The no-nonsense style of France’s finance minister has won her many admirers. She tells The Banker of how she intends to tackle the hardest task of her tenure, that of regulating France and Europe’s post-crisis banking landscape. Writer Silvia Pavoni

French finance minister Christine Lagarde has emerged as one of the rare winners from the financial crisis. Named European Finance ­Minister of the Year by the Financial Times, she has a forceful political presence and promising economic measures on her side.

Impeccably dressed and professionally charming, Ms Lagarde embodies France’s new powers and is one of the few European politicians to have achieved international renown.

Her professional past at law firm Baker & McKenzie is well known and respected: a politician with private sector experience is someone that markets warm to. She joined the firm as an associate and worked her way up to become chairman of the group in 1999. Under her leadership, the firm increased gross revenues by 50% and ended the fiscal year 2004 with $1.23bn in profits. When French president Nicolas Sarkozy asked her to move from her brief role as minister of agriculture in 2007, she was the first woman to become an economy or finance minister of a G-7 country.

A member of France’s national synchronised swimming team in her youth, Ms Lagarde learned, early on, the importance of hard work. As in the swimming pool, the motto ‘grit your teeth and smile’ can be easily applied to politics.

Outspoken and straightforward, Ms Lagarde has helped to bring France’s negotiating clout to a new level. In the first minutes of her interview with The Banker, she can’t resist a little dig at the media. When asked about the progress towards regulating bank bonuses, she quickly says: “Yes, I do see progress. Probably not as fast as broadcast by the media, because you run on a ­different timeframe than regulators do and you gen­erally trumpet the outcome for a process that has yet to take place.” She adds that bonuses have attracted the attention of the media as they make for a good headline, but many other topics were the real focus of the G-20 discussions.

Media attention is surely what any politician dealing with financial crises and bank bail-outs wants when trying to convey the ‘hard line on irresponsible bankers’ message to their electorate. And the media has been fed many headline-grabbing statements by many countries over the past few months. Criticising highly paid bankers has become a pastime across the world.

It is, however, Ms Lagarde’s belief that individuals ultimately respond to what closely affects them. “You can set as many policies as you want, as many minimum capital requirements and all that is needed and necessary, but at the end of the day, when it is a matter of making a decision, people ask ‘what’s in it for me?’.”

The competition factor

Beside the academic considerations on the link between pay and systemic risk, bankers’ remuneration also has an immediate, practical effect on competition.

Many across the industry believe that fiddling around with compensation will become a real issue and could make institutions from countries with a more relaxed approach, such as the US, far more appealing, penalising countries such as France and the UK, which have recently announced a one-off 50% bonus tax. France, which waited for the UK to take the initiative, is now inviting other European countries to follow this example.

How much could this push New York and the US ahead of European financial centres? Ms Lagarde says we should not allow banks to play off one country against another in this way and suggests that there would be a wider consensus on bankers’ compensation across governments in the future. “I see with great interest that people such as Alistair Darling or Tim Geithner, in the past few weeks, have raised their voices concerning the payment of bonuses and I can tell you that we talk among ourselves. There are lots of decisions being made in relation to bonuses, based on lack of information and understanding on what’s going on. We’ve seen it in the crisis and we see it again. I have banks coming to me and saying, ‘oh, I can’t do that [about bonuses] because Royal Bank of Scotland, or Barclays, or UBS are paying this much’ and then UBS goes to so and so and says, ‘we need a level playing field and we have to offer the same’. We’re not dumb – we might not be able to very strongly influence the process, but we’re not dumb.”

On their side, French banks have responded to government pressure and have agreed on limiting their bonus packages. However, industry insiders suggest that there are ways around this and that the word ‘guaranteed’ has been used again when negotiating bonuses packages. In the UK, for example, Barclays Capital has implemented back-dated pay rises and doubled the maximum basic pay for its top managers from £120,000 (E133,500) to £300,000 as a way of making up for lower bonuses.

Progressing with pace

As a strong defender of the European legislative process, Ms Lagarde believes that good progress has been made in good time. Compared with the speedy way in which the US churned out Sarbanes-Oxley in 2002 – with its severe requirements – the current European course to address financial systemic risk and banking and financial markets’ regulation is progressing at a reasonable pace. She says this should mean the structure that will emerge will be well balanced and well thought-out.

But not everyone agrees. Some suggest it has been put together far too quickly. The draft directive on alternative investment fund managers (AIFM), first proposed in April 2009, is a fitting example. The text of the draft directive has been defined as rushed and confused, and it has been suggested that its outcome could potentially wipe out the European hedge fund community – the vast majority of which is based in London.

Ms Lagarde insists that the furore about the proposed legislation of hedge funds has, again, been mainly created by the media, while the real intent of the G-20 was not to leave any market, product or player outside of the regulatory reform.

An alternative viewpoint

The alternative investment community in London has a different take on this. Many people have accused Ms Lagarde of meddling at the European level to make sure the AIFM draft directive was as stringent as possible. The text of the proposal has subsequently been softened, eliminating limits on leverage for hedge funds or the requirement for an independent valuator in private equity deals, which caused confusion, and in a few cases outrage, when first introduced.

The animosity surrounding the most sophisticated areas of finance is symptomatic of the clash between the Anglo-Saxon model and the continental European model.

This controversy has been exacerbated by President Sarkozy’s recent triumphal comments on the appointment of Michel Barnier as EU internal markets commissioner, which have reignited negative sentiments in the City of London. In this role, Mr Barnier will also ultimately head the new European supervisory authority. Will this mean that the continental European approach to financial markets will prevail?

“I think the players are going to change the system themselves,” says Ms Lagarde. “Whether you look at governments or bankers’ associations, at least in some countries, there is a clear understanding that things need to be changed and be different. The public has been made aware now of how the system functioned – what kind of pay-outs, what kind of salaries, what kind of policies, what kind of leverage. I don’t think they’re going to tolerate business as before.”


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