Source: Guardian

European policymakers have slammed Wall Street banks for putting profits before financial stability. Photograph: Mark Lennihan/AP

European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch.

For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.

Goldman Sachs doesn't make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn't appear this year.

"Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament's economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."

European sovereign bond league tables are now dominated by European banks such as Barclays Capital, Deutsche Bank, and Société Générale, the Dealogic table shows. Their business model is usually seen as more relationship-based, while US investment banks have traditionally been focused on immediate deal-making.

Being left out of government bond sales means missing out on one of the top fee-earning opportunities this year, given the relative drought in mergers and acquisitions and stock market flotations. Western European governments need to raise an estimated half a trillion dollars this year to refinance debts and pay for bank bailouts and rising unemployment.

Banks typically take a percentage of the total deal value for underwriting a bond issue, which could run into tens of millions given the ballooning sovereign debt sales this year. On a 1% fee, Barclays Capital would have pocketed $92m (£61m) from the $9.2bn European bonds it helped sell this year.

Barclays may have profited as a domestic anchor of UK debt sales, as a certain level of "nationalism" has surfaced according to Philip Augar, author of Chasing Alpha and other books about investment banking. "People have done as much as possible to take care of their own financial institutions," Augar said.

The National Bank of Greece featured in the top 10 for the first time in at least five years, according to Dealogic. Greece left Goldman and Morgan Stanley out of its most recent bond sale, and also dropped hedge funds from its list.

Petros Christodoulou, the head of Greece's debt management office, told the Guardian the bond issue had been directed to more "long-term" investors as they were seeking market stability. Greece has had tense relationships with Goldman recently after it emerged that the US bank had helped hide the real level of the country's public debt with derivatives contracts. The country also denied reports about the bank selling a stake of its debt to the Chinese government fund.

Investment banks insist their business areas are separated by confidentiality walls, but countries have been furious about some of their trades appearing to conflict – either on their own books, or on behalf of clients.

Goldman Sachs said its overall position in the European sovereign bond market had improved this quarter once US dollar denominated deals were included. It said its own data showed it ranked fourth in European sovereign bond sales this year.

Greece, Spain, Germany and France are also pushing for changes in the credit default swap market, where investors can bet against the possible default of a country, ultimately bringing more instability.

Britain, Spain, Ireland and Belgium have not used Wall Street firms in the largest 10 deals of the year, according to Dealogic.

Britain used Barclays, Deutsche, RBS and Royal Bank of Canada in its $7bn issue last month, the data shows. Spain has also used Santander, as well as Barclays, Citi and SocGen in recent issues.

Goldman Sachs, JP Morgan and Morgan Stanley have exploded in wealth and power over the past decade. In their glass towers in Canary Wharf, or in Goldman Sachs' European headquarters on Fleet Street, reception rooms regularly welcome prime ministers, world business leaders and multibillion-pound investors.

"The power of big investment banks was a factor in the banking crisis, and it's up to regulators and customers to stand up to them, and not picking them is one of the ways," Augar said.

But the power accumulated is too large to wane, the author said. "I doubt this will last," he said. "The US investment banks will be back in Europe before too long because they are very powerful and they have a very big footprint in Europe."

The EU is also trying to curb US financial power by creating its own monetary fund – a replica of the Washington-based IMF.The need of a European fund has emerged during the Greek crisis, as European politicians have insisted financial troubles should be resolved at home.

Swaps Come Under Fire
* MARCH 10, 2010

International momentum is building for stricter oversight of derivatives trading, as a top U.S. regulator recommended new limits on credit-default swaps and European leaders pushed for a ban on speculative bets against government debt following recent financial turmoil in Greece.

In the U.S., Commodity Futures Trading Commission Chairman Gary Gensler in a speech Tuesday offered his most-specific criticisms yet of credit-default swaps, the insurance-like contracts often blamed for the near-collapse of American International Group Inc. during the financial crisis.

He offered several recommendations to limit their use—though didn't go so far as to suggest a ban on speculative trading with credit-default swaps. "We are to a surprising extent working well with international regulators," Mr. Gensler said in a question and answer session after the speech. "I'm optimistic we'll end up at roughly the same spot."

A spokesman said his agency doesn't have the authority to put some of his recommendations in place but would need to rely on Congress or other regulators.

German Chancellor Angela Merkel said Tuesday that her government is backing an initiative to curb the credit-default swaps market, together with France, Greece and Luxembourg, and she suggested Europe would forge ahead on its own even if the U.S. didn't go along.

José Manuel Barroso, president of the European Commission, the European Union's executive arm, said the commission would examine closely the possibility of banning outright "purely speculative" trading of the swaps.

The officials' comments mark their strongest stance yet against credit-default swaps. They fueled the growing debate about whether swaps contributed to the financial woes sweeping some European countries—or merely reflected them. Mr. Gensler, who has been calling for changes in how derivatives are traded for several months, on Tuesday grew more specific as he singled out credit-default swaps.

The U.S. Securities and Exchange Commission had no comment on the talks among European regulators about banning credit-default swaps.

Greek Prime Minister George Papandreou brought his pitch for a crackdown on speculative trades in international financial markets to the White House Tuesday. Mr. Papandreou said he "found a very positive response" from President Barack Obama on a European proposal to curb the kind of activity he believes has pushed up Greece's borrowing costs and could trigger another financial crisis.

It's unclear if any of these changes will get off the ground, or if the U.S. would be willing to go along with the European proposal. An administration official said Mr. Obama's proposed regulatory overhaul, now making its way through Congress, would make trading more transparent and give regulators better tools to rein in manipulation. These would include limits on the size of trading positions and rules on business conduct. White House spokesman Robert Gibbs didn't comment on the European swap proposals.

The European leaders Tuesday encouraged global action from the U.S. and other countries but made clear they wouldn't wait for it. "It's important that this is done on the American side, too, but we think that a step ahead from our side, from the European Union, would help us," Ms. Merkel said.

Credit-default swaps function like insurance against a bond default. If a borrower defaults, the holder is paid by the seller of the protection. Traders don't need to own the bonds to buy the protection. Instead, they can use the contracts to make "naked bets" on a bond's direction.

In recent years, the credit-default swaps market has boomed. Seven years ago, less than $3 trillion of these contracts were outstanding; today that has topped $25 trillion, according to the International Swaps and Derivatives Association.

There is little publicly available information about who is buying and selling the contracts, which generally are negotiated in private, off-exchange deals. Thus it is hard for regulators and others to monitor who is on the hook for selling CDS contracts, and whether certain investors might be pressuring the contracts on a nation's or company's debt.

As financial problems mounted for Greece and other euro-zone countries in recent months, prices of swaps insuring against debt default by those nations soared, drawing attention to the troubles and raising questions about whether speculation was worsening them.‬‪Politicians increasingly lashed out against hedge funds and others assumed to be profiting as prices of the nations' bonds plunged.

However, a study released Monday by Germany's financial regulator, BaFin, found no evidence that credit-default swaps have been used to speculate against Greek national debt. The study showed the net volume of outstanding credit-default contracts on Greek national debt has remained unchanged since January at about $9 billion. This compares to total Greek government debt of about $400 billion. "The market data do not show massive speculation in CDSs," the regulator concluded.

The ban now being discussed in Europe would allow investors to use the contracts to hedge against possible defaults by government borrowers, but prevent them from taking purely speculative positions. "It's hard to justify why market players should purchase insurance against risks to which they are not themselves exposed," Mr. Barroso said.

The contracts can provide helpful protection for those who own bonds.

Any attempt to restrict CDS trades could result in unintended consequences such as more risk for the financial system and higher borrowing costs for a range of nations and companies, some analysts and investors warn.

Restricting credit-default swap trading could push up borrowing costs for various nations if investors feel they have fewer ways to protect themselves if the bonds' prices decline. Tuesday, the cost of CDS protection on debft of Greece, Italy, Portugal and Spain rose, though it's not clear how much of the moves, if any, were due to concerns about the future availability of credit-default swaps.

It is also unclear how "naked" purchases would be defined or how such a ban would be enforced.

The issue of a ban is expected to be discussed at a meeting of EU finance ministers in Brussels next week. Any new law to ban the contracts would have to go through the EU's often convoluted law-making procedures, and commission officials said lawyers were still examining whether an outright ban would be legal.

The commission's Mr. Barroso said it was possible that European competition policy could be used to address the issue, allowing the commission to avoid the legislative process and enable it to act on its own.

However, such action could only follow an unusual and potentially lengthy inquiry into competitive practices in financial markets.
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