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Macaskill on markets: Bankers hunt for friends in high places

Limited understanding of markets by key regulatory and political figures is a contributing factor to the European sovereign debt crisis, as financiers and government officers increasingly fail to communicate.

Europe reveals much through what it is trying to hide

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

German finance minister Wolfgang Schauble, who implemented a unilateral domestic ban on naked short CDS trades in a list of key credits, is following an established local tradition by condemning the actions of financial market players. In 2005 his predecessor, Franz Müntefering, memorably compared private equity investors and hedge funds to swarms of locusts in an early sign of hostility to the sector and chancellor Angela Merkel echoes his rhetoric today.

Bankers and fund managers have more respect for French finance minister Christine Lagarde, who is often critical of current financial market practices but generally seems aware of the potential effect of particular proposed reforms.

Recently appointed European Union internal markets commissioner Michel Barnier will play a key role in determining whether reforms of wholesale market practices result in a further reduction in liquidity in key sectors, such as derivatives trading. A former French foreign minister might not be expected to show much sympathy for what are often portrayed in the eurozone as Anglo-Saxon market practices that have undermined global stability. But bankers are cautiously optimistic after early meetings with Barnier and his staff that the European Commission might serve as a broker in limiting some of the more aggressive proposals for reform.

The details of a pan-European derivatives trading overhaul that is scheduled for September will give some indication whether this optimism is simply wishful thinking on the part of bankers.

A complicating factor in dealings between bankers and their overseers is the need for politicians and regulators to be seen to be taking a tough line with financial market players. Some supervisors are better at keeping bankers on their toes than others. Predictably, some market experience helps to identify the weak spots of bankers, without prompting a complete breakdown in relations.

US commodity futures trading commissioner Gary Gensler is proving to be expert in walking this line. As a former Goldman Sachs partner he is exposed to accusations that he is soft on the industry where he once worked. He combats this potential weakness with aggressive negotiating tactics on potential commodities and derivatives reforms. And he also keeps market participants guessing where they stand with some tactical infighting moves that he presumably honed while at Goldman. One tactic is a recent habit of cancelling meetings with bankers relatively close to their start times. This is infuriating for bankers who have often come down to Washington from New York specially to see Gensler and have a very healthy sense of the value of their own time. It serves the purpose of reminding bankers where the power lies in their relationship with Gensler, while also giving him more time to decide on his preferred line on a given issue.

UK Financial Services Authority head Hector Sants is not known for the brass-knuckle tactics that are standard among Goldman employees past and present – he is a UK investment banker by background after all. But the former UBS and CSFB equity chief is likely to take a tougher line with the industry in his future position as head of a micro-prudential regulator within the Bank of England than he did as chief executive of a standalone FSA.

Almost paradoxically, this might serve to help to restore confidence in the sector. Investors and counterparties are now keenly aware of the weaknesses at big banks and the limited outside insight into their exposure. The knowledge that a chastened regulator who also has a deep understanding of markets is handling prudential regulation should provide some comfort as conditions remain turbulent.