Ethics and governance in the European Financial centers

Prime Minister Juncker today gave his annual speech before the parliament.

Some paragraphs of the speech in 2000 are worth reading and sometimes commenting as they illustrate that the Luxembourg authorities do not want to adapt to the reality of today’s world.




En 1999, nous avons eu une loi contraignante sur la domiciliation des sociétés, qui devrait mettre fin aux activités illégales et frauduleuses en marge du secteur financier.
(In 1999, we had a constraining law on the domiciliation of companies, which should put an end to the illegal and fraudulent activities in margin of the financial sector.)

The law is not enforced, as the abuse of offshore scams through Luxembourg remains.



Nous voulons conserver le secret bancaire pour de bonnes raisons. Nous voulons le conserver tant que nos concurrents le maintiendront aussi.
(We want to preserve banking secrecy for good reasons. We want to preserve it as long as our competitors will maintain it too.)

He does not quote the reasons. The only “good” reason why banking secrecy should be preserved is that there are competitors that maintain as well banking secrecy.



Notre économie déborde de force et croît de manière robuste. (…) Nous pouvons être contents de l’état de notre économie et de nos finances. Nous pouvons être contents de nous, mais pas au point de nous surestimer ni de nous dépasser.
(Our economy overflows with strength and grows in a robust way. (…) We can be satisfied with the state of our economy and our finances. We can be satisfied with ourselves, but not to the point to over-estimate ourselves nor to get ahead of ourselves.)



Juncker cannot see the coming crisis.

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