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Buried in the avalanche of meaningless press releases from Istanbul is a highly significant item. Dominique Strauss-Kahn, managing director of the IMF, "has proposed the appointment of Naoyuki Shinohara to the position of deputy managing director. Mr. Shinohara, a former vice minister of finance for international affairs of Japan, will succeed Takatoshi Kato."
This is a disaster.
I have nothing against Mr. Shinohara, who is most likely a distinguished and accomplished public servant.
But the G-20 said at its April 2009 London summit that (paragraph 20, bullet 4), "we agree that the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process."
And the background briefings, from all sides, stressed that "senior leadership" included deputy managing director positions at the IMF.
To replace one Japanese national with another in this fashion is to break a critical symbolic and substantive G-20 pledge—the signal it sends is that the next managing director of the IMF will be European; the next president of the World Bank will be American; etc., as they have always been. This further undermines attempts to rebuild the legitimacy of these institutions.
No doubt Japan and its G-7 allies put great pressure on the IMF to make this appointment. But the signal this sends to emerging market leaders is evident and, quite frankly, insulting.
It would have been a brilliant gesture, for example, to appoint a distinguished Chinese bureaucrat to this position—in fact, this was the hope of pro-IMF people among emerging markets (and there are still a few).
We are not back to zero in terms of meaningful IMF governance reform. We are deep in negative territory: All the G-7 and G-20 rhetoric has been exposed as empty.
Also posted on Simon Johnson's blog, Baseline Scenario. The following was previously posted.
A Short Question for Senior Officials at the New York Fed
By Simon Johnson
(October 3, 2009)
At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point)—hence the brouhaha over Steven Friedman's shareholdings.
Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People's Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions—in fact, it is annoyed bankers who have asked me to take this up.
Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis? (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)
Increasingly, the issue of "too big to regulate" in the public interest is being brought up—an issue that has historically attracted the interest of the Department of Justice's Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?
Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.
In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?
