Simon Dawson/Bloomberg NewsChristine Lagarde, the managing director of the International Monetary Fund, spoke in London last week.
Over the weekend, Christine Lagarde, the managing director of the International Monetary Fund, was desperately trying to back-pedal. A report had surfaced citing an internal I.M.F. document estimating that Europe’s banks were woefully short of capital — by a whopping $273.2 billion.
“Misreporting,” Ms. Lagarde insisted, before awkwardly describing the number as “tentative.” Then she went even further, saying that the number “is not a stress test that the I.M.F. conducts nor is it the global capital need for European banking institutions.” She added, “We are currently in discussions with our European partners to assess the global methodology until we reach a tentative draft. It will be published before the end of September.”
While Ms. Lagarde acted as if she was surprised by the number — and tried to play it down — she shouldn’t be. And in truth, she wasn’t.
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Changing her tune seems to be a theme for Ms. Lagarde, which may explain her feigned sense of shock.
Ms. Lagarde sounded alarm bells last month about what she called the need for an “urgent recapitalization” of European banks, and was roundly criticized for it.
“Developments this summer have indicated we are in a dangerous new phase,” she said then. Her refreshingly honest remarks had been so honest — apparently, too honest — that some bankers blamed her for further undermining confidence in European banks.
Yes, Ms. Lagarde had broken the secret code of silence among Europe’s top bankers — a silence she herself had kept for far too long when she was a politician.
Just this summer, before being appointed to her post at the I.M.F. in the wake of Dominique Strauss-Kahn’s scandal-forced exit, Ms. Lagarde was trying to will the world into believing that the French banks, the ones she oversaw as France’s Minister of Economic Affairs, Finances and Industry, and the ones which are now in the headlines every day — BNP Paribas and Société Générale, among them — were sound.
Shares of those banks fell as much as 12 percent on Monday amid worries that Moody’s is about to downgrade them because of their exposure to the mounds of distressed Greek debt that they own.
In an interview even before the results of this summer’s stress tests of European banks, she told The Economist: “As far as my banks are concerned, the French banks, I am very confident about the results; and No. 2 and probably more importantly, from what I have seen of the criteria, and the kind of tests that are applied to the 91 banks in Europe, it’s a very tough standard that is applied. And I’m saying that because I have seen here and there some, you know, allegations, little hints, and, and, various comments, analysts saying ‘Oooh, not so sure about the tests.’ Well, let’s go down to the details, the tests are really, really hard.”
Remember: only eight European banks failed the test (none of them French), and the test did not — and this was truly surprising — measure the banks’ ability to manage through a Greek default. Unlike Ms. Lagarde, who gave up her efforts to soft-pedal the condition of her country’s banks once she stepped into her role at the I.M.F., Europe’s central bankers continue to defend the fictional stress test.
Even as late as last week, they somehow argued that “individual disclosures of sovereign exposures were an essential component of the exercise and a great enhancement in terms of transparency” despite disbelief in the markets.
An I.M.F. spokesman declined to comment on behalf of Ms. Lagarde.
We often blame United States politicians and regulators for not owning up to our economic problems until it is too late. But the Europeans have tried to keep up the fiction of their economic strength for much longer. That, despite the popularity of banker condemnation, was clearly the result of horrible policy decisions that have created a structural dilemma throughout the European Union.
While the United States was injecting capital in banks, guaranteeing debt and trying to increase capital requirements, European regulators were fighting behind the scenes to keep capital requirements low. Instead, European regulators, including Ms. Lagarde, jumped on the banker compensation bandwagon, which might have won her political points, but appears now to have also kept the public eye off the bigger issue: Europe’s banks were woefully undercapitalized and every regulator knew it.
I remember officials from the Federal Reserve and the Obama administration complaining privately more than a year ago, which we and other news organizations reported, that Europe’s regulators were preventing them from instituting higher capital requirements because the European banks could not afford them.
Back in February, Timothy Geithner, the Treasury secretary, said it aloud: “Europe is more willing to run a system with lower capital requirements than the U.S.”
Simon Johnson, a professor at the M.I.T. Sloan School of Management, wrote on his blog in May, in an impassioned piece against Ms. Lagarde’s nomination at the I.M.F., that “France worked long and hard to prevent increases in bank capital during the recently concluded Basel III negotiations. Bank capital is a buffer against losses; as long as this remains as low as the French government wants, there is no safe way for any euro zone country to restructure its debts. Low bank capital creates serious systemic financial risk for Europe and the world.” (Mr. Johnson also contributes to the Economix blog of The New York Times.)
Europe’s economic problems won’t be solved until the banks — and their regulators — accept that they need more capital and a solution is reached about the structure of the European Union. (It probably has to happen in that order.) The question, of course, is now that Ms. Lagarde has broken her code of silence, can she persuade the rest of her European counterparts to come clean too?
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AN UPDATE: Two weeks ago, I wrote a somewhat controversial column raising questions about the lack of public charitable giving by Steven P. Jobs, the co-founder of Apple, including his decision in 1997 to close Apple’s philanthropic programs upon his return to the company. Last Thursday, Apple’s newly installed chief executive, Tim Cook, announced to the company’s employees that Apple would start a charitable giving program.
Mr. Cook said Apple would match all employee donations to nonprofit organizations up to $10,000 per employee in the United States. He said that he hoped to expand the program in the future to include Apple’s employees in other countries.
Correction: A previous version of this article misstated Ms. Lagarde’s title. She is managing director of the I.M.F., not its president.
Article source: http://feeds.nytimes.com/click.phdo?i=a4ea22aaf139cbb6dc3ee88af6eab280
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