Wednesday, January 30, 2008

Shades of Difference

It has been interesting to watch fissures already evident in the Sarkozy team widening as the Société Générale affair evolves. Two days ago we had the president's own reaction, that such a colossal failure of oversight must not go "without consequences." Of course, the president, despite his past as finance minister and well-known affinity for billionaires and "bling-bling," is not, as I have several times had occasion to remark, a part of the elite business establishment, of the restricted group of énarques (for the most part) who shuffle back and forth between ministerial cabinets and corporate boardrooms in the venerable practice known in French as pantouflage. His friends are from a less discreet and staid group, the press barons, media moguls, construction tycoons, and corporate raiders, which may to some degree explain their taste for the flashy, tawdry m'as-tu vu style that Sarko has adopted and that seems no longer to be working its seductive magic on French voters, to judge by the polls.

Within his government, however, and within the UMP, there are others closer to the more buttoned-up business establishment. Christine Lagarde, a former corporate lawyer, is the most prominent of these. She has strayed off the reservation a number of times in the past: for instance, when she said that a policy of "austerity" would be required to remedy France's budget woes and was immediately rebuked by Sarkozy. Yesterday she said that, despite the president's call for "consequences," it didn't make sense to replace the "captain" of the ship (SG head Daniel Bouton) in the midst of a storm. Today, as the SG's board meets to consider Bouton's fate, Patrick Ollier, a UMP deputy and chair of the economic affairs committee, used the same metaphor, while Philippe Pruvost, a member of the board, gave it a more dire twist by saying that "when the ship is sinking, you don't throw the captain overboard."

Meanwhile, journalists Laurent Joffrin and Sylvie Pierre-Brossolette debate the issue in similar terms, although now the suggestion is that Lagarde is the one to be thrown overboard: though not the captain, she is, for Joffrin, at least, the first mate who fell asleep on watch and allowed the ship of state to run aground, as it were.

Inconsequential debate of this sort is common when large systems go awry. The initial instinct is to find a culprit, as if eliminating the rotten apple will make the rest of the basket fresh again. More sober students of these kinds of crises are rightly suspicious of these simplifying metaphors, whether they involve storm-tossed schooners or putrifying fruit. I suggest that all French commentators read Peter Temin's study of the panic of 1837 in the United States. Writing a century and a half after the fact, Temin explains why all contemporary observers, misled by the protracted struggle between another president and another bank, got the story seriously wrong. A century and a half from now, we may understand more fully how the 1990s boom in high tech, the housing bubble, Fed policy under Greenspan, the American subprime crisis, the Asian miracle, the Maastricht treaty, and the securitization of everything initiated the decline of the West that Spengler thought he saw happening decades earlier. Or not. But make no mistake: the tectonic plates are in motion (to use yet another simplifying metaphor), and each new upheaval is but a manifestation of a situation still in flux and likely to remain so for quite some time to come.

Yet some contemporary observers seem to me to have a fairly lucid picture of at least the immediate changes ahead. For instance, there is this interesting analysis of the way in which global savings imbalances will work themselves out by a massive infusion of Asian reserves into western banks, which find themselves unable to "securitize" long-term debt in the wake of the subprime crisis and must therefore bring their loan portfolios back onto their balance sheets, which requires large amounts of new equity. And large amounts of new equity can no longer be raised at home.

LATE WORD: The "captain" has been asked to remain with the ship. Interestingly, Bouton, as well-connected an énarque as one can find in France, was the author of a report on corporate governance for the government.

Additional references: on public relations by SG, on committee to manage losses.

1 comment:

Anonymous said...

And while Bouton has plenty of critics right now, I've seen fewer attacks on his old cronies at the Bank of France, who kept the story inside the club for three days, from Sunday to Wednesday, not informing the government. (Which, by the by, gave anyone who might have been dumping shares in SocGen itself a little extra time to do it. I've seen no proof that this was going on, but the trading volumes are certainly suspicious).

More tremors, for what it's worth --- Swiss bank UBS announces $14 billion in losses related to the American mortgage market --- $12 billion subprime, and $2 billion "other" (presumably "prime", though for years, American rating agencies were giving "prime" ratings to nontraditional mortgage arrangements which, in fact, had seriously subprime default rates).