The International Monetary Fund is not known for random assaults on the financial establishment.

This makes the results of a new IMF study - A Fistfull of Dollars: Lobbying and the Financial Crisis -  all the more compelling. Large US banks that spend heavily on lobbying are more likely to engage in high-risk lending, and their shares perform less well. The UK's Guardian newspaper notes that finance sector lobbying outstripped all other sectors.

It is 8 days until the Financial Crisis Inquiry Commission begin to take testimony from top bankers. Their lobbying activities should provide one of the core, and still current, seams of questioning.

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Stephen Green, Chairman of HSBC and author of a new book "Good Value", has said in a BBC interview that he feels banks owe the public an apology.

This makes quite a change from the tales of "back to business as usual" emanating from Wall Street and London's Canary Wharf, and much more appropriate to the author of a book with the subtitle "Reflections on Money, Morality and an Uncertain World". I wonder though whether an apology is enough. Here's a reminder from my earlier post about what we can now view as:

the worst financial crisis since the Great Depression: an increase in the number of people around the world in chronic hunger and poverty by over 100 million, to 1.02 billion; between 200,000 and 400,000 more babies could die each year between now and 2015 if the crisis persists; an increase in global unemployment by between 29 million and 59 million people; one in eight US mortgage borrowers is behind on mortgage payments or facing foreclosure at the end of the second quarter 2009; pensioners relying on developed country stock market returns for their retirement incomes have seen their savings fall by 45%.

The Financial Crisis Inquiry Commission in the US holds out the promise of going beyond apologies and the inevitable return to customary way of doing business. It offers a public space in which public but impotent anger can be channeled into better understanding and a focussed demand for real change, generating and sustaining in its turn the political will for the necessary reforms.

London could do with a comparable public inquiry of its own.

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A Newsweek article argues the new Financial Crisis Inquiry Commission should play the role I was advocating for a truth and reconciliation commission to bring daylight and justice to the events leading to the financial crisis.

Michael Hirsh argues:

we don't necessarily need a parade of Wall Streeters headed to the Big House. What we do need, however, is a parade of witnesses who will provide what's been missing so far in this crisis—a prominent outlet for public outrage. In the last nine months, the Obama administration and the grandees in Congress have been designing solutions without much input from the outside, often using experts from Wall Street (especially "Government Sachs"). It's pretty much been a closed system.

Like I said, we need some public, inclusive, truth and reconciliation.

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Just premiered in Venice...

UPDATE: The Guardian's review is here.

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Mixed news on the battle brewing over bankers' bonuses.

European finance ministers (with the UK taking a back seat) are coming out strong on curbing banking bonuses.

This I get. Dealing with the excessive (arguably unbounded) risk taking that super-high bonuses encourages, and the crises such excessive risk-taking produce, finding a way of reining in the expectation of high bonuses for excessive risk-taking seems like the only way to ensure the recurrence of such a damaging crisis is avoided.

On the other hand there is something very disturbing about the recently announced French approach: curtailing the bonus upside but also punishing traders for any substantial hit suffered by the bank.

This seems to me merely to raise the stakes - a contributor to the adrenalin fueled environment that leads to excessive risk-taking in the first place.

The French, of course, are feeling somewhat bruised by the whole Kerviel affair in January 2008 when national financial champion Societe Generale was hit with  a 4.9 billion euros ($7 billion) loss due to what the bank maintains was unauthorised trading by Mr Kerviel. The preferred narrative in France is that the bank's systems and controls (including remuneration culture and policies) were not at fault; this was a simple case of a rogue trader. So punishing the trader when the bet goes the wrong way helps reinforce that narrative.

But surely it is better to address the up front incentive for unbridled risk-taking rather than pull your punches in favor of creating stiff personal consequences for the failure of the bet? Rogue traders already know that if the bet goes wrong they stand to lose their jobs and their lifestyles, but "rogue" traders (ie those produced by the prevalent bonus culture) show again and again that they never imagine they will fail, that the bet will go against them.

It is the size of the potential upside that motivates their actions and that is where serious politicians and regulators should focus their attention.

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Was the chairman of the UK's financial watchdog just trying to impress concervatives when he expressed support for a tax on foreign exchange deals?

Development charities are delighted. And why wouldn't they be? The global economic crisis rooted in excessive risk-taking (rooted in remuneration policies that rewarded it) is estimated to have caused some 100 million down to the level of extreme hunger.

Personally I wonder whether a Truth and Reconciliation Commission could help bring some measure of justice by bringing together victims of the crisis perpetrators.

But a Tobin tax on currency transactions could help remedy the material impacts of the crisis rather than simply the emotional and cultural. It is argued that the tax brought in could be used to finance economic development for those who have suffered at the hands of the finance industry.

Lord Turner went on to comment that the UK's financial sector has "grown beyond a socially reasonable size". Hardly seems like posturing towards a future Conservative government to me; more like a note of sense from someone who is not only close to the action as a regulator now, but has himself been a business leader.

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At the end of this year bailout recipient Goldman Sachs may award its highest level of bonuses ever.

This seems more than a touch surreal.

Goldmans' revenues are experiencing a surge benefiting from business driven by the crisis the firm helped bring about.

Firstly, the crisis wiped out some of their main competitors, so they can charge much more for their services.

Second, the crisis created a need for governments and corporations to raise substantial amounts of new money (eg, in the government's case, to bail out banks like Goldman Sachs). Goldman Sachs is a prime broker of government debt and one of the principal market intermediaries in all asset classes and is therefore benefiting from a cut on these transactions.

So, bonuses are back. Goldman's points out that now bonuses are held back for one year before payment, but the risky behavior they reward generally take a few years longer to translate into problems.

Better sit tight, or tackle your legislator to support effective regulation.

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The emphasis on beefing up oversight without changing the rules of the game isn't exactly change we can believe in.

Following years spent in the compliance department of financial institutions I came to the conclusion that there was something fundamentally wrong with a system that relied on compliance to keep things on track. Too often you spent your time trying to stuff the toothpaste back in the tube.

You cannot rely on dealing with the problems that arise; you need to create greater intrinsic motivations within the system to do things right to start with.

Robert Wiseman at Multinational Monitor's Editor's Blog appears to feel the same way, and regards the Obama administration's new regulatory package as inadequate as a result. It's a good read.

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While bankers already talk of "turning the corner" and going back to business as usual, others continue to bear the legacy of the banks' imprudence.

This makes grim reading.

On the one hand, the word on Wall Street is that the crisis is basically behind them, and they can now get back to "innovating" as before.

On the other hand, the financial crisis created by the banking industry has been credited by the UN Food and Agriculture Organisation (FAO) with increasing the number of people in chronic hunger and poverty by over 100 million, to 1.02 billion.

Last year, before the crisis erupted, the FAO revised downward its estimate of the number of chronically hungry and poor people from 963 million to 915 million, due to improvements in the global food supply.

When companies talk at Davos about how they might contribute to the achievement of the Millennium Development Goals - which include the goal of eradicating extreme poverty and hunger by 2015 - the talk is of philanthropic actions.

It seems to me that the financial sector might best show their commitment by undertaking not to make things worse through irresponsible behavior. Instead, bankers are lobbying like crazy to retain the freedoms they have so massively abused.

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While we wait for the US President's speech on regulatory reform, the Guardian summarises the 85 page white paper that holds the details.

Key points (with my comments) include:

• Federal Reserve would get powers to supervise big banks, but there will not be much simplification of the regulatory scene other than disbanding the Office of Thrift Supervision. This is disappointing. Regulatory fragmentation potentially leads to regulatory arbitrage and regulatory capture. The lobbyists won on this one.

• Hedge funds forced to register with watchdog. A good move to bring transparency to a sector that thinks it has the right to keep market-damaging risks close to its chest.

• A new consumer regulator, reported previously on APEsphere. This makes it sound a bit like the "twin peaks" regulatory structure that was considered in the UK in the 1990s, before a single powerful regulator was decided upon. One peak would cover institutional markets, the other retail financial products. It is good to see a focus on retail financial product regulation, assuming it has a strong focus on regulating sales practices.

• Mortgage firms forced to keep loans in-house. I like this a lot. Essentially, the Obama administration is proposing to ensure that mortgage houses cannot simply write up any business they find then palm all that toxic risk to investors through securitised products, as happened with CDOs this time round. Instead they will have to keep 5% of the value of each mortgage on their own balance sheet. If the mortgages they write up go sour, their 5% is at risk too, so reducing the moral hazard of the status quo. That said, I wish the percentage was higher. 10% should have been acceptable and more meaningful.

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