Ethics and governance in the European Financial centers

In the previous article relating to Luxembourg I have evoked the impossibility for the actors in the Luxembourg jurisdiction to deal with change.
My wording was based on Spencer Johnson’ famous book: “Who moved my cheese”

I am afraid Switzerland did not realise either the paradigm shift.

In an article Didier Remer lays emphasis on the Swiss situation.

Angel Gurría confirmed in the columns of le Temps that banking secrecy was in question and that the engine was launched, that it would not stop, that the collision was imminent
Swiss leaders were informed of the evolution of international mentalities, and systematically informed on collaboration between OECD and G20.
Additionally, neither Switzerland nor Luxembourg attended the OECD meeting last October, which was the beginning of the process of the reviewing of the OECD list.

The jurisdiction is not exactly in the same situation as Luxembourg. It has a long tradition of finance. It has various alternative industries to finance. And as Didier Remer observed there is a political debate.
(in an article I had highlighted huge business differences between both jurisdictions. )


To the contrary, in a recent interview, Jean Asselborn, who is Vice Prime Minister of Luxembourg stated (in order to soothe and to reassure?) that there is still the fund industry in Luxembourg which has great competences, and many countries trust us, and that there are as well the credit markets (il y a d’autres atouts. Par exemple, au Luxembourg il y a l’industrie des fonds qui a des grandes compétences et beaucoup de pays se fient à nous. Il y a aussi tous les marchés des crédits.)

The problem is that with Jean Asselborn’s statement Luxembourg goes on selling a stinking cheese with
- the Madoff story that just did not happen by chance in Luxembourg, and
- Bank Landsbanki that went bankrupt in a dubious context
- etc.

The problem is that Jean Asselborn belongs to the left wing of the governing coalition.

Which demonstrates that no politician in Luxembourg never ever questions the dysfunctions.

In an interview one month ago, Serge Allegrezza analysed without kindness the Crisis. If the financial sector had, in the Eighties, taken over from the iron and steel industry, he cannot see any new sector.


In the Eighties Luxembourg had actually implemented what Spencer Johnson explained in his famous book “Who Moved My Cheese”. In the style of a parable, Spencer Johnson described what is to be done to face change.

The process is the following as described in the book:

1. Change Happens
They Keep Moving The Cheese
2. Anticipate Change
Get Ready For The Cheese To Move
3. Monitor Change
Smell The Cheese Often So You Know When It Is Getting Old
4. Adapt To Change Quickly
The Quicker You Let Go Of Old Cheese, The Sooner You Can Enjoy New Cheese
5. Change
Move With The Cheese
6. Enjoy Change!
Savor The Adventure And Enjoy The Taste Of New Cheese!
7. Be Ready To Change Quickly And Enjoy It Again & Again
They Keep Moving The Cheese.

This is exactly what Luxembourg did to replace the iron and steel industry.

Luxembourg imagined new activities, and became a great financial center.

Luxembourg has always had a taste for niche opportunities, in fact selling its sovereignty.
Examples:
RTL
SES
Cargolux
Shipping Register and of course the
Financial Center.

When in 1974-75 the steel crisis broke out, it made socially and economically good decisions: creating the DAC, Division Anti Crise, and the BED or Board of Economic Development. Two remarks though: DAC was needed because nobody had seen the Cheese moving, and BDE failed to diversify because the actors saw the easy Cheese in Finance.

As far as the financial center is concerned, the problem is that the actors defined the center with specific parameters that were their cheese for business success:
- banking secrecy (despite the fact that it was not a tradition in Luxembourg contrary to Switzerland)
- little control and little sanctions compared to other jurisdictions (it may be proven with ratios)
- a trend to hush up issues or dysfunctions with a press that does not really act as a watchdog
- specific pragmatism with the meaning of laxism
- no fear of international sanctions thanks to the memberships : FATF, OECD, European Union.
- …

Since 2004-2005 I called to make an aggiornamento because the world was visibly changing and the parameters of development of the Luxembourg financial center were dramatically overhanging: in other words their “cheese” was becoming dangerous for the jurisdiction.

In a book that was published in 2006, I noticed that professionals in Luxembourg were self-satisfied with a lack of positive pragmatism as they were unable to see that the reality of the world was changing.

The cabal against the OECD, the G20… while they are not questioning the dysfunctions of the jurisdiction, demonstrates that the Luxembourg authorities and professionals do not want to adapt the cheese to the reality of today’s world.

The CSSF published last Wednesday two press releases to state that two Luxembourg-domiciled investment funds that had money invested with Bernard Madoff are to be wound up. The first one for Luxalpha SICAV and the second one for Herald (Lux) SICAV.

In both cases it is stated that "The judgment specifies, that the liquidators represent the company as well as its investors and creditors and, that their powers will be exercised in the Grand Duchy of Luxembourg and abroad pursuant to the unity and universality principle [règle de l'unité et universalité] of the judicial winding-up of a company, having its registered office in Luxembourg. This rule applies to all moveable property and immoveable property of the wound up company, even if these properties are abroad.
The judgment states that the unitholders shall be considered as shareholders which will share the surplus of the winding-up. According to the judgment, they do not need in these circumstances to file their statement of claims in order to assert their rights. At least once a year, they will be convened by the liquidators in a general meeting in order to be informed of the results of the winding-up and the reasons why the winding-up procedure has not been terminated. The first general meeting will be held before 31 October 2009. During this meeting the possibility to constitute a committee of creditors/investors could be discussed."

As I already wrote, the Luxembourg authorities and professionnels are handling in a very bad way the Madoff case:
- they did not tell the truth about the legal and regulatory framework in Luxembourg that did not transpose faithfully the European Directive : the synoptic table is clear enough.
- they did not take the initiative at the beginning to compensate clients. Should they have compensated the clients, the issue would be over. The reality is that for clients recovering their money lost is a "long shot" with expenses to pay for the lawyers that anyway will not be included in the surplus of the winding-up.

As the fund industry is a key success for the jurisdiction I cannot understand the reason why almost everyone in the jurisdiction is doing wrong.

Or rather I understand very well: it is perfect illustration of what Sydney Finkelstein described:

· Flawed executive mind-sets that throw off a company's perception of reality

· Delusional attitudes that keep this inaccurate picture of reality in place

· Breakdowns in communication systems that were developed to handle potentially urgent information

· Leadership qualities that keep a company's executives from correcting their course

· Long before obvious danger signs appear, several of these syndromes can take hold of executive behavior. People might continue to do business the way they always have, maybe even doing it extremely well. But when a problem develops and things stop working the way they did before, managers have no way of knowing because they are largely cut off from the outside information they need