Draghi Channeling Bradley Deploys Self-Reliance in Crisis at ECB
On the basketball court of Rome’s Liceo Massimo high school about five decades ago, Mario Draghi modeled his playing on that of future Hall of Fame hoopster and U.S. Senator Bill Bradley, then shooting for Olimpia Milano.
Former teammates say the drive and attention to detail that shaped Bradley’s career also are hallmarks of Draghi, the Bank of Italy governor who is set to be the next president of the European Central Bank. From worshipping “Dollar Bill,” Draghi stands to inherit the title of “Mr. Euro,” the No. 2 monetary- policy maker after Federal Reserve Chairman Ben S. Bernanke.
“He was a perfectionist, certainly competitive, definitely a team player,” said Paolo Vigevano, chief executive officer of electricity trading company Acquirente Unico SpA and a former center to Draghi’s guard. “He has always lived with the same determination in all the jobs he has been asked to do.”
The father of two, who lost both of his own parents as a teenager, will need such determination as he becomes the ECB’s third chief since the euro began trading a dozen years ago. From Jean-Claude Trichet Draghi will inherit a central bank that’s at loggerheads with governments over how to resolve a sovereign debt crisis ricocheting through Europe.
Inflation is rising at the fastest rate in more than two years and the bond yields of Greece, Portugal and Ireland are close to euro-area records, exacerbating a two-speed economy across the 17-country bloc.
“Monetary policy will take into account the emergence of fresh inflationary tensions,” Draghi said today at a conference in Berlin. “To ensure financial stability in a monetary union three conditions must in each member country be satisfied: price stability, fiscal discipline, national economic policies conducive to growth. The first was and is ensured by the ECB, but in some countries we do not have the second and the third.”
In his 63 years, Draghi has worked as an economics professor in Italy, a financial diplomat at the World Bank, a bureaucrat at his country’s Treasury and a banker at Goldman Sachs Group Inc. (GS) He has sat since 2006 on the ECB’s governing council and chaired an international panel of regulators charged with revising the rules of international finance.
“Mario has strong views, which he expresses firmly but politely,” said Bank of Israel Governor Stanley Fischer, who taught at Massachusetts Institute of Technology in the mid-1970s when Draghi received a doctorate there. “He doesn’t bang on tables and things like that. But he knows what he wants and he’s been very successful.”
The Frankfurt-based central bank itself has undergone a revolution in recent years. The credit crunch and subsequent debt turmoil forced it to ease lending to banks, buy 75 billion euros ($105.6 billion) of debt from stressed nations and cut interest rates to a low of 1 percent, all while Draghi was on the governing council.
“The role has changed since Trichet was appointed,” said former U.K. Chancellor of the Exchequer Alistair Darling, who knows Draghi from Group of Seven summits. “The ECB is buying bonds from some countries and he’s had experience with that.”
Draghi must coalesce the 23-member governing council around a plan to unwind the stimulus and aid measures and at the same time help it play a greater role in financial regulation. That marks a shift from when Trichet took the post in 2003: He was able to wait more than two years before shifting interest rates.
Laurent Bilke, a former ECB economist who is now head of European interest rate strategy at Nomura International Plc in London, says he expects Draghi to maintain Trichet’s direction on rates after the central bank lifted its benchmark a quarter point to 1.25 percent in April.
Where he may differ from the incumbent is on debt restructuring, which Trichet has opposed in the case of Greece even as it struggles to tackle its 329-billion euro debt burden. Finance chiefs last month began floating the idea of asking bondholders to voluntarily extend Greek’s repayments.
“What can evolve is the ECB’s opposition to any form of restructuring,” said Bilke. “They’ll have to change because they’ve taken an extreme position and a number of governments are now pushing in a different direction.”
As the ECB raised its key rate in April, inflation was accelerating to 2.8 percent, the fastest pace in 2 1/2 years. It was a breach of the ECB’s 2 percent limit for a fifth month. The focus on headline inflation differs from the Fed, whose policy makers have signaled no imminent change to their near zero benchmark as they ignore more volatile food and energy prices and follow their mandate to also support employment.
Other ECB challenges include deciding how to deal with banks addicted to ECB aid and whether to revamp how the bank auctions securities, said Gilles Moec, a former Bank of France economist and now co-head of European economics research at Deutsche Bank AG in London.
Draghi has known hard times in the past: He was orphaned in high school when his parents died within months of each other, leaving him the oldest of three children. At the time, he was getting a Jesuit education under headmaster Father Franco Rozzi, a philosophy professor known for constantly challenging students by asking “why” whenever they presented answers.
“The school was very difficult, with Mass early in the morning and long hours hitting the books,” said Giancarlo Magalli, a schoolmate and now a talk-show host on state-owned television network Rai SpA. While Magalli was expelled, Draghi “was very polite, well educated and funny.”
Luca Cordero di Montezemolo, now the chairman of Ferrari SpA, remembers Draghi as a “serious boy” whom classmates would turn to for help and also rib for his elegant attire.
“Mario was never uncombed, he was always tidy,” said Montezemolo. “Those of us who sat in the classroom behind him tried to find a fault in the way he was combed or dressed, but he was always so perfect and paid attention to details.”
Draghi went on to graduate from La Sapienza University of Rome, where he studied under Keynesian economist Federico Caffe, before heading to MIT, where Bernanke also was a student. The Italian was taught by Nobel laureates Franco Modigliani and Robert Solow, who said he expected Draghi to become an academic as well.
After a professorship at the University of Florence and a time advising the Bank of Italy, Draghi became his country’s representative to the World Bank in Washington before returning to the finance ministry in Rome in 1991 as its director general.
Just months later, Italy was being whipped by a currency crisis that forced it to devalue the lira 3.5 percent and then quit Europe’s exchange rate mechanism, a precursor to the euro. Draghi began more than $100 billion of asset sales.
“Privatization is a fundamental component in keeping the deficit within the limits of the European single currency,” he said in March 1998 testimony to the Italian parliament.
On the block went stakes in energy companies Eni SpA (ENI) and Enel SpA (ENEL), as well as telephone company Telecom Italia SpA (TIT) and Banca Nazionale del Lavoro SpA. The windfall earned Draghi the nickname “Super Mario” in local newspapers, after the computer game developed by Nintendo Co. in the 1980s.
“His experience at the Italian treasury in the pre-euro days has given him a hands-on experience with the challenges of a seemingly unsustainable sovereign debt,” said General Electric Co. (GE) Chief Economist Marco Annunziata.
Draghi also wrote 1998 legislation that overhauled Italian financial market rules. The measure forced companies to pay more attention to corporate governance and gave additional powers to internal auditors and minority shareholders.
Goldman Sachs hired him in January 2002 to “develop and execute business” as a London-based managing director and vice chairman of its international division. By November 2004 he had joined the firm’s global management committee, a two-dozen- strong executive including then-Chief Executive Officer and future U.S. Treasury Secretary Henry Paulson.
Draghi stayed three years at Goldman Sachs, often traveling to its London office by subway rather than using a company-paid limousine.
In 2005 he was named to succeed Italian central bank governor Antonio Fazio, who resigned in the face of two criminal probes into whether he favored Italian lenders in takeover battles. The bank’s reputation had already been tarnished by its failure to detect the financial fraud behind the 2003 bankruptcy of Parmalat Finanziaria SpA.
The banks Fazio had sought to protect were taken over and lenders were encouraged to consider more mergers. Draghi streamlined the central bank’s sprawling branch network.
Draghi also changed the tone within Palazzo Koch, the 19th century Rome headquarters. He removed the portrait of an arrow- riddled Saint Sebastian that had hung above Fazio’s desk, to be replaced by abstract works by Italian artists.
Staff members were allowed to access the Internet from their desks and to carry Blackberries, as he did. He came to be called “Governatore atermico,” the cold-resistant governor, for his penchant for avoiding coats.
Outside Italy, Draghi was named chairman of what became known as the Financial Stability Board, a panel of regulators now charged with revamping the rules of global finance to avoid a repeat of the global financial crisis.
While the board published guidelines on bank pay policies and central clearing of over-the counter derivatives, Simon Johnson, former chief economist at the International Monetary Fund, criticized Draghi for not pushing for more capital buffers at banks. He predicted the incoming chairman won’t do so when at the ECB either.
“I don’t hear that he was pushing for more capital,” said Johnson, a Bloomberg News contributor. “Some say the ECB should just focus on inflation targeting, but I think regulation is an essential central bank function.”
Italy’s own finance minister, Giulio Tremonti, has clashed with Draghi. He attacked the governor’s regulatory push at a meeting of European finance chiefs in Paris in December 2008. While Draghi was addressing the other ministers, Tremonti told reporters it would be “stupid to listen or take lessons from people who don’t understand anything.”
Draghi began this year with only an outside chance of ending it as Europe’s central bank chief. While Prime Minister Silvio Berlusconi had made him the only candidate to be publicly nominated, investors were betting Bundesbank President Axel Weber would win the job.
Then Weber announced his resignation in February, telling Der Spiegel there was a lack of “acceptance” among euro-area leaders for his views on monetary policy.
At the time, authorities in Europe were questioning Goldman Sachs’s involvement in currency swaps that helped Greece hide the extent of its deficit and debt. A 2010 inquiry by the government in Athens uncovered a series of deals with securities firms, saying that they may have allowed it to mask the real state of the public finances.
Draghi’s office released a statement in February 2010 denying he had any involvement in the Greek trades, and Draghi said in interviews that he had focused only on private investors.
Bild, Germany’s biggest selling newspaper, expressed concerns about Draghi’s inflation-fighting credentials in February with a headline that declared: “Please not this Italian! Mamma mia, for Italians inflation belongs to life like tomato sauce to pasta!”
He also had to deal with Chancellor Angela Merkel, who was sliding in the polls after signing up her taxpayers to bailouts for Greece, Ireland and Portugal. She was under pressure to ensure the next ECB chief shared Germany’s support for hard currency, balanced budgets and low inflation.
Draghi used newspaper interviews to describe Germany as a model for the rest of the euro area, while calling for tougher sanctions for budget-rule breaches and vowing to ensure price stability.
The charm offensive paid off. Merkel announced her support for Draghi on May 11, calling him a “very interesting and experienced” man who shared Germany’s “ideas of the stability culture and solid economic policy.” Five days later he was endorsed by all 17 of the euro area’s finance ministers; national leaders are to affirm his nomination by June 24.
Bradley, 67, who was a senator from New Jersey from 1979 to 1997, was the first player ever to win a triple basketball championship: He was on the U.S. team that won the Olympic gold medal in 1964 and then, after taking Milano to the European title in 1966, won two NBA championships with the New York Knicks.
He was known for a peripheral vision of 195 degrees, which he developed as a teenager by looking straight ahead and trying to see into store windows at the same time. His basketball skills were honed by dribbling around chairs while wearing glasses that kept him from seeing the ball. He practiced three hours a day during the week and five hours on weekends.
Draghi may try to deploy his idol’s skills as he takes the court in Frankfurt against Europe’s debt crisis.
“Mario has always been very serious,” said Montezemolo, the Ferrari chairman. “He remained like that throughout his life. The institution that Mario Draghi will lead is one of the most important for our future.”
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