Watchdog: Another Draghi Conflict of Interest Uncovered

February 16th, 2012
in econ_news

by Guest Author, ECB Watch

DraghiSMALL

Editor's note: This is breaking news presented with interspersed editorial comment.

From the report on the Council recommendation for appointment of Mario Draghi (pictured) to be the President of the European Central Bank (rapporteur: Sharon Bowles):

4. Do you have any business or financial holdings or any other commitments which might conflict you with your prospective duties, and are there any other relevant personal or other factors that need to be taken account of by the Parliament when considering your nomination?

[M. Graghi:] No.

Follow up:

Yet, Draghi's son has been an interest trader at Morgan Stanley since 2003. From the ECB Code of conduct (2002/C 123/06):

4. Conflict of interests
4.1. The members of the Governing Council shall avoid any situation liable to give rise to a conflict of interests. A conflict of interests arises where the members of the Governing Council have private or personal interests, which may influence orappear to influence the impartial and objective performance of their duties. Private or personal interests of the members of the Governing Council mean any potential advantage for themselves, their families, their other relatives or their circle of friends and acquaintances.

According to Nouvel Observateur, ECB has said that Draghi scrupulously abides by the code of conduct.

To date, there are two counts of possible perjury during the June nomination hearing by the European parliament. The one above, and that about his defense on the issue of the falsification of Greek debt while at Goldman.   Nobel laureate Stiglitz thinks, based on logical deductions, that the ECB is acting in the interest of a few banks (the aforementioned one is, evidently, included); the incriminated motive, in fact, can be found in a statement of Draghi in the June hearing...

*

Let's recap our understanding of the falsification of Greek debt. Goldman Sachs, who arranged the infamous Greek currency swaps in 2001, had used the pretense of external validation of Greece's books as evidence there were doing nothing illegal in parliamentary hearings in 2010 (UK/EU). But according to extensive Eurostat audits that were made public in November 2010, there has been a pattern of deceptive, willful, irregularities in Greece's national accounts reporting, throughout the decade. That's a major contradiction.

A crucial fact, a major restructuring of the deal in 2005, has gone under the radar completely. That's a very odd oversight. To this day, the prevailing thought is that the deal was done in 2001, regrettably, but what can you do?!  Well, what a government does, in a society that upholds the rule of law is appoint a prosecutor to seriously investigate this kind of problem. The falsification is, presumably, a serious offense, but, in addition, Goldman Sachs shorted Greek debt. On the face of it, this falls within the broad category of violations called a market abuse. The FSA and the EU have specific directives against that (for the EU,2003/6/EC). Who was in charge, or rather was supposed to be in charge? We will find out. What is willful or gross negligence?  In 2010, according to the Business Standard:
UK Prime Minister Gordon Brown said he wanted the Financial Services Authority to open an inquiry, declaring he was “shocked” at the “moral bankruptcy” indicated in the suit. The German financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor Angela Merkel said.
Goldman's other line of defense (repeated at nauseum) during these hearings, is that their deal with Greece was commonplace. It wouldn't have made it right (only embarrassing in the capitals of Europe, an effective weapon), and, in any case, IBTimes recently reported that it is false:
Eurostat, which provides the EU with statistics on member states, told IBTimes UK that there were "only a very few off-market swaps for small amounts" in a "limited number of EU member states" including Italy, Germany, Poland and Belgium...There were concerns that other countries may have done similar large deals to that between banking giant Goldman Sachs and troubled Greece a decade ago, using pretend exhange rates, effectively disguising the true scale of their debts.
The hearings, which were chaired by Michael Fallon and Sharon Bowles, respectively, were a complete mockery of due process : no independent evidence, no witnesses, just a Q/A between some MPs and a Goldman Sachs spokesman, Mr. Corrigan, who was hardly challenged.  Corrigan and Draghi sit on the board of the G30 and Trichet, who, as we recall, used exceptional powers to shut access to ECB files on the matter discussed here the month preceding Draghi's nomination hearing, chairs it. Meanwhile, Goldman was one of four banks selected for the underwriting of EFSF bond, the precursor to Euro-bond, potentially the largest bond market in the world (if the Euro survives). Hats off, Mr Klaus Regling!

There was mention of an investigation by the Fed in 2010.   Does anyone know what the status of that is?

Sources and References:

Extensive reference bibliographies accompany the above articles.









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10 comments

  1. Lafayette Email says :

    Draghi's son is an interest dealer, so Draghi lied to the question posed? Read the question posed once again. Where does it say, "you or your direct family"? "Relevant personal factors" does not necessarily cover his immediate family. Legally, he has no control over what they do in financial matters, presuming they are adults, nor should he. Draghi therefore is not responsible for all the members of his family and their dealings. Otoh, if his son is benefiting from insider information - which remains to be proved - then GEI would be right in its accusations. For the moment, however, it is way off base and indulging in innuendo - which is bad journalism. Furthermore, Draghi worked for Goldman Sachs, but where is the proof that he was directly responsible for hiding debt contracted with Greece. That too is not proven in the above article.

  2. Admin (Member) Email says :

    @Lafayette:

    I think you should read the article again.

    1. Draghi was being questioned regarding a position of head of the ECB.

    2. The relevant section of the ECB code of ethics is presented. In it it states:
    "Private or personal interests of the members of the Governing Council mean any potential advantage for themselves, their families, their other relatives or their circle of friends and acquaintances."

    Dragi's answer "No" is clearly a false statement.

    A correct statement to comply with the Code of Conduct of the organization he was being questioned as prospective head would have been:

    I have relatives and acquaintances who are employed by major banks and financial institutions but they will have no influence over my decisions in the proposed position.

    Draghi gave an obfuscatory and evasive answer and a friendly interogator did not follow up.

    With regard to your lack of understanding of the Greek debt / currency swaps issue, read the first two references which document the entire history (first reference) and Draghi's involvement (second reference). The two articles contain comprehensive lists of published references (with links).

    Draghi and some endorsers have indicated he had nothing to do with that because it was started in 2001. However, extensive modification and extension of the debt hiding scheme occurred in 2005 at which time Draghi was head of the Goldman Sachs European unit responsible.

    Was he a figurehead? Was he simply ignorant of a multi-billion dollar deal for which he nominally had executive responsibility? Or is his entire involvement simply being swept under the table?

    No pentrating questions were asked about this in the interview hearings held on behalf of the European parliament.

    If you care to comment further on the quality of the research and journalism by ECB Watch come back with some more facts.

    John Lounsbury, Managing Editor

  3. Admin (Member) Email says :

    ECB Watch has posted a reply at their website (http://ecb-watch.blogspot.com/2012/02/quibbles-about-conflict-of-interest.html ):

    Obviously, the risk of leaked information runs mostly (but not completely) from Draghi to Morgan Stanley. The criticism above about confuses "conflict of interest" with the type of negative outcomes, such as "his son is benefiting from insider information", that the former makes more likely. It is contested that Draghi is not responsible for all the members of his family etc: he was asked to disclose the conflict of interest, not remove it.

    The question was: "are there any other relevant personal or other factors that need to be taken account of by the Parliament when considering your nomination?"

    Anyone having some doubts that "No" is not the proper answer has to prove, using only publicly available data and logic, that:

    Under no reasonably conceivable circumstances can Draghi's son, who is an interest rate trader at Morgan Stanley, obtain information from his father, that can benefit him or his company in his line of work.

    Good luck with that.

  4. Lafayette says :

    {Dragi's answer "No" is clearly a false statement.}

    Not in the least.

    As I said, there must be proof that Draghi was complicit with his son's transactions.

    Aspiring to any position anywhere may require the sort of question posed, but subsequently proof must be supplied that there was connivance between the parties that resulted in personal benefit of either both are one party.

    A case in point is the wife of the ex-President of the Swiss Central Bank who's American wife traded Swiss Francs for US dollars with knowledge of the bank's impending market transactions. There the transgression was clearly demonstrated.

    Perhaps Draghi was indeed conspiring with his son's market trading. But its proof, I submit, remains to be established.

  5. Lafayette says :

    {The question was: "are there any other relevant personal or other factors that need to be taken account of by the Parliament when considering your nomination?"}

    Anybody in this situation is not obliged to know what close or distant relatives may be doing in terms of market trading.

    I find it difficult to believe that Draghi should be held responsible for his sons "insider trading", which is indeed the innuendo posited, just because his son happens to be a market trader.

    Sorry, but this would not even hold up in a court of law without further proof of the conspiring between the two individuals. There must be some proof-positive, which is always difficult find but not impossible.

    Perhaps further investigation of the son's trading that may have been relevant to Draghi's personal knowledge of market conditions can be established? If so, it should be.

    But Draghi could very well have answered with confidence that he had no knowledge of the nature and kind of his son's market trades. And what if he did not?

    Then the innuendo that he did would be false and defamatory.

  6. Lafayette says :

    {However, extensive modification and extension of the debt hiding scheme occurred in 2005 at which time Draghi was head of the Goldman Sachs European unit responsible.}

    If this is so, then it behooves the ECB to investigate the complaint.

    I am, by no means, a friend of either Mario Draghi, Goldman Sachs or Bank Directors in general. Far too much hanky-panky has occurred in that profession.

    I do feel however that journalistic balance must be upheld in all reporting that regards such public figures. Otherwise we are indulging in a witch-hunt.

    Your claims certainly do call for more clarifications of exactly the position of Mr. Draghi in each circumstance. Why not ask the ECB to investigate? After all, it is an EU public institution.

    Why not ask the Governing Council? After all, the integrity of its head is being impugned. They should feel obliged to reply ...

  7. Admin (Member) Email says :

    @Lafayette - - -

    What do the words in the code of conduct mean when they say:

    "The members of the Governing Council shall avoid any situation liable to give rise to a conflict of interests. A conflict of interests arises where the members of the Governing Council have private or personal interests, which may influence or appear to influence the impartial and objective performance of their duties. Private or personal interests of the members of the Governing Council mean any potential advantage for themselves, their families, their other relatives or their circle of friends and acquaintances."

    Focus on the words:

    "may influence"

    "or appear to influence the impartial and objective performance of their duties."

    The code does not say that any such conduct has ever to happen for there to be a problem. It says that the "governing members shall avoid any situation liable to give rise to a conflict of interests."

    It was not said in the article that any transgression had occurred. The problem is that there is a potential conflict of interest that was not disclosed by Draghi and the lax questioning did not seek to pursue any possibilities.

    You are confusing the commission of an improper act with the appearance of possible conflict of interest. In this case the appearance is clearly specified as a problem by the ECB code of conduct and Draghi was guilty of false statement by omission of pertinent facts.

    In order for your defense of Draghi to hold water you must be able to prove that he could not provide "any potential advantage for themselves, their families, their other relatives." (Words from the code)

    As the author pointed out, without clear statement from Draghi himself there is no way to know that he recognizes his responsibility not to allow any information, released however casually, to provide trading advantage for his son.

    If you say that he should obviously know that, I ask you shouldn't all the banking executives who allowed deceptive and fraudulent mortgage and securitization activities to be carried out also have known not to do what they did?

    We clearly have two different views of what level of trust can be placed in the ethics of individuals when it comes to the potential for corruption by money and power.

    This entire problem could have been avoided had Draghi recognized and addressed this possible appearance of conflict of interest.

    Thanks for commenting. This has been a good discussion.

    John Lounsbury

  8. Lafayette says :

    {In order for your defense of Draghi to hold water you must be able to prove that he could not provide "any potential advantage for themselves, their families, their other relatives."}

    And, how, pray tell, could he provide that guaranty? (Banish his son to Tasmania? ;^)

    Let's agree to disagree, shall we?

    Yes, good exchange. Thanx!

  9. Admin (Member) Email says :

    Lafayette - - -

    We clearly disagree. I maintain that Draghi deceived by omission of pertinent fact when asked a direct question. You maintain that he had no obligation to be forthcoming about something directly related to a very clear statement in the ECB code of conduct.

    Lax questioning by the interview panel allowed the omission to go unexposed at the time.

    I support the position that Draghi was deceitful in not acknowledging a potential conflict of interest that he would specifically avoid actuating.

    You support the position that he had no obligation to reveal that there could be potential for conflict of interest with regard to his son.

    I am not a lawyer and perhaps you are. If so then you might be able to provide case study justification of your position. If you are not a lawyer please don't consider this suggestion a challenge to your non-professional opinion.

    John

  10. Admin (Member) Email says :

    Comment submittted by the author (ECB Watch) by e-mail in answer to Lafayette's question about the allegations that Draghi may have had an involvement in the Goldman Sachs scheme to hide Greek debt. The comment ended:

    [Why not ask the Governing Council? After all, the integrity of its head is being impugned. They should feel obliged to reply ...]

    ECB Watch reply:

    Thanks, but how does one "ask" the Governing Council [of the ECB]? If Draghi may have had a connection to this scheme it would make the GC both judge and party. Furthermore, there has been a pattern of deception on this issue, at various governmental levels, including the ECB, according to Bloomberg news Editor-in-Chief. You'll find the details in my previous posts.





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