By John O'Donnell
BRUSSELS (Reuters) - Jacques de Larosiere says he is an isolated and modest man. Yet the 84-year-old former head of the International Monetary Fund is one of the most influential voices in European and global finance.
An eminence grise as respected among France's political elite as in the heart of the law-drafting European Commission, de Larosiere finds himself at the nexus of finance and rulemaking, treading a fine line between lobbying and advice.
Following the financial crash, his blueprint - produced by a group of experts he led at the request of the European Commission in 2009 - shaped the most ambitious round of banking reform in Europe's history.
Now he is pushing to help banks with a scheme that some experts warn could repeat mistakes that led to the collapse.
His work provides a rare glimpse of the ease with which European lawmakers interact with industry and how banks, despite the crash, still shape the 'rules of the game'.
He runs a Paris-based think-tank called Eurofi where investment banks such as Goldman Sachs (GS) and JP Morgan (JPM) pay for membership in part to interact with the officials and parliamentarians who decide the fate of their industry.
Although he is no longer on its payroll, he provides advice to BNP Paribas (BNP.PA) and has an office at the bank.
In biannual meetings of the Group of 30, an elite body of financiers and academics who meet around the globe, de Larosiere rubs shoulders with Mario Draghi, the President of the European Central Bank, and former U.S. Treasury Secretary Timothy Geithner.
Now he is proposing a scheme to securitize - repackage and sell to insurers, pension funds and possibly even the ECB - loans made in the go-go years that have turned into a dead weight on banks' finances. The declared aim is to make it easier for the banks, once unburdened, to lend to credit-starved small and medium-sized companies.
The plan, outlined last month at a Eurofi event on the sidelines of a meeting of European finance ministers and central bankers in Athens, could play a pivotal role if the ECB embarks on quantitative easing or money printing to buy such assets.
"It would provide some breathing space to the financial sector that is being stifled," de Larosiere told Reuters.
CHANGE OF HEART
There is support for such a move. Last month, the European Commission said it would loosen the rules to make it easier for insurers and pension funds to invest in securitized debt. And the ECB is warming up to its use, accepting more such debt as security in return for credit.
Michel Barnier, the French commissioner in charge of regulating finance, announced that he would cut the amount of capital investors must carry to cover potential losses on such investments, paving the way for them to snap up such debt from banks, who are eager to sell.
Insurers, said Barnier, have 84 trillion euros of assets, while pension funds have 37 trillion euros - money that could help unlock lending and tackle the concerns of voters over the economic malaise ahead of European elections.
He was among the speakers at Eurofi in Athens, where he outlined plans to "revive sustainable securitization markets", drawing a distinction between what he called "good and bad securitization".
It marks a change of tack when dealing with the financial industry. Having temporarily banned officials from meeting lobbyists ahead of a contested proposal to shake up the structure of big lenders, Barnier's latest rule change is more bank friendly.
For Graham Bishop, an economist and advisor to the European Commission, the reason for this change of heart is clear. European businesses need their banks.
While companies in the United States are ever more enthusiastic about selling bonds and raise almost as much finance this way as by borrowing from banks, euro zone firms rarely turn to financial markets.
"If you are going to go banker bashing, then you bash the economy as well," said Bishop. "That's why the politicians have had to take a deep breath and start dealing with the devil again."
De Larosiere, who works from offices in an upmarket address in Paris, a short walk from the Champs Elysee, describes himself as "modest". He dipped a croissant in his coffee as he talked to Reuters.
"I'm an isolated man who happens to be chairman of a think-tank," he said. But his track record bears testimony to the sway that he holds.
It was de Larosiere who framed the debate that led to many reforms including the European Central Bank's new role as supervisor. His plan for securitization may be shooting at an open goal.
His Eurofi conference, traditionally held when Europe's finance ministers travel to 'informal' meetings, attract heavyweights such as Geithner and Jean-Claude Trichet when he was ECB president.
Held in expensive hotels under tight security and strictly off-limits to journalists, the event is designed to set the financial agenda.
Last month, members gathered in a Hilton hotel in downtown Athens and heard de Larosiere explain his vision for securitization.
It received enthusiastic support from some, including Xavier Musca, who was economic advisor to former French President Nicolas Sarkozy and is now a top manager at Credit Agricole.
De Larosiere's arguments are persuasive, as politicians and the ECB grapple with an economy stuck in the doldrums despite record low borrowing costs.
"In order to overcome the negative connotation of securitization that comes from the scandal, you need to overcome the very bad image," said de Larosiere. "The way to do that is to focus on 'very good, well rated, simple to understand'. Those words are important."
The market is potentially large. Banks have lent almost 4 trillion euros in loans of under 1 million euros, according to ECB data.
Many in Brussels are persuaded that it makes sense to shift these loans away from banks and towards pension funds and others in the hope that banks will then be prepared to lend again.
But securitization evokes memories of the dodgy mortgages and car loans packaged by U.S. banks that triggered a credit crunch in 2007, leading to the collapse of Lehman Brothers bank, which sent shockwaves around the world and caused the 'Great Recession'.
"We are not going to invite a new subprime disaster," said Barnier last month.
Pervenche Beres, a French lawmaker in the European Parliament, is not convinced.
She recalls a similar debate when she reluctantly accepted an invitation to lunch with top Goldman Sachs executives in June 2010 at their New York headquarters.
"They were crystal clear that they did it all correctly ... that they were helping the economy," Beres told Reuters, recounting how Goldman Sachs executives argued the case for securitization then.
"I'm very skeptical," she said. "I have yet to be convinced that there is 'good' securitization."
The discussion - or lobbying - will continue. For Sylvie Goulard, a center-right lawmaker in the European Parliament, the contact with industry is welcome.
Goulard said it was important for lawmakers to talk to the banks they are responsible for regulating, to ensure that legislation did not choke off lending.
"It would be ridiculous not to accept invitations to talk to them about banking regulation when you think what is at stake for the functioning of our economies," she said, defending de Larosiere, who she said had often taken contrary views to banks.
Barnier dismissed the idea that banks swayed his views. "No lobbying will impress me," he recently told Reuters. "I listen to all sides."
Europe has a better track record with securitization than the United States, but experts still see perils.
"In order to judge an SME (small and medium-sized enterprise) loan, you have to visit the CEO," said Frederic Hache, a former banker with Finance Watch, a group that seeks to counterbalance the industry lobby in Brussels.
"That's not something every investor can do. Investors will have to rely on banks' credit assessment."
But in the end, the desire to kick-start Europe's debt-laden economy may override concerns about the risks.
"Finance is so central to the economy, and particularly when you are talking about these debt levels," said Commission advisor Bishop. "Politicians have realized this. If you kill it, you kill yourself."
(Additional reporting by Paul Taylor in Paris; Editing by Will Waterman)