April 2 (Bloomberg) -- World leaders agreed on a regulatory blueprint for reining in the excesses that fed the worst financial crisis in six decades and pledged more than $1 trillion in emergency aid to cushion the economic fallout.
The Group of 20 policy makers, meeting in London, called for stricter limits on hedge funds, executive pay, credit-rating firms and risk-taking by banks. They tripled the firepower of the International Monetary Fund and offered cash to revive trade to help governments weather the turmoil resulting from the surge in unemployment. They avoided the divisive question of whether to deliver more fiscal stimulus to their own economies.
The statement amounts to an effort to rewrite the rules of capitalism to address an integrated world economy that has outgrown the ability of nations to keep it in check. The assembly echoed -- on an international stage -- the introduction in the U.S. of securities regulation after the 1929 crash.
“By any measure the London summit was historic,” President Barack Obama said after the talks. U.K. Prime Minister Gordon Brown said, “we have reached a new consensus that we take global actions together to deal with the problems we face.”
The measures to fight the recession and reform finance helped push U.S. stocks up, extending a global advance, and Treasuries down. The Dow Jones Industrial Average exceeded 8,000 for the first time since Feb. 10.
‘Systematic Cooperation’
Even as the G-20 leaders said they will maintain power over their own markets and companies rather than cede it to a cross- border regulator, they closed ranks behind “greater consistency and systematic cooperation” to flesh out a new regulatory order first outlined at a November meeting in Washington.
The crackdown is “a major step forward,” Nobel laureate Joseph Stiglitz, a professor at Columbia University, said in an interview. “It’s a historic moment when the world came together and said we were wrong to push deregulation.”
Blaming “major failures” in regulation as “fundamental causes” of the credit crunch, the G-20 said national regulators will be revamped to better monitor threats to the international system.
A new Financial Stability Board will be established to unite regulators and join the IMF in providing early warnings of potential threats. Once recovery is underway, work will begin on new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times.
Hedge Funds
Hedge funds that are “systemically important” will be subjected to greater oversight as will all key financial instruments, markets and instruments, the G-20 said. That signals a setback for German Chancellor Angela Merkel and French President Nicolas Sarkozy, who wanted all of the investment funds to brought under the spotlight.
That didn’t stop the funds’ lobby from complaining the $1.4 trillion industry had been made a “scapegoat” for the market meltdown. “Although we agree that any entity that provides banking services should be regulated as a bank, the vast majority of hedge funds do not fall into this category,” Andrew Baker, chief executive officer of the London-based Alternative Investment Management Association, said in an interview.
Principles will also be introduced on pay and bonuses to create “sustainable compensation schemes” after concern that executive remuneration rewarded short-term risk-taking over the long-run interests of companies. Accounting-standard setters were urged to improve valuation methods and credit-rating companies will be forced to meet a code of good practice.
Tax Compromise
Having proved a sticking point at the talks, the G-20 said it will impose sanctions on tax havens that do not provide enough information. Officials split over the Organization for Economic Cooperation and Development publishing a list of such nations, agreeing in the end not to block it after Obama and Sarkozy hashed out a deal with Chinese President Hu Jintao.
After bilateral meetings around London yesterday, today’s summit was held at East London’s barn-like Excel Center, within sight of the Canary Wharf, which houses Citigroup Inc.’s Citibank, Barclays Plc, HSBC Holdings Plc and Bank of America Corp. After a 1 1/2 hour-breakfast meeting, the group spent most of its time in a circular room, taking breaks for one-on-one chats in a separate lounge, a U.K. official said.
During the plenary sessions, the leaders wore microphones and got simultaneous translations for any of the 13 languages spoken. When one wanted to speak, he or she pressed a button, set off a light and waited for their turn.
Applause
After a lunch of filet of beef and talks that went 30 minutes beyond schedule, the room erupted in applause when the final text was agreed upon.
The G-20’s pact to impose tougher regulation marks a narrowing of differences after Merkel and Sarkozy entered the summit demanding Brown and Obama endorse a more detailed response to the crisis than that initially planned.
“We never thought we would find an agreement this large,” Sarkozy said. Merkel called it a “victory for common sense.”
Throughout the day, investors bought stocks and sold Treasuries on speculation that the deepest global recession in six decades may be abating. Data today showed orders placed with U.S. factories rose in February for the first time in seven months, U.K. house prices unexpectedly gained in March and Chinese manufacturing increased.
Job Losses
Bad news may regain the focus as companies from French automaker Renault SA to computer-services provider International Business Machines Corp. ax jobs. The OECD this week predicted the world economy will contract 2.7 percent this year, trade will plunge 13 percent and joblessness in the Group of Seven nations will reach 36 million in late 2010. A report tomorrow is forecast to show U.S. unemployment at a quarter-century high.
That represents the economic pain of a financial crisis that began in August 2007 and has since cost banks almost $1.3 trillion in writedowns and losses, forcing them to seek support from governments and to choke off credit to consumers and businesses.
Police sealed off the summit site with a ring of barricades after clashes yesterday between protesters and police led to 111 arrests. United Nations Secretary General Ban Ki-moon warned such social unrest may build if politicians fail to combat surging unemployment and poverty. “I fear worse to come,” Ban told the leaders.
Budgets, Inflation
Having committed $2 trillion in fiscal packages to save their economies, the leaders today said they would “deliver the scale of sustained fiscal effort necessary to restore growth,” while ensuring sustainable budgets and price stability in the long-term. With banks still bogged down by toxic assets, the G- 20 promised “to take all necessary actions” to restore the availability of credit and protect major institutions.
Obama and Brown have pushed for more spending only to run into resistance from Merkel and Sarkozy, who argue they’ve done enough, have bigger social safety nets and don’t want to bust budgets. The IMF will gauge the policies taken which should accelerate the recovery of the global economy to its long-term trend, the G-20 said.
Inundated with record requests for loans from troubled economies including Pakistan and Hungary, the IMF was told its war chest will be boosted by $500 billion and it will receive another $250 billion in special drawing rights, the agency’s synthetic currency. Multilateral development banks including the World Bank will be enabled to lend at least $100 billion more.
‘Historic’
“It’s historic, there’s no question about it,” said Colin Bradford, an economist at the Brookings Institution in Washington.
In return for their contributions, emerging markets such as China and Brazil will receive more of a say in the fund, the G- 20 said. The IMF will also use revenue from sales of its gold reserves to aid the world’s poorest countries and its next leader will no longer automatically be a European.
To help reverse the decline in trade, the group said it will spend at least $250 billion over two years on freeing up finance for it. The leaders said they remained committed to completing the stalled Doha round.
After the World Bank said 17 of the G-20 nations had reneged on a November promise not to resort to protectionism, leaders vowed not to introduce any restrictive trade practices through 2010 or to pursue financial policies which hurt other nations. The World Trade Organization will report quarterly on any violations.
The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union. Officials from Spain and the Netherlands were also present. The leaders will meet again in New York in September, Sarkozy said.
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