March 31, 2008

Mr. Clive Crook. Now you please repeat after me too

Sir Clive Crook is absolutely right when titling “Markets need more than a patch-up” March 31, and ending it with “We need an entirely new model” as in between he really wavers around among a world of possibilities.

Now given that Crook gives so much weight to the issue of moral hazard that he orders us to “Repeat after me: you encourage recklessness if you protect people from its consequences” and which I duly did, I would love Crook to return the favour and also repeat after me that “you encourage carelessness if you make it to be seen that risks could indeed be measured and nominate credit rating agencies as duly qualified to do just that.”

Regulators really have tremendous workload cut out for them especially when they have not yet really decided the objective of their regulation correctly, since avoiding defaults and crisis cannot be the only societal role of a financial system.

Eerily peculiar recommendations

Sir Lawrence Summers writes about “Steps that can safeguard America’s economy” March 31, and suggests “that a top priority for financial policy has to be increases in the level of capital held by financial institutions” and “have Congress insist that [the government sponsored enterprises] stop paying dividends and raise capital substantially as they expand their lending”.

Given that we heard so many times during the last years about how well the financial institutions were capitalized; and that the lack of capital had nothing to do with how this crisis came about, since even the over leveraging of financial institutions had more to do with the lack of common sense, these recommendations sound eerily peculiar indeed.

Why not suggest they stop digging in the hole they’re in first?

March 29, 2008

Give the banks time instead of bailouts!

Sir in your editorial of March 29 “Not yet time for a bail-out of time” you mention that “Governments can also help by facilitating renegotiation of mortgages. The principal aim is to avoid unnecessary and costly foreclosures.” That is nonsense! The principal and perhaps only aim of any renegotiation is to make the credit viable, ideally taking it out from the shadows of the subprime world and bringing it in to the prime world, where all debtor and creditors can enjoy lower interest rate return requirements.

Now also and though I fully agree that it is not time for a bail-out of banks, it is definitely time to give them some more time to react. This whole affair of putting the banks against the walls just because of the change of mind of credit rating agencies is too harmful. At least give them a year to find and make the new capital increases by allowing them to use a 12 months moving average to account for market changes in the value of their investments. And this way tax-payer does not have to step up to the plate as fast either, or even at all.

March 28, 2008

Too much ‘Group think’ C’est la vie!

Sir Gillian Tett in “Banking oversight and the danger of ‘group think’” March 28 mentions the “difficulty the staff of the Financial Services Authority’s (FSA) face in terms of challenging the dominant financial creed” mostly because they lack the glamour needed to be allowed to question the glamorous.

Something similar happens when a modest MBA like me, with only 30 years street experience, in only a developing country, tries to get through to journalists to alert them of what has and is really happening out there, only to be ignored because it is so much more glamorous when appearing surrounded by PhDs. I guess c’est la vie! Regulatory authorities will not get to see the full truth, and neither will the journalists, not even some columnists.

Now if Gillian Tett sees danger in the above when occurring in FSA she should have a look at what happens in that mutual admiration club composed by The Basel Committee on Banking Supervision, the International Monetary Fund and all their members the Central Bankers…talk about the mother of all ‘group think’ they even have their own checks and balances, like The Financial Stability Forum. The World Bank and that should presumably do some of the questioning, was just told to shut up and harmonize.

A subprime dollar? Not the end of the world; but a change of collateral may be asked for

Sir Martin Feldstein’s “The dollar may be falling at just the right time” March 28, is a timely reminder that it is not necessarily that bad for the dollar doing upon other currencies what other currencies have done to the dollar; and that there is no need to look at it all as the end of the world… even though it might be the end of that money that was backed only by the trust in the government and that has had a run for almost 40 years now, some say amazingly.

March 26, 2008

To insulate us from realities? Thanks but no thanks!

Sir John Kay writes “Why more regulation will not save us from the next crisis” March 26, and though he is absolutely right I do not make the same inferences that he does. Just for a starter, I believe that if we do not have a next crisis, that could just the same be the symptom of that we are not doing enough… getting out of bed has its risks, but staying in bed leads you nowhere.

Also, when Kay argues that we should “insulate the real economy from the consequences of financial stability” and meaning with it that the governments should “protect small depositors” (how are they identified?) and mentions “to restrict the use of retail deposits as collaterals for speculative activities” he is in fact proposing something like forcing us to invest exclusively in government papers… and as if that carried no risk to us.

We do know about many different efforts going on in trying to create absolutely risk free environments for retail deposits and that is not only arrogant and preposterously silly but also quite dangerous… much like the belief that the credit rating agencies could be imposed as official risk surveyors without themselves tuning into a huge systemic risk.

Wake up Mr. Wolf!

Sir Martin Wolf holds that “The rescue of Bear Stearns marks liberalisation’s limit” March 26; as if we have had some true liberalisation. He is wrong.

Much the contrary, never before have the financial markets been so regulated as they are now with the credit rating agencies, empowered by the regulators, deciding over how much each bank needs to pack their rucksack with reserves; and most of what has happened since imposing the minimum capital requirements imposed on the banks through Basel I, has been the result of regulatory arbitrage.

Wolf quotes Ben Bernanke in a speech that “makes one’s hair stand on end” saying that much of the subprime mortgage lending of recent years was “neither responsible nor prudent”. Mr Wolf. You know what makes my hair stand on end? That all the market did was to follow the criteria of the credit rating agencies that felt that such mortgages were good enough to make up prime collateral.

Wake up Mr. Wolf, before we can start to think about the limits of liberalisation we still have much to think about the limits of regulations.

March 25, 2008

The truth as always lies somewhere in the middle!

Sir Michael Skapinker in "The market no longer has all the answers" April 25 writes that though the hands-off regulatory policies have clearly been discredited even in the eyes of hardnosed free-market fans no one knows what to do now and that "Trawling leftwing and far-left wing websites is instructive, because they clearly have not got a clue either".

May I invite Mr Skapinker to trawl the radical middle too? From the middle we protest the sheer thought of the financial sector having had a hands-off regulatory policy since in our view never before has the financial sector been so much nannied as with the empowerment of the credit agencies as the officially outsourced regulatory risk surveyors. Had these agencies not worked undercover as private agencies I am sure all hell would have broken out long ago.

But from the middle we also protest any deepening of the regulations that starts without taking a huge step back and realizing that to regulate the banks, with the sole objective of avoiding a bank crisis, as it has been done for almost two decades now, is totally meaningless.

We need banks to do much more for society than simply avoid risks and survive and therefore we need to clearly define what their whole purpose is. How on earth could you regulate without doing that?

March 22, 2008

We do not need FT to be a Besserwisser

Sir in your “Muzzle the market manipulators” March 22, you just come through as a Besserwisser saying “All long term-investors can do is ignore rumours, ignore share price volatility and concentrate on the facts. Easier said than done, in a world where there are more finance courses on how those real not that good Besserwisser and rumourmongers we know as the credit rating agencies could change their opinions than there are course on how to analyze the rated companies themselves.

March 19, 2008

We better not leave bank regulation in sophisticatedly skilled unscrupulous hands.

Sir Martin Wolf in his marvellous “Why today’s hedge fund industry may not survive” March 19, describes how the hedge fund industry by acting as bookies arranging the betting on low probability events manage to profit handsomely while these events do not become the certainty that they indeed must become, at some point; and that this clearly attracts the unscrupulous and the unskilled. Wolf also frets that the hedge fund managers by copying each other could produce a real disastrous stampede of non-events and says “the more one believes this is how an unregulated financial system operates, the more worried one has to become”

What Wolf fails though is in connecting the dots with between the way the hedge funds operate and how our banks are currently regulated. The regulators, exactly like hedge fund managers, have been able to collect their praises upfront for a system that by favouring size tends to unload failures into an even greater accumulation of risks; that by using minimum capital requirements exclusively based on short term default risk leaves us not considering sufficiently all the other risks; and that by imposing upon the market the credit rating agencies as their official risk measuring bureaucrats, will just guarantee that we all will, sooner or later, follow them and fall off the deepest of the cliffs.

We should not fret the unscrupulous unskilled as much as the unscrupulous skilled and sophisticated… the last conform the really dangerous wild bunch. And please, do not tell me that some of our current bank regulators do not have it in them to know this is all true. I sincerely believe that Greenspan knew it all along but he did nothing about it!

March 18, 2008

What we need is trusting doubters

Sir Gillian Tett in “A lack of trust spells crisis in every financial language” March 18 should also remember that usually an excess of trust equally spells the origin of a crisis in any language. Tett spells out in no ambiguous terms that “the key to resolving this crisis will not lie with just the injection of billion more of central bank dollars; instead what is needed is restoration of credit” which is exactly trust.

That said and as true as it is, this time around let us please make certain that what we build is some reasonably doubting trust and not that type of blind trust that could only come out of such a preposterous idea that you could leave the issue of managing risks with some minimum capital regulations for the banks based solely on one risk type, namely default, and measured over a fairly short time horizon by some humanly fallible credit rating agencies.

March 17, 2008

A really scary title… coming from a former Federal Reserve chairman

Sir it is frightening a former chairman of the US Federal Reserve like Alan Greenspan titling an article with a “We will never have a perfect model of risk” March 17, since he should know that if we even came close to believing we had such a model, then this would constitute on its own the greatest risk machine ever seen.

Greenspan is right when in his conclusions he argues that “our most reliable and effective safeguards against cumulative economic failure [is] market flexibility and open competition” but which is also why Mr Greenspan should now at least have the decency to repent from having helped to impose the opinions of some few credit rating agencies upon the markets.

March 14, 2008

Does winning but not getting the expected odds paid out really make it a loss?

Sir Prof Louis T. Wells commenting on March 14 on Alan Beattie’s article “Concern grows over global trade regulation” March 12 hints at what I have always found as one of the most intriguing questions in matters of foreign investments. If you require a high rate of return to invest in one country and thereafter you obtain a lower return but that is perfectly in accordance with your expectation of returns in lower risk countries should you be satisfied or should you feel let down because the risk did not materialize?

Having said that and returning to Mr Wells´ real issue, the validity of international arbitrary courts and proceedings, let us also never forget that those that in the long run are mostly hurt by closing down courts and proceedings are those that being weak most need them…and they should therefore be the ones most careful with not shooting the messengers.

And no one called Mr Sharma’s bluff!

Sir, in View from The Top March 14 you have Devin Sharma, the president of Standard & Poor’s saying “Ratings play an important role in the capital markets by providing opinions on creditworthiness” and nobody called his bluff. Had it been true then we would most likely not be in our current mess, though perhaps in another one.

The truth is that the credit rating agencies give much more than opinions since empowered by the financial regulators they do in fact give orders to many of the actors in the financial market of where these can or not go, and to the banks with respect of how much capital they have to set aside for each credit.

Striping the credit rating agencies of these really crazy powers is one of the most important things to do if we are to avoid future financial disasters that could prove if possible even more lethal than the current one; and so that they then can go back to just providing opinions.

March 12, 2008

Mr. Wolf, this is no a black plague that will just soon be over

Sir Martin Wolf in his “Going, going, gone: a rising auction of scary scenarios” March 12 seems reduced to being a chronicler of the black plague. In truth, what should the world care about a couple of trillion more or less in losses when in fact it is our whole financial system that is under siege and there is nothing right now that promises us a brighter and better day.

Much more important then that to tally the losses it is to make certain that our scarce rescue forces are send to save the real economy and not the virtual parts of it; which unfortunately seems to be what our regulators have come up with pouring monetary resources on the fire while praying this will not turn out to be gasoline for the inflation.

Also start mending what got us into this mess. Fixing those minimum capital requirements for banks solely based on risk assessments for short term defaults; give the banks time to adjust their capital ratios when this need is sprung upon them by surprising down-ratings; take away the frankenstenian powers given to the credit rating agencies; make certain that those mortgages that have been turned into viable mortgages by means of a reduction in the principal or rate adjustment are not longer valued as subprime; make sure that mark to markets means what it says without self-enforcing the panic of a mark to the markets-fear-anticipation; force the managers and directors of financial institutions to sign an affidavit stating that they have an inkling of what they are doing and freeze the bonuses paid to financial executives pending final results seems like a decent place to start.

March 11, 2008

Spend your limited ammo on the real world!

Sir one would expect you to be right saying that the “Fate of finance lies with real economy” March 11, but one of the conclusions one should also draw from that is that all the assistance provided by governments in a world with scarce resources, should be targeted at the real economy and not squandered away on some frontiers that seem more virtual than real.

Better confused than wrong!

Sir Saskia Scholtes writes that “Agencies’ differences add to confusion” March 11, describing how credit rating agencies differ in their appreciation of companies in this case of bond insurance companies, to which I would just have to add a Hallelujah!, since it is clearly better being confused than wrong.

It is precisely the fact that the whole concept of risk relates to so many different variables that can be analyzed with so many possible methodologies over so many different time horizons, and that makes it impossible to come up with a true risk assessment, that the world should never have allotted so much power and influence to some few credit rating agencies.

The mess these credit rating agencies got the world into by all three of them giving prime ratings to securities collateralized with junk mortgages, is bust just a small example of why we should welcome more of the confusion that reigns in real life and that real investments are all about.

March 10, 2008

This is a mark to the markets anticipation of a crisis crisis

Sir Wolfgang Münchau tells us that “Central bankers cannot stop this contagion” March 10 and he is right; how could they?... when no one is really sure about what is going on in that no mans land between the primary financial asset such as a subprime mortgages or municipal loans and their final expression in the financial markets in the form of some type of sliced and diced derivative contract.

For instance Münchau speaks about a “hugely contagious solvency crisis … spilling over into municipal debt, corporate debt” though we have yet to see any significant municipal or corporate debt defaults. This is not a mark to market crisis; it is more a mark to the market’s anticipation of a crisis crisis.

Therefore, central bankers should stop throwing real money at anything virtual that hurts, like blindfolded children trying to hit a piñata; and carefully keep their monetary munitions for the many real world problems that could break out down the line… like those very real subprime mortgages that have already started to default.

March 08, 2008

The born again financiers

Sir Aline van Duyn in her report "Banks spend $500m on Ambac shares" March 8, quotes Michael Callen the chief executive of Ambac saying that "The market gods were totally against us"; which must be very humbling to say for a member of a profession that so recently believed themselves to be the gods of the market.

That said the operation also begs the answer for how the banks are going to account in their books for the registry of what basically amounts to an expense in order to avoid having to expense even larger losses if the credit risk insurance provided by Ambac is shown to be worth less than a prime rating.

We need the regulators to backtrack on their own ideas

Sir Francesco Guerrero wants "ideas to stop backlash from regulators" March 8 and there is nothing like reminding them of the blame they have in this mess.

A market with many participants measures many type and dimensions of risks, applying many different time horizons and using many different risk measuring techniques. The final result might not be perfect but at least it avoids the risk of leveraging excessively on any presumption and opinion that might turn out to be dangerously mistaken.

It was when the regulators forced the market to give special consideration to what some few credit rating agencies told it about risks of default over a short period of time, that the information capacity of the market was constrained and extremely dangerous regulatory biases and fresh systemic risks introduced.

Although there is such a thing as prime mortgages awarded to the subprime sector it was only because credit rating agencies gave good ratings on securities collateralized with badly awarded mortgages, that this pure junk could grow into incredible volumes and travel so far that a German bank became their first casualty.

And there are currently almost more courses given about how to analyze how the credit rating agencies might change their ratings that there are about analyzing the underlying credits and companies.

This has to stop, urgently; and it is not a question of the credit rating agencies becoming better at what they do since that will only force or induce us to follow them even more to a precipice.

March 05, 2008

A Nobel prize-winner should not make such a statement

Sir Joseph Stiglitz and Linda Bilmes while defending their book The Three Trillion Dollar War (that I have not yet read) March 5 from some comments made by Tunku Varadarajan on March 3 say with respect to the price of oil “we attribute only $5-$10 to the war” and this is just a plain wrong statement, from a pure economic point of view.

All the terrain between the marginal extraction cost of oil and its market price is complete no mans land and so no one, not even a Nobel prize-winner, could therefore attribute any of it to any specific condition. If there is just one barrel of deficit in the supply, speculation and desperation could lead to any price; just like one barrel of surplus could start a movement towards equating the price of oil to its marginal cost.

That is why less than 9 years ago pundits predicted $5 per barrel of oil with the same ease other predicts $100 or more. That is why there is the extreme volatility in oil that wets the appetite of so many speculators. That is why it is impossible for me to understand why producers and consumers have yet not entered into long term production and take up contracts that could benefit them both.

March 04, 2008

A flat tax is what a flat world needs!

Sir much as I wholeheartedly agree with the intentions that John Christensen and David Spencer express in their "Stop this timidity in ending tax haven abuse" March 4, and that establishing a network of bilateral tax agreements will not be sufficient to solve the problem of world wide tax evasion, I do not believe that what they propose in terms of shifting the focus "towards the infrastructure of cross-border economic crime, including accountants, lawyers and financial institutions" will cut it either. On the contrary we could just be opening up new growth opportunities for those many illegal and illicit organizations that thrive so much on all our prohibitions.

What I would suggest is to go instead for a real worldwide tax transparency by making all countries sign up on an easy to understand world wide flat tax. This would help to remove the incentives to geographically arbitrate taxes and that keeps so many accountants, lawyers and financial institutions in the business "legal and intelligent tax avoidance"; and that keeps so many governments from not knowing whether they are giving true and needed tax incentives to attract investments or just being taken for a ride.

In all, a flat tax is precisely what a flat world needs; and by the way, just in case, a flat tax can be construed as a progressive tax too.

March 03, 2008

A crash capital replenishment is bad for the banks

Sir let us suppose you have gone to your doctor for regular checkups and because his balance had broken down you never discovered something was very wrong and as a result you had become seriously obese. What would you say if the doctor when discovering his mistake sends you on a crash diet, even though that could be life threatening?

This is exactly what is happening in the financial sector when the banks, after it was discovered that the credit rating agencies that were imposed on the banks by the regulators got it all wrong, and they are now ordered to replenish their capital… immediately… while the conditions are as adverse they can be. Who on earth could benefit from this? Only those who shorted the banks.

A rational doctor would work out a medium or long term plan for a diet and a rational bank regulator would give the banks ample time to come up with new capital.

And by the way, for the record, I do not own a single bank share.

PS. We normally know if a weight is lying to us…but how we love it for that!