The Financial Crisis: A European Perspective

Washington, D.C.

PETER ACKERMAN:  Good morning to all of you.  And I can't think of a more timely moment than now to have Christine Lagarde, the French finance minister, talk to us about the crisis we're all undergoing from a European perspective.

My name is Peter Ackerman.  I'm a member of the Council on Foreign Relations.  I'd like to ask all of you now to please turn off your Blackberrys, cell phones and any other contrivance and make sure it's not on vibrate but completely off so it doesn't interfere with the sound system.

I'm going to introduce Ms. Lagarde and then ask a series of questions and that will get us about 20 minutes into the program.  And then I'll stop and then we'll ask the floor to basically continue and we'll ask questions until -- and Ms. Lagarde will respond to them until the meeting is over.

Christine Lagarde was appointed minister for Economy, Industry and Employment one month after the formation of the third government of Prime Minister Francois Fillon in May of 2007.  Born in Paris in 1956, Minister Lagarde completed her undergraduate studies in Le Havre, then received an additional degree in social law from the University of Paris and a Masters degree from the Institute of Political Studies.

After being admitted as a lawyer to the Paris bar, our guest joined the international law firm of Baker and McKenzie as an associate specializing in labor and antitrust law.  Mrs. Lagarde became chairman of the Global Executive Committee of Baker and McKenzie in 1999 and subsequently chairman of the Global Strategic Committee in 2004.  Under her leadership, Baker and McKenzie increased their gross revenues by 50 percent.

In 2004 Christine Lagarde was ranked the 30th most influential woman in the world by Forbes Magazine and the fifth best European female executive by The Wall Street Journal-Europe.

Asked by the French Prime Minister Dominique de Villepin to join his government in June 2005, Ms. Lagarde decided to put her skills and experience to work in the service of her country.  Her tenure as minister of Foreign Trade demonstrated her skills as a negotiator during the WTO talks and as a promoter of French exports.

After a brief stint as minister for Agriculture and Fisheries under the newly elected President Nicolas Sarkozy, she became the first woman to hold the post of France -- of Finance and Economy minister of a G7 country.

And here's the part I especially admire:  Minister Lagarde is also a proven sports person.  She was a member of the French national team for synchronized swimming, and if you think about it any experience with synchronization is a relevant qualification for leadership in this extraordinary moment.  (Laughter.)  So -- (laughs) -- good morning.

MINISTER CHRISTINE LAGARDE:  You also have to hold your breath. (Laughter.)

ACKERMAN:  For long periods of time.  (Laughter.)

Now, Minister, on September 20th, you offered a perspective that I think most Europeans shared at that moment, and this is what you said:  "The big risk which was feared by the financial markets which lead them to fall a lot over the past days is behind us -- that is to say the systemic risk which was feared."  Do you still maintain that the systemic risk is behind us?  And if not, what has changed?

LAGARDE:  Well, I think that you could be -- you should be held accountable for whatever statements you've made.  And I've made several statements over the last couple of years that clearly proved not true.  The only consolation is that I'm not the only one in that situation.  (Laughter.)

ACKERMAN:  I -- (inaudible.)

LAGARDE:  And I'm sure that if you each look back at what you said, what you thought, what certainties you had, it's pretty much questioned by the current state of events and the speed at which events are developing.

You know, what I think we are all learning at the moment is that there are systemic centers pretty much everywhere.  And to actually determine what is systemic, what is not systemic, where it is systemic and what the consequences, ramifications, and ripple effects some systemic events will have is clearly different.  And the horizon has broadened very much in that respect.

ACKERMAN:  Recently you made the point that you thought the decision to let Lehman Brothers go by the American secretary was a mistake.  Could you elaborate on that for a moment?  And also talk about what lesson that conveys to us as we try to work our way through this crisis.

LAGARDE:  Our first lesson is certainly humility because, you know, I certainly would not want to put the blame on anybody and let -- you know, let alone on Hank.  But -- because I would probably have made the same mistake, and lots of others would have made the same mistake, clearly being torn between the feeling that lessons must be taught, on the one hand, which may have prompted the decision, and the fact that there are balances and counterparts and actors of systemic values that need to be maintained and settled and straightened on the other hand.

So being torn between those two principles it's awfully difficult to actually draw the line properly as one does retrospectively because, you know, ex post, it's easy to say, "Oh, that shouldn't have been done."

But, yes, I believe that that decision has precipitated a series of events that have -- that have unfolded, that are unfolding, and that have precipitated further additional and deeper financial crises.

ACKERMAN:  Is there a Lehman in our future -- that same set of issues, moral hazard versus too big to fail?  Is there one that is going to have to be confronted?  Is there another institution like that comes to mind?

LAGARDE:  Well, what, you know, it seems to me at the moment that the moral hazards have to be dealt with at a later stage.  That's my sense.  And the issue of the systemic crisis and the maintaining of the functioning of the basic principles of our markets have to be -- have to be restored when they -- when it doesn't work or maintained when it works sufficiently. But I think that is the first and main and top priority.

And, you know, later on I'm sure we'll be looking at this and we'll probably learn lessons as far as timing.  I think on this issue, timing is critical, and that priority should be dealt with now, first of all, and other issues have to be dealt with later on when we rebuild, reconstruct and reorganize the system.

ACKERMAN:  Three days ago we all had a nanosecond of rejoicing when we saw global coordination and the reduction of interest rates by 50 basis points, but those basically coordination between central banks.  There seems to have been less coordination with respect to issues like the design of the troubled asset recovery pool in the United States or the decision to basically rescue Dexia.

Do you see coordination of that kind increasing now between the United States and Europe?  And if not, is there another way through that you foresee for this crisis?

LAGARDE:  Yeah, I honestly think that coordination and synchronization together with the right timing are of the essence and are absolutely necessary at the moment.  Having said that -- and as president of the (Equifin ?), which is the gathering of the 27 ministers of economy and finance in Europe for the current six months -- it's all well to say so, but to actually execute upon coordination and synchronization, to have the immediate reflex and to be able to link up, join, think ahead and make sure that what you're doing at home to rescue this, that or the other or restore the situation is not going to have spillover effects or consequences on not only your immediate neighbors, but generally all players on the financial scene and beyond -- it's not something that you do naturally.

So it's going to require -- to achieve coordination and synchronization with the right timing will require an enormous amount of -- how would I put it? -- a broad approach and one that is not driven by self-serving interests.  And by self-serving I mean those interests that you see in your immediate jurisdiction that have to do with your constituency, essentially.  And that is a major effort.  But in view of what we are facing at the moment, it's absolutely necessary.

ACKERMAN:  Let's take a moment to, sort of, reflect -- to look forward as to --

LAGARDE:  Can I just -- I mean --

ACKERMAN:  Please go ahead, of course.

LAGARDE:  -- follow up on that.  There have been moments in the last few days when we all thought, okay, this is now going to give the strong signal of, we are in this together; we're confronting it together; we're going to face the difficulties together.  And the interest rate raise was one of them.

But immediately after that then you have one event, one incident, one potential collapse that suddenly derives the attention and is read by those who are observing the situation -- and I'm thinking of the media; I'm thinking about the analysts; I'm thinking about, you know, some of us. as well -- immediately we think, okay, this is no longer a coordination; this is no longer synchronization; it's everyone running for shelter and looking after its own interest, which is not necessarily the case.

I don't know if you're going to ask me questions about the sort of doctrine that we've elaborated within the -- Europe.

ACKERMAN:  Please go ahead and elaborate on it.  I'm (honored ?).  (Laughter.)

LAGARDE:  Okay.  I thought I would just try.  (Laughter.)

ACKERMAN:  This is your moment, please.

So --

LAGARDE:  Yeah, I'm just trying to link up to -- with what I was just saying.

It's -- I mean, it's a word that we had not used, actually, prior to that -- "doctrine."  And it's one that we were encouraged to use and encouraged to (divvy ?) up into, how will it work and what will be, number one, the objective, number two, the principles by Jean-Claude Tricket.  As president of the European Central Bank, he actually encouraged us in that direction.

Why is it?  Simply because in each of our respective 27 markets we face a different situation -- we have different players; we have different standard of livings; we have different ways of banking; different ways of organizing our respective markets.  And as a result of that difference in our respective situations, obviously, we deal with issues in a different way.

It's an example that I generally take:  If you look at the Danish market, for instance, well, Denmark has a 114 banks -- sorry, 140 banks, 1-4-0, whereas Sweden next door has 14.  Sweden has gone through its own crisis in its own days and that has lead to consolidation.

If you look at a country like the Netherlands, it's not very, very big in terms of population, and yet it has some major banking players and major flows of liquidity as a result of its very optimized tax position in relation to other international treaties.

France has very significantly consolidated its banking sector, whereas a country like Italy is in the process of consolidation.

So you've got all these different markets which call for different actions.  And you have in each of the 27 member states a different set of people in charge of leading, managing, governing the country -- sometimes with coalitions; sometimes with not; sometimes with a strong executive; sometimes with a strong parliament.

So with this huge diversity -- which makes the richness of Europe and it -- you know, it makes it a fascinating scene -- we, nonetheless, need to coordinate and synchronize our actions, which is why we -- we have tried to elaborate that doctrine that I was referring to, which essentially is -- number one, the objective is, we will not let our financial institution down.  We added the word "systemic" so that not, you know, the teeny-tiny guy around the corner who calls himself a bank can actually expect the same treatment -- but financial institutions of systemic nature will not be let down because we want to protect clients, those who have deposited money, those who are saving money with those institutions.  That's the key objective that we're flushing out.

As a result of that we agree to abide by certain principles which have to do with a combination of tools and methods.  The tools will include recapitalization -- however strange it may sound for countries that are of a liberal -- not in the sense that you understand liberal -- you know, that are more free market than others.  But recapitalization is one of the key tools that will be used; guarantee up to certain amounts -- without amounts, but, you know, certainly guarantees will be included in the toolbox that we want to have.

Minimum -- say, minimum -- sorry, thresholds to protect deposits by clients -- that's another one.

And then there are principles according to which we want that to happen which have to do with reforming the management, reorganizing the structure, doing that on a temporary basis, being mindful of the taxpayers' interest, and at the end of the day, returning the interest that the state may have taken to the market because we all believe that the -- you know, it is not in the -- it's not a core attribute of the state to own stake in the financial sector.

But, you know, with due regard to what is happening at the moment, we also think that it is necessary to enter into this recapitalization process by taking stake in the institutions; sorting it out; doing away with the management, if necessary; putting in place the right teams; sorting the whole place out, and then returning it to the market.

Those are the key principles and some of the tools that we think we should be using together, sensibly, depending on our market situation, depending on the diversity of the places but agreeing to the same principles.

ACKERMAN:  Madame Minister, I think it's clear that no one -- I mean, absolutely no one could have foreseen the level of volatility that's happened since your comments on September 20th, and then I think everybody is quite admiring of the kind of catch up that public officials have had to do to deal with this volatility.  Who, for example, could imagine that the Japanese market would be down 25 percent this week?  Extraordinary.

But I am going to ask you to do something that's probably very difficult now, is to just look forward for a minute -- take yourself out of the crisis and think about what the impact will be when it's over on our currency system.

I want to ask you three related questions -- what do you think this crisis's impact will be on the dollar's role as the reserve -- world reserve currency?  Do you think that this crisis might cause significant tensions within the Eurozone that could even lead to the breakup of the euro?  And last is, will this, in your mind -- this crisis put more pressure on the Japanese to -- on the Chinese to raise their currency?

Take all or -- (laughter.)

LAGARDE:  Gosh, I'm surprised you're not asking me about the yen -- (inaudible).

ACKERMAN:  Well, if you want to talk about that, too, that'd be fine.

LAGARDE:  I'll start with the yuan.  And we're observing it at the moment, and I think it's going to -- it's likely to continue.  The Chinese authorities had finally embarked on the process of re-appreciating their currency.  If what is happening at the moment continues for a period of time -- that is, reduced growth, reduced consumption generally, and certainly on this market -- the volume of exports from China to the rest of the world will be reducing.  And under those circumstances I could not see how the Chinese authorities would continue to weigh on the yuan and -- with a view to re-appreciating the yuan, given the reduced exports.

So I think that's -- I have no certainty and, as I said, the first word I used when you asked me about Henry Paulson's decision was we're learning humility every day.  So certainty is not part of this exercise.  But I would strongly suspect that that would be the direction.

You asked me something about the euro and what about the breakup of the Eurozone.  Frankly, we were thinking the other day, if we had not had the euro, that would have been --

ACKERMAN:  A mess.

LAGARDE:  -- a mess -- a complete mess.  And the franc, deutschmark, lira -- I mean, all -- thank goodness we have the euro.  That's what I would say.  And it has certainly protected us from major shifts and devaluations within the Eurozone, and it has created a zone of great monetary and currency stability which has been very, very useful.

Now, your initial question had to do with the dollar as a reserve currency.

ACKERMAN:  Yes.

LAGARDE:  The U.S. is still the leading economic power in the world, the leading military power in the world, and in many respects it drives the show as we are seeing at the moment.  Is it going to continue being that currency reserve that it enjoys at the moment and draws benefit from?  I don't know.  I would suspect that other strong currencies are going to, you know, rise and be of value to those that are, you know, looking after liquidity at the moment and looking after reserves.  I would suspect that given the strength of the euro, the euro might also play that role, although it certainly does not have the benefits of being "the" reserve currency that that dollar has at the moment.  I think what will unfold later on will have to do with, what about budgetary balances around the world, what major -- what major deficits, either budgetary in nature or trade in nature will -- how those deficits will be handled; who will suffer from it; how will it spread out; how will it be contained?  I think the whole issue of containment and coupling those and decoupling is something that will be worth examining as well.

ACKERMAN:  One last question before we go the floor.  This is a bit more metaphysical in character:  On September 26th, President Sarkozy offered this observation: "Self regulation as a way solving all problems is finished.  Laissez faire is finished.  The all-powerful market that knows best is finished.  The world came within a whisker of catastrophe and we can't run the risk of it happening again."

Is it your view that this crisis is a serious threat to the Western-led models of globalization that are built of the foundation of economic liberalism and even political liberalism?

LAGARDE:  All right.  Let's throw ourselves into metaphysics now.  (Laughter.)

Well, point number one, I think that globalization is not over.  Globalization -- let's not forget, it has brought enormous values, enormous improvement, has taken people out of starvation the world over, and that should not be abandoned.  It should not be abandoned to the benefit of protectionism.  I think that would be a terrible direction for the world to take -- point number one.

Point number two, I think there are a couple of things which in my view are critical.  Number one is the issue of balance.  I think that we need to restore a sense of balance.  We need to get away from excess where, you know, the market forces may have taken us, but I wouldn't say the rules have taken us.  And I'm not suggesting that the current situation is an abandonment of the rules of the market, but I'm suggesting that the markets need different rules and better rules.  And I think that quite a few of the difficulties that we've had result from the absence of rules more than, you know, the absence of rules and sometimes the absence of the market, actually.

But if you look at the subprime originating point, the fact that quite a lot of that activity which involves the creation of money, really -- the fact that that activity was outside the scope of regulation certainly is of concern and needs, you know, thoughtful redress.  And I'm saying thoughtful here on purpose because I was here at the time of the Sarbanes-Oxley evolution implementation.  And however thoughtful it was, it certainly was not thoughtful enough because it went excessively way in the other direction.  So that's the reason why I'm using the word balance.

A point of equilibrium which, you know, avoids excess of, quote, "the free non-regulated, non-supervised market," as well as the excess of regulations which eventually prevents, constrains, refrains and then leads to players trying to find little ways around and on the sides which may have had to do with the current situation we were in.

So one is the point of equilibrium that we need to constantly try to find and refine because market forces will move it, number one.

And number two, thoughtful regulations and comprehensive regulations which leave market players enough room to maneuver, to move money around, to bring the liquidity that is necessary but without the excess that we have seen recently.

ACKERMAN:  Thank you so much.

I'd like to invite council members now to ask questions.  When you're identified by me, please stand up, wait for a microphone and identify yourself, please, before speaking.  Keep your comments and questions brief so we can have as many people speak as we can.

QUESTIONER:  (Inaudible) -- CSIS.  Madame Minister, as you know, excessive compensation packages have become quite an issue on Wall Street.  And I noticed that the French president said it should be brought under control in France; otherwise something would be done by the government.  Is there some sort of coordination going on among the EU countries on executive compensation?

LAGARDE:  Yes, sir.  The European group of finance ministers has adopted conclusions -- actually last Tuesday afternoon during our last (Equifin ?) meeting -- which has included, again, the various principles that we agreed to enforce in our respective countries.  And it has to do with complete transparency of the overall package of compensation.  In other words, fixed, variable, bonuses, stock option plans, fringe benefits, added retirement plans, whatever -- the whole package, including perks and goodies -- transparency applied to that.

Number two, link between performance, properly reviewed and appreciated, and whatever variable portion there is about the compensation.  And third -- how would I put it? -- however the compensation is structured, there should not be an encouragement and a link with abusive speculation or speculative behavior.  I'm probably not translating exactly what we mean by that, but we do not want to introduce in compensation packages mechanisms that actually encourage irresponsible behavior -- let's put it that way.  Rather than no speculation, we want to make sure that there is responsible behavior in relation to the conduct of the business embedded in the remuneration packages.

And, by the way, just to -- because I think that's a very good point to explain how Europe actually operates.  We agreed to respect those three pretty basic principles.  But then it's -- for each of us, our respective countries, depending on our social chemistry, depending on our political situation, depending on the spirit of the nations to actually organize those principles.  And it would not surprise you that the Dutch, for instance, were adamant that in their home country, it should be stronger, deeper, capped with thresholds and so on and so forth.  And that's the, sort of, you know, protestant approach to life -- (laughter) -- applied in the current crisis.

In France, our French president, Nicolas Sarkozy, asked the Manufacturer's Association to take up the matter and to propose solutions before or under the threat that if no solutions -- if no sensible solution is put together and implemented within companies then the parliament will be asked to take it up.  And the business associations came up with a plan which is extremely detailed and addresses all issues and includes an element of parity.  In other words, there can only be stock option plans available to the team of executives provided that there is an element of profit sharing within the company.  Call it socialism or otherwise -- it's our way to deal with the issues of the allegation of profits.  And each country will have its own characteristics, but we agree that the three basic principles will apply.

By the way, it's not socialism -- (laughter) -- for those in doubt.

QUESTIONER:  David Apgar, BlueOrchard Finance.

Minister Lagarde, this is a question that bears on the conduct of U.S. fiscal policy.  Earlier this week a prominent conservative economist did link this crisis to a crisis in confidence in part reflecting concerns about ongoing U.S. current account deficits, but declined to conclude that there's any real lesson for budget deficits in the U.S.  In fact, when questioned he said something to the effect that because interest rates have been low during a period of deep U.S. budget deficits, well, therefore, there really can't be much of a link between budget deficits and current account deficits.

I gather from your earlier remarks that you probably disagree with that, and I'd like to invite you to expand on your comments about any implications of this crisis or the conduct of fiscal policy.

LAGARDE:  I think your question is far too complicated for me at this time of the day.  (Laughter.)

You know, at the origin of the crisis -- I'm sure there will be a list of things that will be identified, two of which would be the trade deficit, the budgetary deficit on the long and extended period of time.  Together with that I'm sure that the low interest rate for an extended period of time together -- you know, and if you couple the massive amount of liquidity available and around and moving and the low interest rate, clearly you have -- not recipe for disaster but recipe for constant continuation of those trends.

Now, the moment that the music stops, clearly the ground is ready for what we're seeing unfolding at the moment.  My personal feeling is that we should be very, very attentive to these issues of the twin deficits.  That's the approach that we've adopted in Europe.  We have adopted the -- what we call the Stability Pact under which we all agree -- certainly within the Eurozone, which is only 15 of the 27 -- but we all agree to cap budgetary deficits to 3 percent.  And we all agree to try to reduce our deficit structurally by .5 percent every year and to bring deficits down to the extent we can and to reduce our indebtedness as well to 60 percent of GDP.

On the Eurozone basis, we don't have trade deficits; it varies from country to country.  Germany takes us way up because it has excess -- (inaudible) -- has deficits at the moment.  But as a zone, as a monetary zone, we are balanced.

I think -- you know, it brings me back to something which is of -- you know, you were talking metaphysics but this is a very ancient Greece principle, this issue of balance again.  You know, trying to find the equilibrium and restoring balances is something that we should all thrive at.  It's probably not the urgent, immediate priority today, but I think we should all agree that this is a midterm goal that we need to achieve.

ACKERMAN:  Go ahead.

QUESTIONER:  Yes, Glenn Kessler with The Washington Post.

The South Korean finance minister yesterday gave an interview in which he blamed this crisis solely on the United States.  And I was wondering how much do you share of that view?  Is this the result of policies pursued by the United States?

LAGARDE:  You know what?  I don't think we should be and certainly I will not be in this blame game situation.  I think it's pointless.  What is important is that we look at tomorrow; we look at the future together and we close ranks and we coordinate our actions.  I think that's what matters at the end of the day.  Who is to blame?  Who was benefited?  Who has suffered?  We will have that discussion maybe at a later stage, but the point is irrelevant at the moment.  That's my sentiment.

QUESTIONER:  Can I just quickly follow up?

LAGARDE:  Sure.

QUESTIONER:  You had said coordination this weekend?  (Off mike.)

ACKERMAN:  Mike.

LAGARDE:  Don't have the mike.

QUESTIONER:  Sorry.  Do you expect to see -- show coordination this weekend?  Is that something that you would like --

LAGARDE:  I would very much hope so.  Absolutely -- yeah.

QUESTIONER:  Minister Lagarde, Peter Trooboff, Covington and Burling here in Washington.

I want to pick up on the point you made earlier about balance and the regulation to come.  Could you talk a bit about whether we have today the kinds of institutions that would allow the coordination of regulation?  After all, here in this country we're still debating over how our structure should exist going forward.  And while there has be coordination in the limited way you describe, regulatory coordination of the kind you've been describing may well require new institutions and a whole new way of thinking about the subject.  Could you elaborate a bit on that?

LAGARDE:  Sure.  And, again, with massive humility because I don't pretend to have all the answers and I think that, you know, every brain will be useful and everybody's ideas will be -- should be, you know, taken and examined and brought together.

I'll try to give you one example.  And I go by the principles that any organization that establishes standards and norms should be accountable to a political power that is democratically representing constituencies.  It should take that principle on the one side.  And that would be mine.  And if you add to that the fact that we need expertise; we need qualified individuals, not people who have gone up with their chair, as I call them.  So those two principles -- accountable to democratically -- accountable to the people at the end of the day, whatever the process is between the people and those that represent them -- democratically is preferred, of course, but be it as it may -- and second, the principle that qualified, competent and experts should be involved.  I think we need to redesign some of our institutions.  And the example I will take is this one:  The International Accounting Standard Board is one.  And again, it's not in -- I'm not into blaming; I'm into trying to encourage a process that works and that works to organize level playing fields for all.

What do we have at the moment?  In the main we have U.S. principles still applying in the U.S.  We have the IFRS principles in the Europe applying.  And we have the International Accounting Standard Board sort of deciding principles and rules with very few Europeans on the board, and yet deciding that the mark-to-market is fine under the IFRS with very strict interpretation.

Now, that's not working.  And it brings discrepancies, the wrong evaluations, and it's spiraling down budgets of a lot of our large institutions.  That's one example of an institution which in my view -- and it's my humble personal view, if I may be -- you know, for those journalists that are taking notes -- scribbling things at the back of the room and typing away -- it's my personal opinion; I'm not, you know, advocating this on behalf of the French government or the (Equifin ?).  I think that needs reform.

I also believe that because the decoupling that we had all dreamed of and that emerging markets may have thought would apply to their respective economies is in fact not working at the moment as we're seeing the effects spreading out around the globe.  I think that an institution where emerging countries are duly represented and on board must be involved with the current situation.

I don't know whether that should be something new, something existing, something existing that does not have within its jurisdiction the current analysis and review of the situation and prescription of proposals, but certainly emerging markets and emerging economies should be represented and on board.

ACKERMAN:  Hani?

QUESTIONER:  Good morning.  I'm Hani Findakly, a member of the Council.

I want to pursue Peter's last series of questions -- the general questions about the markets.  And given the fact that something like more wealth has been extinguished over the past few weeks than had been created over the last several years, does this raise a question in your mind about the fall foundation of capitalism and the premises on which it based, which is free markets?  And if so, what kind of rules and transition this market applies?

LAGARDE:  Well, if you consider that the two options are capitalism or communism, I'm definitely of the view that capitalism is the one that survives that, will survive, and that we need to concentrate on because the other one has failed, and has failed dramatically by, number one, not creating the right values; number two, not making people happy.  And at the end of the day, it's the wellbeing of our populations that we are accountable for.

So we need to look at what we have which is capitalism and see how we can improve the rules, improve the markets and make sure that it does actually lead to the wellbeing of our populations -- with an "s" -- which means that it should not be restricted to a very teeny-tiny portion of our populations but that is actually embraces all in our populations.

Now, I don't have the rules all laid out in my book because otherwise I'd be president of the world.  (Laughter.)

ACKERMAN:  Jessica.

LAGARDE:  Which I'm not.  (Laughs.)

QUESTIONER:  Jessica Einhorn, SAIS.  Let me just say that a great source of optimism today is to sit in an audience with Jacques de Larosiere -- is to be reminded that wise and very steady leadership can take us out of financial crisis.  So that's very nice.

But my question to you, Minister, is what governments do matter?  And I was wondering if you could share with us your view on two relatively hard cases right now.  One is the actions of Ireland and how we might think about them, and the other is the case of Iceland and whether there are some countries that are so small that they can fail.

LAGARDE:  Let me first of all share you introductory remarks about Jacques de Larosiere his presence and his talent and his -- (inaudible) -- that we all have to him for what he's done.  Can I just add an additional comment to what you said?  And that shouldn't -- he should not feel specifically designated.  But when I was looking at what Warren Buffett was doing and I was listening to Antoine Bernine (sp), the president of -- (inaudible) -- who said to me, you know, "The moment those young guys came to me and explained what the derivatives were and how it worked out and how it, you know, sort of spread the risk around so that I was eventually buying something that had no risk attached to it, I thought, 'This is bollocks.  I don't believe that.'"  (Laughter.)

And when I see Mr. de Larosiere with us, I think to myself, you know, there's something great about this crisis, which is the return of the senior.  And I'm not suggesting that in the sense of senior meaning elderly -- quite to the contrary.  I think a senior brain which has gone through difficult times, which have experienced other crisis and have gone through crisis and have seen the light after the crisis, are illuminating factors to all of us, and I think it is great that you are with us, Jacques.  And I would ask the audience actually to applaud Jacques.  (Applause.)

QUESTIONER:  Ireland and Iceland?  (Laughter.)

ACKERMAN:  -- and Iceland.

LAGARDE:  Ireland and Iceland.  Well, Ireland -- it's -- how would I put it?  It's work in progress very much, because the first move made by Ireland I think was a response to a particular situation which was regarded as especially dramatic by the government of Ireland, and actually called for immediate action and this sort of blanket guarantee that was put together in relation to the six Irish banks -- blanket guarantee for the depositors.

And when I say that it's work in progress, I mean that the Irish government is currently refining the plan, is currently fine-tuning it, is cutting it around the edges and making it European-compatible because it was not, in a way.  When you set up a guarantee of that nature and you say it's only for the six national banks, you clearly are creating a competitive advantage for those six Irish banks that have guarantees attached to their operations.  And as a result, potential -- (inaudible) -- from other banks to those six banks within Ireland, but also within the Euro zone and possibly from the UK to Ireland.

So they are refining it.  They're changing it at the moment.  They're in discussion with Commissioner Cruz (sp) who is in charge of competition, to expand it to all financial institutions as defined under the -- well, it's not exactly the same definition, but it essentially says any banks operating on the -- in Ireland.  So that's on Ireland.

On Iceland, what do you say --

QUESTIONER:  (Off mike.)

LAGARDE:  Yeah, small enough to fail.  And with big institutions as well, I think we've seen here the issue of the discrepancy between the size of the country and its GDP and the balance sheet and exposure of banks.  Clearly there is -- you know, there is rescue underway and I hope that we can do that in the most coordinated fashion, helping them out and addressing the issues of their branches and subsidiaries around Europe because it's not just the three Iceland --

ACKERMAN:  Icelandic.

LAGARDE:  You say Icelandic?

ACKERMAN:  Icelandic, yes.

LAGARDE:  -- Icelandic banks, but also their networks around Europe that need to be addressed.

QUESTIONER:  I'm Bill Coleman (sp).  I'm a lawyer.

LAGARDE:  You're forgiven.  (Laughter.)

QUESTIONER:  Do you give any weight to the fact that in the last three or four years, a large part of the money has moved places where normally it doesn't, like the Middle East, for example?  I've been told that the U.S. sent about $700 billion there.  Certainly Russia got a lot of money, which committed them to go from a deficit to a plus.  And yet because they weren't as educated in the system as other people or Great Britain, it didn't get back in the system the same way.

My other two observations are, one, we all have great universities, but as far as I understand, none of them picked up the fact that we were having problems.  And thirdly, even though I'm a lawyer and -- (inaudible) -- I worry about some of the law firms if they let this happen without recognizing it.

LAGARDE:  On your first point, I don't think you should underestimate the talent and the skills with which massive amounts of money are being managed simply because they originate in countries that you characterized as you did.  Point number one.  And that leads me to -- in other words, those countries that have accumulated massive surpluses have generally had those surpluses managed in the, quote, unquote, "best equipped" and -- (laughter) -- financial centers.

But it leads me to another comment that I would like to make in relation to specific places.  I think that there are places that are currently tax heavens that we will have to address in the process of this crisis if we want to be honest to those to whom we are accountable.  Because I believe that tax shelters, tax heavens -- however you call them, tax paradise or whatever -- (laughter) --

ACKERMAN:  Havens.  Havens.

LAGARDE:   Havens.  Sorry, I said heavens.  Havens.  Tax havens.

ACKERMAN:  It could be heaven.  (Laughter.)

LAGARDE:  They certainly present a serious hazard.  That needs to be tackled.  I don't think we can carry on with little loopholes in the system where clearly you can siphon massive amounts and recirculate, recycle in ways that are not compatible with the rules that we want to put in place.  That's a conviction that I have.

You asked me about universities.  Remember the Sarbanes-Oxley times when no one had seen either that those special vehicles were being used on the side of balance sheets, when no one was particularly concerned about ethics or ethical principles.  There were vague talks about corporate social responsibility, and that was really addressed on the side by people who thought that they would sort of dress up well and cover up whatever was happening behind.

Then immediately after that we had burgeoning ethics courses and special classes and special curriculum and academics that suddenly addressed those issues as part of MBAs and whatever.  I'm sure that will happen again, and I'm sure that there will be members of universities or professors or members of the academic society who will say, "Well, sorry, but I thought about it."  It's probably that we didn't pay attention.  And that's a huge, big, very, very alarming and difficult wakeup call.

You mentioned law firms -- I agree with you that law firms -- but just like in the -- (inaudible) -- days, when we go back in a few weeks or months time, we'll find out that everybody failed eventually.  You know?  The accountants, the auditors, the lawyers, the bankers --

ACKERMAN:  The mathematicians.

LAGARDE:  -- the mathematicians, the modelists --

ACKERMAN:  The regulators.

LAGARDE:  -- regulators, supervisors.  And maybe it's because we had that piecemeal chain that did not permit us to sort of have an encompassing view of a very, very sophisticated and highly structured process, where not only risk was scattered but responsibilities were also scattered around.

QUESTIONER:  (Off mike.)  (Laughter.)

ACKERMAN:  Sir?  At the edge, and then you.

LAGARDE:  I didn't have myself that privilege.  (Laughter.)

QUESTIONER:  Harry Duncey (sp), the Associated Press, scribbling away.  (Laughter.)  President Sarkozy has proposed a economic summit involving the G7 countries and some emerging market countries.  President Bush is for it, provided there is proper preparation.  What issues have to be resolved before such a summit can take place, and when do you think it will take place?

LAGARDE:  I'm afraid I don't have the answer.  I don't know when it should, when it would, when it will.  I hope it does.  And clearly there needs to be -- you know, it shouldn't be a summit for a summit, and I'm sure that this is what my president, Nicolas Sarkozy, intends.  It's a summit that should provide for that coordinated and synchronized action in various directions, which certainly would include how we address the financial crisis of the moment, what are the urgent measures that need to be taken on a broad basis by all major players.  That would also include, I'm sure, regulations going forward, actors and institutions that would be relevant.  And you know, you can draw the shopping list of those.

ACKERMAN:  (Inaudible) -- just one more.

QUESTIONER:  My name is Andrew Pierre --

LAGARDE:  Monsieur Pierre, bonjour.

QUESTIONER:  -- graduate of -- (inaudible) -- and I'm a political scientist rather than economist, which will account for my question, I fear.  (Laughter.)  We've had a bit of a metaphysical discussion, and you have made very clear that you're not in the blame game.  But I think there's still sort of an underlying question about what lessons will be drawn in Europe -- perhaps in the United States, but -- (inaudible) -- Europe -- regarding the American economic model and the extent to which it is a problem, let's say -- if I can put it that way -- for the Europeans, to the extent to which it reinforces -- I realize Europe is very broad -- the European model, which is different than ours.  Because after all, at the end of the day, if I understand this correctly, it was the subprime issue which then led to -- because of lack of regulation -- which led the whole world -- brought the whole world down to its knees.  And I would have thought that apart from all the very important fixes and so on that you've been discussing, there is in the background the question of what is the model we come up with in Europe and in the United States, and how can we bring these two models closer together?

I might add, there's very little discussion of this thus far in the American presidential campaign, though a lot of discussion about bailouts and so on, but nothing really deep about how our system in this country is so different from that of other parts of the world, and which is the right system in the end.

LAGARDE:  Well, again, I don't pretend to have the answers, but there are three points I would like to make.  Number one, you're saying that it brings the system to its knees.  I don't think we should leave this room thinking that the world is down to its knees.  One of the beauties about being minister of Economy, Finance, Industry and Employment is that you actually go on the ground and you visit with companies that are actually in the process of manufacturing, of producing, of finding clients, of recovering debts and that are actively participating in the creation of value.  Right?  So because you're based in Washington or Paris or New York, you have a certain approach, which is clearly gray, if not very dark at the moment.  But there is a world around those centers, and it is -- you know, with those people that are leading the enterprises, that are creating value, that are producing goods and services -- it is with them in mind that I'm in action mode at the moment because I think it's for them -- it's for consumers, it's for employees. and it's for the creators of value that we need to sort this out.  Point number one.

Point number two, we are moving into a different world, and it's not just the issue of the financial crisis that we are discussing at the moment.  It's also the issue of population, demography; how do we create the ground-force sustainable growth; how do we address the issue of maintaining our -- not burning resources in a responsive and an irresponsible way?  And those are long-term matters that we need to very, very quickly embrace while dealing with the immediate priority, which is to settle -- to -- (inaudible) -- and settle the system.  But growth -- what growth, how sustainable, for what population, with what distribution of -- with what creation of then allocation of resources and values -- all those deep questions I think are affected in the medium and long term and need collective thinking.

And I'm not suggesting that one model will be better than the other, because I'm a strong believer that diversity is in itself a richness.  But there are urgencies and survival issues that transcend our diversities and that we need to all collectively accept.

I'm sorry if that was not, you know, very clear, but I think that -- there are major points that go beyond what we are discussing at the moment, and that will determine how we go through that as well.

QUESTIONER:  (Off mike.)

LAGARDE:  So you know, the long term is moving into the short term, and we need to address that as well as the immediate priorities.

ACKERMAN:  I'd like to entertain one final question.  And I'm asked when I do this by the council to make it clear once again that we are on the record.

Please.

QUESTIONER:  Richard Soudriette, IFES.  Madame Ministre, bienvenue.  I have another question for you.  Last year President Sarkozy and the prime minister came into government promoting a very visionary reform program.  Where do those reforms stand today, and what needs to be done in the future?  Thank you.  Merci.

LAGARDE:  Well, reform has been our priority, continues to be our priority, and we are adamant that this current situation is not going to stop us from actually implementing our reforms.  And those reforms are intended to alleviate obstacles, remove barriers, and make sure that, number one, people that have that entrepreneurship spirit which leads to the creation of value can actually operate and can exploit that talent; number two, that employment is encouraged without being only supported, but encouraged, and that anybody who wants to work can actually do so.

It's pretty basic and simple, what I'm saying here, and it's -- as s result of that, we've transformed lots of things.  The employment market has been transformed.  The employment support packages are being transformed.  It's based on a balance of duties and responsibilities -- duties because, for instance, people looking for a job have to look for a job and have to accept new jobs when they become available.  That's the duty part.  Responsibility -- the state will support that, will encourage the movement on the basis of the concept of -- (inaudible) -- security -- that's an example.

On the goods and services market, we have voted a very significant bill this summer that will be implementable with all decrees and implementing measures being available and effective as of the first of January, that remove the obstacles to the setting up of distribution systems, retail systems, that free up the relationship between suppliers and distributors, that eliminates chapters of regulations that were gradually constricting those relationships.

Those are just two examples that I can give you.  There are multiple others because it's just a massive wave of reforms that is underway and that will continue.

ACKERMAN:  Minister, I want to thank you very much for being with us.  I think the group here -- (applause) -- this was a terrific session, and we're very glad that you were with us.  Thank you.

LAGARDE:  My pleasure.

.STX

(C) COPYRIGHT 2008, FEDERAL NEWS SERVICE, INC., 1000 VERMONT AVE.

NW; 5TH FLOOR; WASHINGTON, DC - 20005, USA.  ALL RIGHTS RESERVED.  ANY REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION IS EXPRESSLY PROHIBITED.

UNAUTHORIZED REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION CONSTITUTES A MISAPPROPRIATION UNDER APPLICABLE UNFAIR COMPETITION LAW, AND FEDERAL NEWS SERVICE, INC. RESERVES THE RIGHT TO PURSUE ALL REMEDIES AVAILABLE TO IT IN RESPECT TO SUCH MISAPPROPRIATION.

FEDERAL NEWS SERVICE, INC. IS A PRIVATE FIRM AND IS NOT AFFILIATED WITH THE FEDERAL GOVERNMENT.  NO COPYRIGHT IS CLAIMED AS TO ANY PART OF THE ORIGINAL WORK PREPARED BY A UNITED STATES GOVERNMENT OFFICER OR EMPLOYEE AS PART OF THAT PERSON'S OFFICIAL DUTIES.

FOR INFORMATION ON SUBSCRIBING TO FNS, PLEASE CALL CARINA NYBERG AT 202-347-1400.

THIS IS A RUSH TRANSCRIPT.