But we still trust many proven fools.

Sir Luke Johnson in “Rough diamonds dazzle as entrepreneurs” May 27 vents the frustration many of us share with him when he says “I hope we never again trust overpaid fools who think they know best thanks to bogus theories”. Unfortunately, we will... just as we still trust the regulators in Basel with their bogus theories that they can control banks through capital requirements that depend on risk assessments made by third parties... just as we still allow our regulators to allow our banks to lend our deposits to the government without any capital requirement whatsoever.

Yes, let’s put a damper on size!

Sir John Kay is of course right in “Why ‘too big to fail’ is too much for us to take.” May 27.

In May 2003 at a Risk Management Workshop for Regulators at the World Bank, as an Executive Director, I said: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that the larger they are, the harder they fall, if I were regulator, I would be thinking about a progressive tax on size.”

There is a zero capital requirement for banks on AAA public debt

Sir, some define systemic risk simply as the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, but, that is in fact more the result of the systemic risks that originates from the interdependencies and the failures of the system itself.

John Taylor, in “Exploding debt threatens America” May 27, writes that he believes the debt projected level of US debt to be systemic. Yes indeed, the debt could be so large that it could bring us an awful inflation but, what really propels it as a systemic risk, is not so much its size but the fact that the current minimum capital requirements for banks, in the case of public debts rated triple-A, is an astonishing zero. This not only subsidizes the growth of public debt but also leaves the system totally unprotected.

This type of systemic risk led us to the precipice of the badly awarded mortgages to the subprime sector ,just as it will help to lead us to the precipice of governments too much in debt.

Regulations are systemic risks.

Yes Sir you are absolutely right when in “Regulation Time”, May 26, you say “This crisis was born of gambles with systemic stability, not of weak investor protection”. In fact it was by trying to overprotect banks and investors from risks, by means of minimum capital requirements for banks that rewarded risk adverseness and the naming of some few credit rating agencies as the world’s official risk surveyors, that the regulators gambled away the systemic stability.

In order for current regulations to stand a chance of being corrected the first thing that has to happen, is for the regulators to acknowledge that regulations are by themselves a prime source of systemic risks.

Should used bank salesmen be trusted?

Sir Henny Sender “This year’s model for cash raising – the GMAC way” May 23, begs the question whether we should trust the used bank salesmen; a question that is difficult to answer when it is so hard to assess what’s under the hood of a bank, especially now when their assets are disclosed in “risk-weighted” terms.

GMAC is reported to have $173.bn of risk weighted assets, but taking away the impact of the weights, the real nominal asset exposure could easily be ten times that amount. For $173bn of risk-weighted assets an additional need of $11.5bn sounds “so reasonable”, but then it could just all be a mirage produced by that dangerous cocktail of faulty credit ratings and arbitrarily imposed risk-weights and that have hit and obscured the financial sector ever since Basel II got going.

The fact though is that while in Germany the sales of new cars are subsidized by a payment to scrap old used cars, in the US it is the financiers of used cars that are receiving government support and that sort of reflects quite different workout strategies.

The safe-haven is always in the eyes of the beholder

Sir you conclude “Dollar worries” May 23 with “currency traders are pricing in the tail risk that the US will be forced to resort to the printing press”. Sir whether forced or not the fact is that with the Fed’s quantitative easing they are already using the printing press, a lot.

Do you have any idea where the rates would be if it had not been for the quantitative easing? It sure puts a big question mark when it needs to recur to quantitative easing in order to sell itself as a safe-haven. The greatest mistake made by the US government and Congress in their current handling of the crisis is that they might have taken the world’s wish for a temporary safe-haven as a wish for a permanent home.

Behind our backs bank regulators in Basel decided that lending to a triple-A rated government required zero bank equity while lending to an ordinary non-rated private company required 8 percent... and the governments loved it... wouldn’t they? The markets though requires x percent return for lending 100 to triple-A rated governments and y percent return for lending exactly the same 100 to a non-rated private company all without any reference to capital requirements.

Therefore though you can subsidize governments and temporarily confuse the market by means of arbitrary regulations in the long term you cannot simply instruct markets to behave as if a dollar lent to the government is any different than a dollar lent to a private company. Having then to reduce the current implicit subsidy to the governments contained in the minimum requirements for banks will also put further pressure to increase the interest rates on public debt... just when the world seems least to afford it.

The gorilla is there in the room roaring and pounding his chest... let’s pray we’ll never have to pay him off, informally, over the counter, with some gold coins.

Go City of London go!

Sir what caused this crisis, as I have so repeatedly written to you about over the years, were the regulators in Basel executing the mother of all interferences in the risk allocation process of the markets. 

Not only did they appoint the credit rating agencies as Thee Official Risk Surveyors but they also empowered them by concocting minimum capital requirements for banks that covered an incredible range from 8.3 to 1 to 62.5 to 1 with all of it depending on the ratings. 

In this respect when Martin Wolf in “Why Britain has to curb finance” May 22, refers to UK regulators having “an influence on the world economy out of proportion to the country’s size” he is either too parochial or he still completely misunderstands what has happened. 

Also a sheer reference to a “light touch” in the context of financial regulations would be almost laughable if not for the sad and serious consequences of the very heavy handed and truly relevant regulations that from Basel hit the world, London included.

Frankly the UK cannot afford to curb anything, less it wants to be left out completely. And the Financial Times should be the first to know that. 

Go City of London go!

Could there be value to be unlocked in the one-year ownership of shares clause?

Sir you are so right in that the recent minimalistic step taken by the SEC to allow the true owners, the shareholders, to name who should be at the Board of their companies was “A much needed victory”, May 22.

What I cannot comprehend though is how the SEC can get away with the one year of ownership criteria... how on earth does one year of ownership change ownership? Could there now be an opportunity to sell the shares but keep them in your name, so as to offer the one year ownership on record? I mean in this severe crisis one has to look under every stone for any value to be unlocked.

But let the markets’ see more with their own eyes

Sir as you must know by now I full heartedly agree with William Poole’s proposal of introducing more market discipline for banks by forcing them to issue substantial amounts of long term subordinated notes “A market solution to secure the future of banks” May 21.

That is of course as long as some of that fog that comes from having the assets reported as seen through the eyes of the credit rating agencies and risk-weighted arbitrarily by the regulators is dissipated. As is everyone, regulators included, might keep on focusing on the wrong exposure where a real 40 to 1 leverage is reported as only a 10 to 1 assets to capital leverage. Let the markets have a better look at what’s really in the banks… otherwise we will just have the blind leading the blind.

Are some doing their best for the market not to regain confidence?

Sir Martin Wolf in “This crisis is a moment, but may not be a defining one” May 20, writes “The willingness to trust the free play of market forces in finance has been damaged.” Of course, how could it be otherwise, when even the Financial Times (notwithstanding my over 200 letters on the subject) refuses to describe in detail the amazing interference with the risk allocation processes in the financial markets made by the bank regulators in Basel.

Through their minimum capital requirements for the banks the regulators allowed for a 62.5 to 1 leverages (and that in some cases can even reach 179 to 1) and all based on the credit rating agencies’ triple-As. How on earth could the free play of market forces in finance stand a chance to correctly handle that?

If you really want the market to regain confidence then you have to explain what really happened.

Rasputins versus Oligarchs

Sir John Kay in “Beware the bail-out kings and backbench barons”, May 20, refers to “Simon Johnson’s comparison of corporate financiers with Russian oligarchs”. Kay should not forget though that Simon Johnson, as a former chief economist at the International Monetary Fund, is part of that regulatory technocracy which played God and interfered with the risk allocation processes in the financial markets, in the most amazing way, by allowing for a 62.5 to 1 leverages (that in some cases can even reach 179 to 1) all based on some credit rating agencies awarding their triple-As... and helped to cause this mess.

In this respect the Rasputins have now a clear and vested interest in blaming the oligarchs in order to protect themselves. John Kay rightly says “We need to reassert the notion that roles of authority are positions of responsibility rather than declarations of personal merit and routes to personal enrichment.” And that should apply equally to bankers and regulators.

Please, may we have a small but growing capital charge on governments?

Sir if your bank lends your government 100 pounds then it is not required to have any equity but, if it lends that amount to your unrated neighbour, then it has to put up 8 pounds in equity. That might sound very reasonable to you I do not know your neighbour, but be sure that in the long term it will just mean we will all end up more and more entangled in the web of the government.

In this respect when we read Aline van Duyn and Francesco Guerrera report in “Geithner plan fuels cost fears”, May 19, that “companies face capital charges against hedges” one wonders when they will start imposing some capital charges on what seem runaway governments. A small increasing capital charge on anything to do with governments is probably an essential element to help stimulate the banks into lending more to the private sector again.

Just for the record

Sir in “Taming derivatives” May 19, you write about “a jungle where companies such as AIG were able to use derivatives to avoid capital requirements”. Just for the record, that was never the real problem with AIG. The problem with AIG was that because of its AAA rating it overextended itself by selling immense amounts of derivatives that allowed others to avoid capital requirements.

How long do you intend to play this charade?

Sir day after day, week after week, month after month, year after year the Financial Times indicates the currency rate of Venezuela 2.1473 Bolívar Fuerte per Dollar and provides the additional vital footnote of “New Venezuelan Bolívar Fuerte introduced on Jan 1st 2008. Currency redenominated by 1000.”

Are you not aware that this currency rate in that it does not by far reflect the FX rate that applies to the whole Venezuelan economy is totally fictitious. That is has been fixed there since February 2003 and that those not favoured by having the government receive their Bolivar Fuerte in order to convert them into dollars, need currently to use at least 3 times as many Bolívar Fuerte to get a dollar.

For how long does FT play along in this charade of the Venezuelan government? If you want to put an end to it I suppose you have two alternatives the first to simultaneously publish an estimate of the rate in the unofficial market, which would provide your readers with more information, and the second not to publish any rate at all.

This crisis is indeed far from being a pure failure of markets

Sir Leszek Balcerowicz writes “This has not been a pure failure of markets” May 14 and the most extraordinary thing about it is that there is a real need for his article.

If a bank regulator decided that the minimum capital requirements for the banks depended on how much some few specially designated fashion experts fancied the colour of the tie that the borrower´s chief executive officer wore; and that capital requirements so determined could then vary between a high of 12% of the loan and a low of 0.56% would you call this a free market? Of course not, not even if instead of the colour of ties what was used were the ratings of some vaguely defined credit-default risks.

But, if even Martin Wolf, the chief economics commentator of the Financial Times, almost two years into the crisis, can still write about “why free-market capitalism went off the rails” and that the “era of financial liberalisation has ended”, “Seed of its own destruction” May 12, when one could very well argue that free-market capitalism was actually placed on rails heading over cliffs, then clearly Balcerowicz’ article is still much needed and appreciated. Clearly those from Poland have a clearer or at least more recent concept of what state dirigisme really means.

Risk is risk is risk!

Sir David Walker with “America’s triple A rating is at risk” May 13 gives new evidence on how dangerously the world has got itself trapped by some erroneous concepts about risk. Of course, America’s triple-A rating is always at risk, there is no absolute quality or anything inherently permanent with a credit rating, this no matter how much the financial regulators want us to think so.

That the US, and the dollar are in trouble, that there can be no doubt about, but the truth is that the US and the dollar could still remain for a very long time the most de-facto triple-A in the world, because, at the end of the day, risk is always relative, except of course, when we really reach the end of the day.

Now on the rest of David Walker’s message I could not agree more. Last year, during the annual meeting of the World Bank and the IMF, I went around asking “how are we going to pay for it all?”, and proposing a new generation of taxes, such as taxing income from protected intellectual property rights, only to be met with a “what is he talking about?”

The bottle that now matters is the one containing bank equity.

Sir Tony Jackson in “Is the liquidity bottle half-full or half empty” May 11 writes “If the banks can only hold Treasuries rather than private securities... The less the scope, too, for securitisation- the vital form of lending that has yet to recover”.

In other circumstances looking at the Treasury versus private securities from a liquidity angle might be correct but, at this particular injunction, the bottleneck for the banks is equity and not liquidity.

In this respect let me remind you that the minimum capital requirements concocted by the Basel Committee holds that in contrast to claims on private assets that do require holding some equity, although in some cases ridiculously small, claims on sovereigns rated AAA to AA- do not, as they are given a 0% risk weight.

As food for thought just think about what are fore-bankers would have thought of making a zero-reserve when lending to a Crown. But of course, a zero equity requirement is what the Basel Committee had to stipulate in order for the finance ministers in their AAA or AA- countries to cheer them on. Now if a sovereign were to be down-rated to A+ to A- then the risk weight goes up to 20% and if that would happen they would either have to change the minimum capital requirement or face the mother of all demand for bank equity.

Unfortunately Tett misses what turned a snowball into an avalanche

Sir another great chapter by Gillian Tett though again she misses the most fundamental point. If it had only been the loss in the market value of the “super-seniors” that had to be covered with new equity, that could have been manageable, but the fact was that as the risk ratings of the whole exposure to super-seniors were down-graded then like rubbing salt on the wounds they had to find additional equity to cover for higher capital requirements.

Assume that Citibank had one of those super-seniors rated AAA and that according to paragraph 615 of the Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version of June 2006 carried a risk weight of only 7%.

This meant that a $1430 investment was going to show up as only $100 in risk-weighted assets, which in fact believe it or not, signified an authorized leverage of (1430/8) of 179 to 1, and therefore required only $8 in equity (8% of 100).

If the market value of those $1430 then fell 2 percent to $1401 the bank would first have to register a $28 loss but if that “super-senior” was also concurrently down-rated to an “awful” A, then the new risk weight applied was 20 percent which signified that the risk-weighted assets increased to $280 (20% of $1401); and therefore requires $48 in additional equity ($280 times the 8 percent equity minus the $8 of previous equity).

And so we not only have $28 in mark-to-market losses that must be covered but the bank has also to find additional equity of $48 to cover for the higher equity requirements... and so the bank is induced to sell those super-seniors but for which there is now not a market since buyers have been scared off by a credit rating downgrade... and so down and down it goes... not so much because of the intrinsic quality of the super-seniors but because of the minimum capital requirements for the banks

The above describes the most vicious part of the current vicious circle in the bank sector and the Basel Committee is fully responsible for it. Never ever has the financial regulators and the financial experts been so gullible and naive like when they believed that “risk-weighted assets” were correctly risk-weighted assets.

By the way when reading the recent stress tests prepared for the largest 19 bank holdings in the US the possibility of this misconception still being in existence is what frightens me the most.

What a stress!

Sir now 19 large bank holdings companies (BHCs) have been told what to should do in order to hang around and so they should at least be a little bit less stressed... but what should we do with these stress-test results?

First it hard for us to interpret the results of the stress test because they all refer to risk-weighted assets” and this we know that no matter its pompous name this does not mean anything absolute. Not only are the weights completely arbitrary, like for instance 20% for triple-A rated assets, but also those weighing, the credit rating agencies, have clearly shown themselves not to be the most very trustworthy risk surveyors. It also makes any comparisons between BHCs impossible since the differences between the risk-weighted assets could be larger than between apples and oranges.

But second and most importantly the stress test does not include any type of recommendation. Do we want to strengthen the weaker BHCs so that these survive or are we looking to show who are weak so that we can strengthen the stronger to make sure that some of the BHC survive? Why do we not put all our money in the group outside the BHCs? What a stress!

You pay for what you paint!

Sir Benedict Mander in “Venezuela’s state oil company gears up for a $2bn bond issue” May 8, quotes experts with “expected to be a two year zero-coupon bond yielding about 16 per cent” and that it “will not affect the yields on existing PDVSA or sovereign debt – one of the best performers in emerging markets this year”. It is hard to understand how they would get away with that.

That said PDVSA with all the richness that it controls, if it was well run, should have to pay only some basis points more than the risk free rate and so, in order for your readers to understand better what is going on, perhaps you should have translated what was painted on the PDVSA oil tanks in the photo. It says "Fatherland Socialism or Death"… hence 16 percent.

The Global Coalition of Oil-Cursed Citizens

The hedge funds were just the regulators’ hobby.

Sir Gillian Tett “writes that the bank follies went unnoticed for so long partly because many regulators spent the last decade obsessed with hedge funds.” “Some effects of an unhealthy fixation on hedge funds”, May 7. Though close, she does not really get there.

What happened was that regulators invented some risk weights and then got themselves some risk surveyors, the credit rating agencies, and produced the line of “risk weighted assets” by which they thought their job regulating banks was all done... and so, to find something to occupy their now fulltime spare-time with they started to pick on the hedge funds.

Do not undercut in any way the disciplinarian role of the market

Sir as an Executive Director at the World Bank 2002-2004 and as member of its Audit Committee I remember as one of my biggest frustrations continuously warning about counterparty risks and always ending up being answered along the lines of... “What counterparty risks? Don’t you know that a triple-A is a triple-A is a triple-A?”

This is why I take strong exception when Matthew Richardson and Nouriel Roubini in “Insolvent banks should feel market discipline”, May 7, though correctly advocating more of Schumpeterian creative destruction, are surprisingly lenient in the case of counterparty risk. They even write “But unlike with Lehman, the government can stand behind any counterparty transaction”. No!

What is counterparty risk? The risk that for example the insurance company you have insured yourself with cannot pay up when it should. This risk is clearly not a risk that an ordinary citizen should have to bear but for the financial system’s overall health it is an absolute must that all the qualified institutional participants bear with the full consequences of it.

In fact, in case they have not read it, current third pillar of the otherwise so discredited bank regulations from Basel – named the market discipline, “aims to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes, and hence the capital adequacy of the institution.” And that of course means the evaluation and the taking of counterparty risks.

And by the way, just as the markets would benefit from more creative destruction, let me also remind you that so would our financial regulators

The marginal authorized leverage was then 125 to 1!

Sir John Gapper in “How banks learnt to play the system” May 7 is slowly identifying the AAA-bomb that set of this crisis. He writes about how regulatory bank equity, by not being real hard cash equity, and how assets, by being minimized through regulatory risk-weighting, made “some investment banks enter this down-turn with capital ratios of 30 times or more.”

But Gapper is not there yet since he seems to forget that in economics as well as in finance, the most important price is not the average but the marginal. If I am allowed to assume what Gapper seems to do that only the 4% equity of tier 1 capital was for real, and consider the fact that loans or investments to corporations and securities that were rated triple-A were risk-weighted at only 20 %, then he should be able to calculate that the marginal authorized leverage for the banks on some operation were 125 to 1... or more, if as Gapper holds, that even the tier 1 capital was partly made up of illusions.

P.S. I just wonder. If I had been a PhD, from a well known university, would I have not been referenced as someone who has warned and argued over this problem over and over again for years? After 258 letter to the Financial Times labelled “subprime banking regulations”? Not including this one.

We need liquidation and inflation and growth

Sir, Martin Wolf in “Central banks must target inflation” May 6 writes: “for clearing up the mess and designing a new approach to monetary policy... we have three alternatives: liquidation, inflation; or growth”, though he knows, of course, that we need all of them all: liquidation so that we stand on firm ground; inflation to grease the wheels; and a lot of hard and clever work at growth. 

Wolf also considers the possibility that our children “in despair...will even embrace... the absurdity of gold”. I do share Wolf’s feeling since they, and we, deserve more than that; in fact one of the most worrisome aspects of this crisis is how often one finds oneself on the side of those gold-bugs one has always considered being somewhat nuts. 

Now, what I do not agree with Wolf is when he writes of “inflation targeting”, as a holy gray, since one of the problem could be that the inflation was not adequately targeted. 

In a letter published by FT in May 2006 I wrote “inflation as they, our monetary authorities know it, is just obtained by looking at a basket of limited consumer goods chosen by bureaucrats and that although they might be highly relevant to the many have-nots, are highly irrelevant to measure the real loss of value of money. For instance, who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.” 

And then of course we have the financial regulations, and that Wolf does not even want to mention. Would a runner be a bad runner just because someone trips him up and he falls? In just the same way must a monetary policy be wrong, just because some financial regulations, risk weighted bank capital requirements, went haywire?

China would collapse too if it loses faith in the dollar.

Sir Andy Xie is of course right saying that “If China loses faith the dollar will collapse” May 5 but he should also remember that because of the Ying-Yang relation between China and the US, if so happens, China would also collapse. We are all riding on an illusion where we need to feel sorry for him who gets off to early and sorry for him who gets off to late…never before with respect to currencies have the “In God we trust” seemed so appropriate.

Do not save us from the embarrassment... it was sheer stupidity!

Sir John Kay in “A boom based on little more than a bezzle”, May 5, with all this talking of “embezzlement or “febezzlemnt”... is he trying to console us? The embarrassing truth is that the crisis originated from sheer stupidity, that of trusting too much the triple-As that never were. If anyone febezzled themselves that was the Basel Committee when it came up with such nonsense as believing they could and should drive out risks from banking, and that the credit rating agencies were just the right ones do to it for them.

Just pay for what you want and you have a slightly better chance of getting it.

Sir John Coates makes quite a disservice by giving a way too simplistic version on the problems with rewarding the much needed risk-taking in “Time to tackle this culture of rewarding the risk-takers” May 5. He sets us up to choose between the hare and the tortoise forgetting completely that the hare can produce tortoise results and vice versa. Those tortoises that have only been able to produce the $20 million in profits the first 4 years can be those giving us the $500 loss in the fifth year.

There is really nothing like a perfect incentive plan though for an investor who is looking for a five year return he should clearly be better off paying an incentive based on the five years results as easy as that. Diversity is also good... if the whole world starts looking for five year results that will be just as bad as the current one year structures... you see humans, and especially traders, they do adapt.

Which bring us to the most important part of all... knowing what the incentives are. Coates refers to the traders but perhaps more important yet is to refer to the trader’s bosses.

Iceland: Financial System Stability Assessment—an Update completed August 2008.

Sir may I invite you to read: “The update to the Financial System Stability Assessment on Iceland"

It was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on August 19, 2008 and provided background information to the staff report on the 2008 Article IV consultation discussions with Iceland, which was discussed by the Executive Board on September 10, 2008, prior to the recent Board discussion on a Stand-By Arrangement for Iceland.”

It makes fascinating reading, especially in these times when the regulators now want to tackle systemic risks while ignoring that their regulations are in fact the prime source of systemic risk.

In it, dated a month before the crisis exploded at the end of September 2008, we can among other read the following: “The banking system’s reported financial indicators are above minimum regulatory requirements and stress tests suggest that the system is resilient. Bank capital averaged almost 13 percent of risk-weighted assets between 2003 and 2006, dropped to 12 percent in 2007 and to approximately 11 percent in the first half of 2008, but remain above the 8 percent minimum. Liquidity ratios are likewise above minimum levels. Notwithstanding the positive indicators, vulnerabilities are high and increasing, reflecting the deteriorating financial environment”

To me once again, this just proves that no one had the faintest idea of what the “risk-weighted assets” really meant and, if they did, they had no will to question the significance of risk-weighting.

Instead of allowing the sceptics to have a voice the regulators forcefully correlated the financial markets to some few credit rating agencies.

Sir from “Genesis of the debt disaster” May 2, an extract from “Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and unleashed a Catastrophe” it is clear that Gillian Tett has written a great book that starts going to the root of the issues. It is sad though to think that a great reporter like her might now have become useless by correlating herself to what she wrote in her own book. (The same way another opinion-maker has correlated himself to explaining all in terms of the economic imbalance among surplus and deficit countries.)

Tett does indeed tell us a lot about one of the seeds of the debt disaster but, as someone who has recently even acquired a license as a mortgage loan officer in the US in order to better understand what happened, I believe that it was really the environment that mattered for that seed to bloom into something really bad. More detailed information on the amounts of mortgages awarded to the subprime sector and that were securitized on year by year or even better month by month basis is useful to understand it all and I hope Gillian Tett has provided that in her book.

My explanations for the crisis is much simpler. In synthesis, the financial regulators in Basel correlated the world to the opinions of just three credit rating agencies… and with that they weakened or even displaced from the market the voice of all the many healthy sceptics like Terri Duhon and Krishna Varikooty and the reduced the market weight of more careful individual investors.

The International Convergence of Capital Measurement and Capital Standards in July 1988, even though the minimum capital requirements there are based on risk, they do not even mention the credit rating agencies and the risk weight for all claims on the private sector is 100% and they therefore require the 8% of capital.

By contrast the International Convergence of Capital Measurement and Capital Standards of June 2006 1988 is all about the credit ratings… and for instance the corporations that are rated AAA to AA- are risk-weighted at 20% and so do only generate a capital requirement of 1.6%. And, from that moment on the road to “fool’s gold” was determined to go thru the credit rating agencies.

The safe-haven must recycle its waters.

Sir you write of the need to “Reopen the taps of global finance” May 1, but that must surely be the responsibility of the current borrower of last resort, the USA.

Ricardo Hausmann, during the spring meetings of the World Bank, at a conference titled “Latin America and the Global Crisis: Towards a Rapid Regional Recovery” argued that the US should take on debt and relend to the world. Hausmann, coming from an oil rich country must have remembered that this was exactly what the oil countries did during the 1974-79 oil bonanza when foreign bankers virtually forced credits on them… and the oil exporting countries recycled and imported and recycled and imported... until.

But is this politically viable? Perhaps not, but even so there are major troubles brewing down the line.

First the US, as the safe-haven par excellence, cannot expect to crowd out the rest of the world from the financial markets, for a lengthier period, without its own waters becoming stale or even having the rest of the world starting to think in terms of sabotaging that safe-haven.

Second if the US, in order to reflate its own economy and which might also help to stop the world from deflating too much, for a while, does so by investing only in its own back-yard, then the returns from those overcrowded back-yards will not be sufficient to repay what will be owed, and so the US taxpayer will start to seriously object having to become the taxpayer of last resort…and with that, again, waive bye, bye to the sweet dollar safe-haven.

Let us not forget that in truth the dollar bill should have imprinted on it “In the American Tax Payer We Trust” but that the US Mint, more pragmatic, more marketing minded and much wiser preferred the much more fundamental “In God We Trust”.