECB to inform select hedge funds and certain other market participants of its latest investment decision, so that they can front run the investment. Naturally, its participation in private placements was all on the QT, but it, too, was leaked – and the ECB had some explaining to do.
Now, thanks to the EU Ombusman’s latest inquiry, it will have even more explaining to do. And it might end up tweaking its rules a tiny little bit, but its practices are unlikely to change any time soon. By Don Quijones, Raging Bull-Shit.
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