A Banker's Warning

January 27, 2010 - Bankers and regulators wasted little time in squaring off at Davos on Wednesday. And notwithstanding the palpable outrage over the financial sector’s failings, even among the corporate elite at the World Economic Forum, it was a banker who won the opening round.

Guillermo Ortiz, the former Mexican central banker, gave a full-throated endorsement of President Barack Obama’s latest plan to bar banks from proprietary trading and investing in hedge funds and private equity. He also slammed banks for trying to return to business as usual so quickly after the massive bailouts of late 2007. “Banks have largely misjudged the feeling of the public regarding the devastating effects of this crisis,” Ortiz told a forum panel on systemic risk.

Robert Diamond Jr., the president of Barclays, responded by cautioning against any crude attempt to reimpose Glass-Steagall prohibitions on banks. Big, global companies need big, global banks to provide financing and manage risk across borders, he said. And to make sure his argument was heard in Washington, Diamond offered an example that should register loudly with administration officials.

The U.S. government and agencies like Fannie Mae and Freddie Mac have $8 trillion in public debt outstanding, and fully half of that — a whopping $ 4 trillion — comes due and needs to be refinanced in the next 18 months alone. Policymakers should be wary of biting the hands of bankers whose services they will need, he suggested. “There’s a real need for banks like Barclays to be an active trader of these securities — every day, every hour — to provide liquidity,” Diamond said.

The debate over what to do about too-big-to-fail banks rages in the corridors here, and skepticism about the Obama administration’s plans runs high. Where would regulators hope to draw the line between market-making activities and prop trading? Would the U.S. really impose stiff curbs on its banks if other major financial powers didn’t follow suit? But Diamond’s pointed remark provided one of the strongest arguments for thinking that regulatory reform will be much less severe in practice than the tough talk coming from some policymakers today.

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A Banker's Warning
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