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Wednesday, January 30, 2008
EU Leaders Push For Financial Reforms

Adequately Managing Risk Exposure

Prime Minister Gordon Brown, French President Nicolas Sarkozy, German Chancellor Angela Merkel, and Italian Prime Minister Romano Prodi were strong advocates for financial reforms throughout Europe when they all met Tuesday in London at Downing Street. They are proposing rules for greater transparency of risk and debt exposure by all financial institutions in Europe and hence in other parts of the world as well.

The concern from the EU Leaders is that trading departments within some financial institutions appear to have a growing appetite to gamble their real equity capital base on leveraged derivative and futures transactions at the risk of the countries in which they have primary business, and their own Client's deposits. The announcement of a €4.82 billion trading loss by Société Générale last week and today's €14 billion write-off by Swiss Bank UBS draw questions about how well institutions manage risk exposure, and whether consistency in the regulation of this would have reduced the impact of the current financial problems being experienced in global markets.

There are calls for regulatory reforms to ensure that exposure to the potential for bad debt or the negative side of a derivative or other financial instrument trade is transparently presented in the day-to-day operations of each financial institution, and sufficient capital exists to cover potential losses. Some analysts believe that the recent sub-prime mortgage related CDO losses are sufficient evidence that some institutions don't have enough controls in place and are taking virtual positions in transactions where they have significant trouble covering the down side with real capital when all goes wrong.

For the Environment, until an appropriate risk managed balance between virtual financial instrument trading and real equity long term financing of companies is restored, there will be no way to promote the significant capital infusion needed to start and maintain the growth of Earth saving environmental technology companies. The timeframe for capital investments in these companies is years, and not hours or minutes as is the case with certain trading. French Prime Minister Sarkozy conveyed this same message when he said in London at the meeting that "we want the kind of capitalism that promotes entrepreneurship not speculation"

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