Analysis: Curtain closes on the G20, but will it close on “money-making games”?

PITTSBURGH — G20 world leaders will leave Pittsburgh satisfied that they have committed to rebuilding a new financial architecture where economies will grow at reasonable levels, the withdrawal of stimulus funds will be done cooperatively and financial regulation will be central to discouraging another worldwide financial melt-down like the one that happened last year.

Designating itself as the “premier forum for our international economic cooperation,” deadlines were set for creating rules on bank capital by the end of next year, global financial overseers were asked to monitor progress and firms were put on notice about excessive pay packages and how much extra capital they would need to cushion future shocks.

“We are committed to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism and regulatory arbitrage,” the final statement of the group’s work said.

Not many would disagree with the objective, especially since much of the work done on the financial front aims to eliminate, as French President Nicolas Sarkozy said: “Totally indecent bonuses paid out to a few traders. We all agreed unanimously not to let this happen again.”

President Obama also professed at the end of the summit that “never again should we let the schemes of a reckless few put the world’s financial system — and our people’s well-being — at risk. Those who abuse the system must be held accountable. Those who act irresponsibly must not count on taxpayer dollars. Those days are over.”

Or, as the G20 closing document said: “Banking as usual is over.” Leaders also said they would not pull the plug on various economic stimulus packages until unemployment improves. When they do move, they promised it would be in a coordinated way.

In short, it all sounds nice on paper and some additional adult supervision of financial institutions and their behavior will be implemented to varying degrees. With the recovery of the global economy since last year, the idea in London, when the crisis was deepest, that there must be global regulation has disappeared.

“It doesn’t matter,” said Marc Mark Weisbrot, an economist who is co-director of the Center for Economic and policy Research, a think tank in Washington, of the G20 final provisions. "They have no means of implementing them. It’s just talk.”

Significantly, the words, sanctions or penalties were not whispered. Instead, the group called repeatedly on the Financial Stability Board, a group of regulators and central bankers who are becoming increasingly important, to stay on top of things, suggest further measures, and report on nations’ progress according to a set timetable.

If countries let their economies become “unbalanced,” the International Monetary Fund would “come in and assess how we’re doing and where you see early signs of unsustainable imbalances emerging, you want to make it compelling to act earlier … not wait,” said U.S. Treasury Secretary Geithner.

Pretty murky stuff.

World leaders, prompted by their finance experts and ministers, can agree on a new set of economic prerogatives, but they will only be as good as the rules underlying them and, even more importantly, the enforcement mechanisms that are put in place to guard against another worldwide financial blowup.

The other push, which is for requiring banks to go about their business more prudently by increasing capital requirements and limiting big payouts to bankers, brokers and traders, will also only be meaningful if the standards are spelled out clearly and then enforced. Sarkozy used language like forcing banks to increase their equity ratios, especially those engaging in high-risk activities. The G20 called on banks to have more capital on hand and restrict compensation and bonuses by tying them to performance, not risk taking. The preference also is to avoid sweetheart, multi-year bonuses, making compensation policies transparent, deferring a portion of compensation and have provisions for giving back rewards as punishment for disappointing results. It said all “major financial centers” would be on board with new internationally agreed upon rules to better quality capital requirements.

As the plan seems to indicate, countries would issue standards, put in place supervisory mechanisms and the Financial Stability Board would assess progress and suggest modifications.

Geithner, who promised agreement strengthening capital standards, reforming compensation and bringing more oversight to derivatives and hedge funds, was short on specifics. He asked for commitments on a clear set of standards “that are measureable and enforceable” with the hope that it’s in everyone’s self interest to have tough rules.

Coming from the world of Wall Street himself, the U.S. Treasury Secretary knows that words like “assess” have little meaning and the hope that a sense of common good will prevail is rhetoric best saved for summitry.

The lack of specificity seemed to irk Germany and Japan who want more attention paid to financial regulation and less to “global imbalances.”

As Yukio Hatoyama, Japan’s prime minister, said in a speech, it’s time to end the “excessive money-making games.”