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A Critique from the Inside - Henry Kaufman
Challenge, Sept, 2000
Q. Are there other domestic reforms you would recommend?
A. There is one reform that I do not recommend, and that is corporate ownership--business ownership of financial institutions. That practice is bound to introduce even more conflicts of interest than we have today in financial markets, it is bound to encourage the kind of system that Japan has had, that Europe to some extent has had. It diminishes competition and pushes you to a more socialistic society.
Q. Do you mean, say, General Electric owning its credit company?
A. That is getting close. General Electric owning a bank and owning major financial institutions gets very close to that. As we get more and more into that kind of setup, you will begin to see a diminution in competition, and, in practice, it is not efficient economically.
Q Internationally, what kind of reform would you like to see?
A. There ought to be something like a board of overseers over major markets in major financial institutions. This board would set uniform trading, capital, and reporting standards for those markets and institutions. We do not have that, so we have different requirements in London, in Frankfurt, in Tokyo, in the United States. You cannot do that when you have global markets. I believe that the role of the International Monetary Fund (IMF) should be more circumscribed. It should be a temporary lender, only to straighten out balance of payments for countries temporarily, and should involve only countries that have access to the open credit market that may be temporarily shut off. I also believe the IMF should be in a position to put credit ratings next to its member countries. It can get the detailed information, and it should. Those credit ratings would have far greater validity than any that a private credit rating agency now can produce. This has been one of the problems in dealing with the bonds of emerging countries, and with their financial problems.
Q. Are you saying the IMF should do it because it has the best access to information?
A. It has the best access to information and it has more government backing globally to do that. I also believe that the World Bank should have a much more circumscribed role. The World Bank is virtually art eleemosynary institution, and it should be. The open credit market should be allowed to function for those who have credit available to them in the open market. On the other hand, the World Bank should deal with countries that are on the poverty level, that do not have any access to the open credit market. That is where those funds should go. Those are longer-term loans, which are made with a lot of financing concessions, and we in the industrial world should obligate ourselves to give that kind of charity to an organization that has the facility to do this in a reasonable fashion.
Q. Getting back to your board of overseers, what would its duties be?
A. The duty of the board of overseers is to supervise the major institutions in major markets in the industrial world.
