24/7 Wall St. G-20 Primer

This year’s first G-20, or the Group of Twenty, meeting being held in the United Kingdom is getting more coverage than perhaps any other recent G-20 meeting.  These are historic times.  President Obama set history by getting elected, and the current financial mess is the worst seen for anyone under the age of 75.  But what is interesting is that the G-20 for the U.S. is likely going to be a starting point for many new international discussions rather be any venue where final policy gets set.  If you are looking for the creation of a new version of a World Bank for developed nations or a solid international regulatory framework to be drawn up immediately, then to you this meeting is going to be another bridge to nowhere.  To help understand and manage expectations, 24/7 Wall St. created a G-20 primer so that expectations could be based upon the known format rather than on unrealistic demands of a quick meeting in the Hall of Heroes.

For starters, the G-20 is an informal forum.  It is meant to promote open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international cooperation, and international financial institutions, the G-20 helps to support growth and development across the globe.

The G-20 is made up of the finance ministers and central bank governors of the 19 countries of Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States of America, and also the European Union who is represented by the rotating Council presidency and the European Central Bank.

Some progress has been made in the past, so this is not entirely just another round of camera appearances.  But you also cannot expect new international laws to be crafted and passed on the spot.  It has helped in reducing abuse of the financial system and in dealing with financial crises (not to this tune of today); and it has aided in combating terrorist financing.  On this front, the best expectation this week will be on a further push towards the adoption of internationally recognized financial standards.  This may sound easy, but it is not.  In 2004, the G-20 nations did commit to new higher standards of transparency and exchange of information on tax matters to help in abuse of the financial system and tax evasion.

In 2008, the ministers and governors discussed the present financial market crisis and its implications on the world economy.  Here we are, a year later.  Still in the soup.  The group committed to deeper relations and to work together to get through and to get past the fiscal crisis and to further cooperate on better regulation, supervision, and functions of the worlds financial markets.  In the November-2008 meeting in Washington, the G-20’s declaration said, “We are determined to enhance our cooperation and work together to restore global growth and achieve needed reforms in the world’s financial systems.” Even then it knew more must be done.

At the Washington meeting the group’s declaration also stated that it agreed that a broader policy response is needed.  This would be based on “closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries.” The group committed to encourage the World Bank, the International Monetary Fund, and other multilateral development banks to use their full capacity to help developing nations.

It also declared a commitment to an open global economy with free market principles.  How the “free market principles” will come out this year is unknown considering that every country seems to be bailing out troubled companies in many sectors.  The issue of protectionism is also going to be a challenge this time around as the U.S. has many policies that run deep into protectionism, and the Europeans and most other nations are not exactly virgins in this matter.  The group said that over the next year it would refrain from raising new barriers to investment or to trade in goods and services.  How that stands now, well, that is unknown.

How the Obama administration plays its hand in regulation will be key this meeting.  It was just in November that the G-20 declaration after the meeting in Washington said “we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows…” So this part is a total guess today.  Find someone who does not believe more regulation is coming, and you will be certain that the person was in a coma for months or lived in the deep woods away from the world.  The U.S. is not alone is capping pay for executives and highly paid individuals in companies that are receiving government aid.

The banking and financial institutions have to be watching closely, with input if they can get that.  At the last meeting the group pledged by March 31, 2009 to enhance guidance for valuation of securities, also taking into account the valuation of complex, illiquid products, especially during times of stress.  CDO’s, CDS’s, CLO’s, OTC derivatives, off-balance-sheet transactions, and complicated loan securitizations are all deep into this category.  So will FASB’s opinion on some relaxation of mark-to-market get a center stage here in assisting the G-20 in how to deal with this?  There were also many pledges for risk management to be completed.  After all we have seen, this portion sounds like it is being reported straight “from the land of Duh.”

The pesky (and arguably worthless) credit ratings agencies are also going to need to pay close attention.  As far as oversight, the group’s November 2008 resolution included a note that regulators should take steps to ensure that credit rating agencies meet the highest standards of the international organization of securities regulators and that they avoid conflicts of interest, provide greater disclosure to investors and to issuers, and differentiate ratings for complex products.  Conflicts of interest?  Yes, that is perhaps the biggest and deepest issue at hand.  How many “Triple-A-Rated” securities sit on the banking balance sheets that are non-performing or were junk in reality?

There was a more recent communique from the G-20 ministers and governors as well with a shorter agenda ahead of Thursday’s event.  The focal issue was on the restoration of global growth and on strengthening the financial system.   The notes pointed to a framework to boost jobs, fight protectionism, and to maintaining open trade and investing.  Another key note was showing a priority to restore lending through continued liquidity support, bank recapitalization, and dealing with impaired assets.  Specifically, it noted “We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.”

The more recent communique also pledged ahead of this week’s meeting that the G-20 central banks will maintain expansionary policies as long as needed, using the full range of monetary policy instruments, including unconventional policy instruments, consistent with price stability.  Another pledge was made to address an “urgent need to increase IMF resources very substantially.”

Again, the systematic risk firms are going to be a key topic.  The March release noted that all systemically important financial institutions, markets and instruments are subject to “an appropriate degree of regulation and oversight.” It doesn’t just stop there. Hedge funds or their managers are going to be required to be registered and disclose appropriate information to assess the risks they pose.  At least that was what seemed to be the message.

You have heard President Obama talk about the end of booms followed by periods of bust.  The format for this meeting also noted that regulations would dampen economic cycles rather than to amplify them.  In short, growth won’t get out of hand and recessions hopefully won’t look like what we have seen thus far.  The notion for this meeting was also that it is vital that capital requirements remain unchanged until recovery is assured.

There are more G-20 events in 2009 after this one.  There is an “Officials Workshop on Global Economy” being held  May 25 and May 26; an “Officials Workshop on Sustainable Financing for Development” in June; a Deputies Meeting to be held in September; and then the late-2009 “big one” where finance ministers and central bank governors will meet on November 7 to 8 in November.

France’s Sarkozy has already pledged to walk out of the meeting if nothing formative and substantial gets put to task this week.  If the agenda stays as we have seen it, then we put Sarkozy’s chances of walking out at about 70%.

Ahead of the meeting in the United Kingdom, we have seen another round of G-20 pre-meeting violent protests.  The Royal Bank of Scotland has had windows broken out and the media is showing video footage over and over a protester who has a bloodied head.  Some may ask if this is possible in the United States as well, and before you debate it the answer is a simple “YES.”  It was already seen at the 1999 W.T.O. meeting in Seattle.

A criticism that keeps coming up is the issue of jobs.  This is on the agenda, but the public is wanting more and more attention to job preservation and to job retraining.  Laid off bank tellers and loan officers are going to make horrible infrastructure workers and nannies.  This will be perhaps what the group gets judged on the most above any other marks.  The good news is that this was on the agenda.  The bad news is that the framework for regulation and international cooperation seems to be on top so far.  The reality is that this is a function of local governance and local effort.  It seems that the public is already being set up for disappointment.

Stay tuned.

Jon C. Ogg
April 1, 2009