April 30, 2008
April 29, 2008
April 28, 2008
The biggest failure with the financial sector is not its current turmoil but the fact that having left it completely into the hands of regulators who on their minds had only the limited goal of avoiding defaults and bank crisis, we now face a totally purposeless banking system. Even if we would get out of the current turbulence, it would still be totally rudderless system. I say this assuming that no one could really be satisfied having a financial system that makes bets in a virtual world, guided by traffic signs set up by the credit rating agencies, all just in order to survive. Ask your regulators… survive in order to do what?
In fact had you not had such a wasteful financial system pursuing so much the lending to the public sector, the housing finance or the anticipation of consumption just because this lending could be disguised as less risky lending, you might not even have the current trade imbalances.
April 23, 2008
For more than a decade I have been also been voicing, sometimes quite noisily, that in fact we do not have a workable regulatory framework for our financial systems, since it should be clear to anyone that our real objectives for it must reach much further than the current limited and almost silly objective that Basel has in mind, that of just avoiding defaults.
Also, from the very first moment I heard about officially empowering the credit rating agencies to do the risk measurements that determined the capital requirements of banks, I have repeatedly stated that this would just lead some participants to let down their guard and end with many investors following, sooner or later, the credit rating agencies over a precipice.
I mention these three aspects, though there are many more, like the “scandalously wasteful biofuels programmes”, in response to Martin Wolf’s “A turning point in managing the world’s economy”, April 23, in order to emphasize that the first turning point we really need to make has to do with the how we manage the world’s economy. Obviously we must break lose from the habit of blindfolding and ossifying our institutions. Perhaps we need to impose term limits on the bureaucrats too, especially since their first rule for survival seems to be…do not ask questions and do not answer what you have not been questioned.
April 21, 2008
Where are we citizens going to be left in this cosy arrangement among those who could share so many mutually beneficially interests? Why do we not just place a little tax on the size of banks based on the bigger you are the harder you could fall on us concept?
April 19, 2008
April 18, 2008
Where Tett falls short though is in the reconstructing of the scene of the crime, since nowhere does she ask herself why the regulators exposed the bankers to these types of temptations, especially when they must have known they would fall for them.
My personal answer is that the regulators were so obsessed with fighting their own demons, “the default risks”, so that they did not care for anything else; and neither did they want or listen to other opinions, since they wanted to show themselves to be independent.
If there is one single lesson that stands out from the current turmoil it is that the regulation of the financial sector cannot be left solely in the hands of the regulators, since single-mindedness is not a good enough reason to award anyone independence.
If investments banks invested in those super senior debt that carried the triple A-tag and that are described by Gillian Tett in “Super-senior losses just a misplaced bet on carry trade” then according to the minimum capital requirements that apply to the commercial banks these could in fact have an even higher leverage…in some circumstances even more than 60 times.
In a global mobile work market where a house when owned often signifies a ball chain around the ankle it would seem that renting should be a very good option, if it is able to overcome the stupid hurdle of having almost been socially derided as a second class choice.
April 16, 2008
Let me just remind you so that you can get over this discussion and return to your senses, that for each trade induced by an overdose of testosterone, there should be a counterparty suffering from an under-dose of testosterone.
Martin Wolf in “Why financial regulation is both difficult and essential” April 16, says “It is impossible and probably even undesirable to create a crisis free system”.
Wolf falls way short since in fact even trying to create a crisis free financial system poses extreme dangers, being that risk is the oxygen of development.
No matter what, the world does not belong to the risk adverse and the real risk is not banks defaulting, the real risk is banks not helping the society to grow and develop. Not having a hangover (a bank-crisis) might just be the result of not have gone to the party!
What we then must do before rolling up our sleeves to do regulations, is to have a fresh look at what has been ignored for so long namely what are the financial institutions and specially the banks to do for us?
In that sense we need to stop focusing solely on the hangovers and begin measuring the results of the whole cycle, party and hangover, boom and bust! For instance the South Korean growth boom that went into a bank crisis in 1997-1998 seems to have been much more productive cycle for South Korea than what the current boom-bust seems to have been for the United States.
If we insist on using as the main ingredient for the regulation the risk of default, is it not time to start thinking of capital requirements for banks based on units of default risk per decent job created or climate change avoided? That would at least seem much more productive that units of badly gauged default risk per subprime mortgage financed. Honestly who could believe that the world would have come this far without a bank crisis now and again?
And, to top it up, FT ran two pieces yesterday suggesting banning testosterones from our trading floors! Sissy banks and sissy markets?
April 15, 2008
Unless this is a complete mess up of an April fool joke I sincerely think you owe your readers an apology. Are we to extend this type of risk adverseness litmus tests to the professionals working for the credit rating agencies too? Why do we not start with FT editors? Seeing that you completely lost control!
April 10, 2008
Sir Nout Wellink’s declaration that “Basel II is sophisticated and sorely needed” April 10, is a splendid example of why we cannot leave the traditional bank regulators regulating banks on their own. The just are digging ourselves deeper in the hole we are in!
Of course there is nothing wrong with sophistication as long as it does not take away from our understanding of what is going on, which it will be the end result, which makes further mockery of market transparency; and as long as it does not create new artificial market advantages, which it will by favouring the big banks and the continuation of our craze of putting ever more eggs into fewer basket; and as long as it does not create new systemic risks, which it will as long as “to err is human” applies, just like it applied in the case of the credit rating agencies.
But, what I most object to is that “there will be greater differentiation in the capital requirements for high risk and low risk exposure”. Who on earth told the bank regulators that the only role of banks was to avoid failing and that for that purpose you had to create an additional regulatory bias against risks, more than the natural bias against risk that already exists in the market? No, we do not need the banks to increasingly finance only securitized consumers and public sectors around the world just because that could be construed as having a lower risk of default. To do so could lead the world to default. If we are going to use default risk as a basis, then we better design the minimum capital requirements in terms of units of risk per decent job created.
April 09, 2008
Fact one: The single most important detonator of the current difficulties in the financial sector was the securities that had been collateralized with truly lousy mortgages awarded to the subprime sector in the US.
Fact two: The single most important factor that allowed truly lousy mortgages to morph into prime paper was the high prime ratings awarded the collateralized securities by the credit rating agencies.
Fact three: If we survive this there is nothing to stop us following again as lemmings the credit rating agencies over an ever worse precipice.
And so if there is a need for a reform that would be taking away the power of the credit rating agencies to impose their will on the markets.
But then of course Plender could be arguing that this would have to be included in a sort of minimum reform, not at all radical; and in that he would have a point.
In this times of complexity let us not forget that the prime detonator of our current crisis were just some simple mortgages to the subprime sector and that were so lousily awarded that anyone should have been able to see them for what they were, had they only used their own eyes and not some old data sets or fancy models.
Alan Greenspan in “A response to my critics”, FT’s economist forum, April 6, says that “The core of the subprime problem lies with the misjudgements of the investment community”; and the core of that misjudgement lies of course with the credit rating agencies; as most of the other financial agents were just doing their normal business which is selling something risky valued at somewhat less risky terms.
In this case what Wolf fails to recognize, sufficiently at least, is that the immediate detonator of the current crisis was not a housing bubble but a bubble in financial securities, such as those collateralized by lousily awarded mortgages to the subprime sector.
The credit rating agencies did not do the job they were supposed to do, to err is human; but the responsible for empowering the credit rating agencies to do the risk measurement for the markets and ignoring the “to err is human” part of it all, were the bank regulators, like Greenspan. And for this Greenspan should at least stand up and take his share of the blame.
April 07, 2008
I am stunned. How can he keep a straight face saying such things when he, as a regulator, did in fact outsource the real-time risk vigilance to the credit rating agencies and thereby helped to lead the market into the temptation of believing that the risk measurement by some few qualified eyes sufficed?
Please FT will you try to help me find out who on earth came up with the idea that the only risks that mattered for the financial sector were the risks of default and thereafter empowered the credit rating agencies to do the measuring?
By the way just to help sort out a deep misunderstanding; the fact that the credit rating are private do not make them less official.
April 03, 2008
Soros accuses the regulators of beeing misguided by a market fundamentalism arguing that they believe markets are self-correcting without being able to grasp that the markets are indeed self correcting, though in a quite violent way grant you, to what should be considered the mother of all regulatory fundamentalisms, the excessive empowerment of the credit rating agencies.
If the credit rating agents had been working for a government institution all hell would have broken out, long ago, but since they work for private companies, they get confused with being a part of the market. Indeed regulatory outsourcing creates confusion.
April 02, 2008
Now if we are going to talk about imprudence, big scale, then let us discuss the appointment by the regulators of the credit rating agencies as risk measuring bureaucrats, as if anyone in a society can really know from what hole risks could jump at you.
That bank defaults are risky and bank crisis bad? Yes, but even more so banks not defaulting and thereby setting us up for the mother of all crisis; and so therefore, please, disconnect the markets from having to give special credence to the credit rating agencies, ASAP.
April 01, 2008
Sir in “Paulson’s gamble”, April 1, you refer to “investor stupidity” without mentioning that the only fault or sin that probably most of these investors committed was to deposit too much trust in the credit risk surveyors appointed by the regulators. Is not the original stupidity the regulators? And the investor’s and yours only let yourselves be fooled by them?