Finance Lobbyists in Experts Clothing

After a few decades of breathtaking deregulation, the worst crisis since the 1930s has left the major players in a state of utter embarrassment. The big financial corporations from Lehman Brothers and AIG to Northern Rock and Hypo Real Estate have wreaked so much havoc that the entire financial sector has ended up in the dock. The money heroes of the past are now being branded as unscrupulous speculators, and judgment is under way. One burning question is being asked again and again: Who is responsible for the crisis?

A strong candidate is the financial lobby in Washington that paved the way for the deregulation that led to the crisis. Big money was on the table to create rules that allowed them to place big bets.

In Europe, it’s impossible to ignore the role of the financial lobby in Brussels. And you don’t have to dig for long to find evidence that financial houses have been given privileges of a kind that is out of reach even for their American siblings.

It’s not been difficult for the financial corporations to get access to decision makers. That door was left open a long time ago, and indeed the EU Commission has issued a standing invitation to the financial sector to join them at the table where policy decisions are made. And despite the financial meltdown, the economic crisis and the deep embarrassment of big banks over their mistakes, there is no indication so far that this will change.

Billions spent on influence

As for the US, there is pretty clear evidence of how the leeway to allow such disastrous investments was created. In February the US research group Wall Street Watch launched a report 'Sold Out! How Wall Street and Washington Betrayed America' on the US financial lobby which shows a direct correlation between the crisis and financial lobbying in Washington[1].

The authors point to 12 specific political struggles in which the financial lobby has managed to create the rules for the financial community, which since led to the collapse of the financial market.

For example accounting rules have been adopted which made it possible to remove bad investments from the official accounts, rules have been introduced that enables banks to self regulate on crucial issues, and the distinction between commercial banks and investment banks has been abolished, making it easier to gamble with big sums of ordinary people's savings.

One explanation for this political 'success' is the amount of money being spent on lobbying. US financial corporations employed just under 3,000 people as lobbyists in 2007, and over the last decade they have spent approximately 3.4 billion U.S. dollars on influencing politicians in Washington. If campaign contributions to Obama, McCain and others are included, it adds up to a staggering $5.1 billion.

But what about Europe, then? How much money did the financial industry spend on lobbying the Commission, Ministers and Parliament in the EU capital? It’s hard to tell. The US rules on transparency, and the register of lobbyists in Washington, deserve far more accolades than the equivalent EU rules. In the EU the register for lobbyists is voluntary, and most financial firms have chosen not to register even the insignificant amount of information required. On top of this, the rules have such large loopholes that you could drive a truck through them. According to the register, the European Banking Federation (EBF), one of the main lobby organisations for the banking sector, spends “more than 1 million euro” a year on lobbying. Whether the real figure is 50 or 10 million or just 1.1 million is not revealed, nor what the money is used for.

McCreevy and the financial lobby

So it’s not as easy to conduct a study of the financial crisis and lobbying on this side of the Atlantic as it is in the US. Yet there is no lack of trails and smoking guns, and recently a key witness took centre stage. This is none other than the European Commissioner responsible for the financial sector. The Irish Commissioner for the Internal Market and Services, Charlie McCreevy, has a reputation for being among the neo-liberal hardliners within the Commission, and was always an outspoken and unreserved proponent of free capital movements and hostile to any serious constricts on the financial sector. He always claimed financial liberalisation to be the way to growth and prosperity. To McCreevy financial stability was never of much concern.

It’s no wonder then, that he became the target of the European Socialists, when he recently refused to follow an invitation from the European Parliament to introduce stricter rules for capital funds, including hedge funds. “This is too much”, three leading social democrats said in a statement. “Commissioner McCreevy’s actions demonstrate a total absence of respect for the European Parliament, and appear to be more appropriate for a paid lobbyist of the finance industry than a European Commissioner.” “Even McCreevy has to respect the European Parliament”, the social democrats stated on the 16th of December 2008. [2]

Against this background, the Irish Commissioner's recent statements about the link between finance lobby and the current crisis are quite remarkable.

In a lecture in Dublin in February, he said:

“What we do not need is to become captive of those with the biggest lobby budgets or the most persuasive lobbyists: We need to remember that it was many of those same lobbyists who in the past managed to convince legislators to insert clauses and provisions that contributed so much to the lax standards and mass excesses that have created the systemic risks. The taxpayer is now forced to pick up the bill.”[3]

This is a new tone from Charlie McCreevy. Perhaps it is pure hypocrisy, but forceful nevertheless.

The Commission in general and McCreevy in particular were always guaranteed to provide thorough consultations with the financial lobby before any piece of legislation on financial issues was passed.

At all stages of any decision-making on financial regulation where the Commission plays a leading role, it invited the major financial conglomerates and financial industry trade associations to influence policy through special advisory groups. These ‘expert groups’ were filled with representatives from big banks, insurance giants and the whole underworld of the more peculiar financial enterprises. Such influence comes surprisingly cheap, as expenses for travel and accomodation of the expert-lobbyists are in many cases covered by the Commission.

Formally, expert groups, a sort of advisory body set up by the Commission, should in principle convey neutral knowledge to the Commission. In reality their role is very political, and they are active both during the development of major plans and of petty regulation.

In 1998 when the Commission submitted a proposal for a long term plan for financial services, comprising no less than 42 separate initiatives, it did so only after thorough consultations with the financial lobby. And during the mid-term review in 2004 of the plan (called the "Financial Services Action Plan”) expert groups were invited to prepare reports on the four main areas, including banking.

The expert group on banking was made up of 22 people from major banks and industry associations, and just one representative from a British consumer organisation.[4]

Not surprisingly, the report contained a number of requests to accelerate liberalisation - and an appeal to the Commission to continue to stay in contact with the private financial sector. It contained no tangible considerations on measures to secure financial stability. It was in many ways a predictable report.

Before the proposal is on the table

The same process applies to single pieces of legislation and regulation, which are not presented to the Council and the European Parliament until the financial institutions, banks, insurance companies and investment fund representatives have been able to present detailed proposals. For this they should be extremely grateful.

It is a particularly great privilege in the European Union to be able to influence a proposal, because in the EU only the Commission can draft proposals for legislation. And due to the complex political process that follows, the first word is hard to change.

Should anyone in the Council or Parliament prefer a different kind of proposal to the Commission, it’s difficult, if not impossible to get it put forward. Usually the only way is to reject the proposal entirely. To hope for another and different proposal from the Commission is usually naïve.

Who actually sits in the expert groups, which provide the Commission with concrete advice on legislation, has been a well kept secret for decades. But recently the Commission began to disclose membership in a new register.[5]

A quick analysis of the expert groups on financial services gives a pretty clear picture. In the groups that are not made up merely of representatives from member states,independent experts and representatives of trade unions or associations are few and far between.

Some numbers: In the 14 expert groups in this category approximately 80 per cent of the 'experts' are from the private sector, mainly from the big financial corporations. In 12 of the 14, the majority of experts come from business, and seven of those groups are made up entirely of representatives from the private financial sector.

Let’s take a relevant example; the expert group on 'securities'. It’s relevant because the current financial crisis began with a collapse in the market for securities based on junk US mortgage loans, known as “subprime loans”.

These loans were traded in the US and internationally as 'securities', and many European banks threw themselves at them with great appetite. This in time caused them, and often their customers, great losses. So it’s worth asking who influenced EU rules on the subject, and who are the Commission’s experts in the field?

The most relevant expert group is called European Securities Markets Experts Group (ESME) and it offers us no surprises. It consists of 21 individuals, who are all either associated with the private financial sector or employed by consultancies working for the financial sector.[6]

In recent years the group has issued “expert advice” to the Commission which is hard to distinguish from the financial industry's political statements.

All the way

Sometimes the Commission simply privatises the policy making process, appointing a private organization linked to business to the status of expert group.

This occurred with accounting standards, where the Commission appointed a private trade association, the European Financial Reporting Group (EFRAG), to work as an official expert group. EFRAG’s list of members include the European Business Association (Business Europe) and the European Banking Federation (EBF).

Accounting rules may sound boring and technical, but they have in fact been a very hot topic since the Enron scandal in the US, which led to the collapse of California's largest energy company. A collapse which to some extent was due to quite flexible rules on accounting.

Not only does the Commission allow the private financial sector to influence the overall strategy and individual pieces of legislation; it also invites it to influence the implementation process as well. Once legislation has been adopted, other expert groups come into play. Normally new legislation would have to be transposed into national legislation. It may sound like a dry and technical exercise, but it is actually packed with politics. Legislation in the EU is often unclear, often because it’s the result of political compromises. There can be strict or lax interpretations, and as a consequence implementation can vary from one member state to the next.

Since 2002, however, a number of committees and groups have had the task of ensuring uniform implementation and common interpretation of a given piece of legislation. In this process a new set of expert groups are consulted, and they have the same predictable composition as the groups at previous levels; that is they are completely dominated by business representatives.[7]

McCreevy again

The way in which the Commission uses experts and particularly the way in which members are selected are in stark contrast to the procedures committed to by the Commission. According to the Commissions rule book, it’s obliged to seek advice from different sides on the issue and harness a “diversity of viewpoints” and variety of opinions.[8]

This is very far from reality. But because details of the expert groups have emerged only recently (despite decades of political pressure), it is perhaps not surprising that no real pressure has developed yet to make the Commission adhere to the rules.

The financial crisis is not a bad opportunity to start building up the necessary force to bring about change in the expert group system. And were we to take the Commissioner's word for it, change is just around the corner. In January, he said at a conference that we need to consider how the expert groups operate:

"I've learned that all consultation bodies should be able to stand back also, say 'it's wonderful what the industry has said' but we need to be a bit more objective ourselves". He continued: "The fact that consensus [among stakeholders] has been reached does not mean it should all be implemented".

But given McCreevy’s reputation, we should question whether this new position is any more than empty words. There is certainly no indication that the Commission intends to use this new scepticism towards the financial lobby for any concrete measures to limit this particular brand of corporate lobbying [9].

A matter of trust

When the crisis became acute in September 2008 the financial sector was humiliated. Financial giants were forced to their knees, and in the US and Europe large banks had to beg at the doors of Ministries of Finance. Governments across the EU uttered condemning curses and oaths against an irresponsible financial sector and promised fundamental change in its relationship to banks and investment funds.

But how much change is underway? Who will design the new financial system and how new will it be?

McCreevy’s statements coincided with the work of a high-level expert group set up by the Commission and the Council to identify proposals for the reform of the financial system. A group with great influence, since the Commission practically promised beforehand that it would take forward its proposals, whatever they would be.

The group, called the “de Larosière group” after its French president, includes among its eight members, four who have close links to the financial giants Goldman Sachs, BNP Paribas, Citibank and the bankrupt Lehman Brothers, one from a consultancy bureau that represents some of the largest banks, and it includes the former head of the UK Financial Services Authority, which has been held largely responsible for the near collapse of several British banks, not least Northern Rock.[10]

The group’s report, published on the 25th of February, can be briefly summed up. It contains proposals for some tightening of existing regulations, for instance on the infamous' hedge funds'. But at the same time the authors insist on maintaining the basic characteristics of the financial architecture. Not an uncommon position in the board rooms of the big financial corporations.

'Self-regulation' is still essential, even after the financial meltdown. If it’s up to the de Larosière group, the banks, for example, must to a large extent be allowed to assess the need for liquidity and judge the risk of their investments by themselves, without significant intervention from the authorities. This is best left to the banks, they claim.

This group has managed to place its report at the heart of the European debate on what should be done with the international financial system and what reforms should follow in the wake of the crisis to avoid a repeat.

Not in sight

Whether it is the European debate on what the EU should propose internationally in the G20 talks, or the alignment of the EU's own rules, the de Larosière Group Report is a supposedly uncontroversial starting point. That this group could get such a position in parallel with McCreevy’s critical and potentially far-reaching statements, does not strengthen his credibility.

In the EU there is no strong evidence that his outburst on the risks of bowing to the financial lobby heralds a new relationship between policy makers and financial corporations. That relationship is still a relationship characterised by trust in the (remaining) financial giants. The unknown factor is whether popular resentment towards the power of the financial corporations will make itself be heard.

Notes

[1] 'Sold Out! How Wall Street and Washington Betrayed America 'is the title of the report, which can be downloaded as a pdf file on the website www.wallstreetwatch.org
[2] Beres, Rasmussen and Schultz; ”Even McCreevy has to respect the European Parliament”, 16th of December 2008.
[3] Charlie McCreevy; ”The Credit Crisis – Looking Ahead”, speech at the Institute of International and European Affairs, Dublin, 9th of February 2009.
[4] The report with a list of members of the group can be downloaded at http://ec.europa.eu/internal_market/finances/docs/actionplan/stocktaking...
[5] The register can be viewed here; http://ec.europa.eu/transparency/regexpert/
[6] The groups composition can be downloaded from the following webpage: http://ec.europa.eu/transparency/regexpert/detail.cfm?ref=1816&l=all
[8] See the Commissions guidelines on the use of expert advice, COM (2002) 713 final, http://eur-lex.europa.eu/LexUriServ/site/en/com/2002/com2002_0713en01.pdf
[9] Charlie McCreevy, speech at Annual European Services Conference, Brussels, 27th of January 2009.
[10] About the de Larosière group see the report from Corporate Europe Observatory, SpinWatch, Friends of the Earth Europe and LobbyControl; 'Would you bank on them? Why we should rely on the EU's financial wise men”, February 2009). http://www.corporateeurope.org/lobbycracy/content/2009/02/would-you-bank-them