Another day in Davos, another bout of “commie-style” bank bashing. Or that, least, is what some frazzled financiers are now muttering as they slosh around the snowy Swiss mountains.
The frenzy kicked off at the start of the week with the arrival of Vladimir Putin, Russian prime minister, who addressed the opening session of the conference. With visible pleasure, he pointed out that “the pride of Wall Street banks” had crumbled, and railed against the folly of creating an economic system where financiers were allowed to run amok with “virtual money” and other forms of financial innovation.
The comment seems distinctly rich, given that Putin’s own financial system looks rather sickly right now. Moreover, the former Soviet system hardly offered an encouraging alternative to Western capitalism either (and I say that with feeling, having personally lived in it.). But Putin is a man who can smell an opportunity as well as any Wall Street trader. And right now instruments such as CDOs have managed to inflict dramatically more damage on American might than all the poison pens or ballistic missiles the KGB ever employed, back in the Cold War days. It is a delicious, peculiar irony that not even a Russian novelist could have ever devised.
Yet Putin’s sniping has merely set the tone for much of the debate in the rest of the week. Indira Nooyi, CEO of Pepsi, for example, infuriated some financiers on Thursday when she publicly declared that there are now “two streets” in the corporate world – and blamed the financial sphere for poisoning the reputation of an otherwise virtuous “main street” business sector. (“How can she say that? She works for a company that is feeding my kids all kinds of toxic crap!” muttered one indignant banker.) In private meetings, non-bankers have been even more scathing about the mainstream banking world. So much so, that they have even temporarily stopped bashing the credit rating agencies and hedge funds, it seems.
For the most part, the bankers brave enough to turn up in Davos at all are quietly taking it on the chin, or utterly the obligatory apologies. Yet they are drawing at least two lessons. One is the obvious one: namely that a lot of regulation is now heading their way. Take the matter of credit derivatives. Virtually the only species of financier which have been wondering around Davos looking truly chirpy this week are those who work for large regulated exchanges.
These have generally emerged from the market crisis relatively well and are now furiously lobbying to get the regulators to encourage more derivatives activity to move to the exchanges. The bankers, are fighting back – as best they can. But it is an open guess what the policy makers will eventually do. When Jean Claude Trichet, the ECB president, was quizzed on the matter he simply said – with an enigmatic Gallic shrug – that “nothing is excluded”.
Another lesson from the Davos debates is that traders cannot expect any rapid return to “normal” in the market soon. For the past decade or so, bankers and hedge funds have tended to devise trading strategies in the debt world (and elsewhere) based on a “reversion to the mean” assumption – or the idea that market prices will always eventually return to some rational, fundamental balance, even if they diverge from that for a while.
Yet, with the government now jumping into numerous markets, and distorting prices in utterly unpredictable ways, the concept of “mean reversion” is crumbling. Based on this week’s debates, no one expects any end to this capricious climate soon. “The socialists are taking over – and it is going to stay like that for at least the next eight quarters,” laments one savvy financier, whose group has slashed its trading positions in the last four months as a result. Putin’s appearance at the start of Davos was indeed symbolic, in numerous ways.
Gillian Tett is an assistant editor of the Financial Times and oversees global coverage of the financial markets