June 30, 2009

For a good obituary you need a good life

Sir Anil Kashyap in “A sound funeral plan can prolong a bank’s life” June 30 writes about “the rapid resolution plan” that systemically important financial companies, according to the financial regulatory reform proposed by the Obama administration, would have to file indicating what arrangements they have made for their demise. It sounds so right and so utterly responsible (even Angela Dorothea Merkel would be expected to endorse that) but, do we not really need more a little mission statement about what they are going to do while living? I mean we still keep on worrying so much of keeping the costs of the funeral down instead of making certain that the life has been worth it. In the financial regulatory reform, where do they discuss the purpose of the banks?

The possibilities of a “rapid resolution plan” to be of any use depends also much on what disaster hit you. For instance what is the “rapid resolution plan” for a bank if all the credit rating agencies turn out to be wrong (again? Suing the regulators for forcing the banks to heed so much the opinions of these risk surveyors?

June 27, 2009

It was not the faith based financial institutions who caused it but the “too few to follow”

Sir we know with absolute certainty that had not the regulators empowered some “too few to follow”, the credit rating agencies, and created some perverse incentives that interfered with the risk allocation mechanism of the market, the minimum capital requirements for banks, we could have had another type of crisis, but definitely not this one. In this respect Michael Mackenzie is as right as he can be to argue “It’s a stretch to blame hedge funds for banks collapse”, June 27, and mind you I am not a great fan of these what I call “faith based financial institutions” that charge outlandish fees for their services and keep you mostly in the dark.

And blaming derivatives when the originals, the mortgages to the subprime sector in the US were so badly awarded is just like the robber pointing with his finger down the street and loudly shouting “there he runs that s.o.b!

June 25, 2009

This particular efficient market hypotheses was murdered and I am not buying any efficient regulator hypotheses

Sir James Montier observes that “The efficient market theory is as dead as Python’s parrot” June 25. After duly goggling what he meant by that, I agree, but only as to the death of this particular parrot and not to the extinction of its whole specie. You see our current efficient market parrot did not die of natural causes it was murdered. Murdered by some scheming banking regulators in Basel who decided that one of the lead actors of the market, the banks, had to swallow a pill of arbitrarily set of capital requirements based on vaguely defined risk and as measured by some external credit rating agencies. It proved to be just too venomous.

Montier could be suffering a state of shock like when he writes “new research shows that career risk and business risk are the prime drivers of most professional investors” as if that was something new, as if we really wanted or expected that to be different; or when he writes “there isn’t a scrap of evidence to suggest that we can actually see the future at all” like even if it were true we should not try to do our best to look into the future. Then again anyone capable of describing the current regulatory approach as “the markets know best” has either no idea of what he is talking about (I am always suspicious of anyone that uses many quotations) or is pursuing a completely different agenda. Just in case I rather go searching after any other efficient market hypotheses or even use the current carcass to clone a new one than to buy myself an efficient regulator hypothesis.

June 24, 2009

Don’t just pick on the fallen bankers.

Sir it is clear as Martin Wolf writes “Reform of regulation has to start by altering incentives” June 24. That said it is hard to understand exactly what incentives Wolf is referring to since most of the problem he describes are an intrinsic part of the realities of banking and therefore, if he just wishes to eliminate banks and go for safe mattresses instead, then he should perhaps say so.

The incentives I most worry about are those arbitrary incentives created by the regulators in Basel and that state among others that if a bank lends to a corporation without a credit rating it can leverage its capital 12 to 1 but if lending to a corporation that has managed to obtain a credit rating of AAA to AA- then it is allowed to go for an incredible leverage of 62.5 to 1… and as if the good risks needed additional subsidies.

Talk about incentives to pursue the AAAs! With incentives like these no wonder many of the AAAs weren’t for real. Like many, Wolf also expresses concern about the “too big to fail banks”. Had he participated in the few debates prior to the approval of Basel II in June 2004, he would have known that this was exactly one of the major concerns and that unfortunately was finally brushed aside.

We know that the bankers are down for counting so it is understandably tempting to pick on them but please let us first and foremost go after on the truly horrendous regulatory incentives which perhaps are also easier to correct.

Wolfgang Kuhn… you are absolutely right

Sir I cannot but subscribe completely to Wolfgang Kuhn’s letter of June 24 “Don’t ridicule Germany for its aversion to debt” and if only I was able to get hold of Mr. Kuhn, and so permitted, I would be glad to post it in my own Tea with FT blog.

We need warning signs placed on academics

Sir Devesh Kapur is perfectly right pointing a finger at academics for their not having been able to produce anything useful that could have helped to avoid the current crisis. Never have so many of those who were supposed to perform societal oversight done (and still do) so little. “Academics have more to declare than their genius” June 24.

But the real fundamental problem is not necessarily with the academics per se but more with those of them who venture into public life selling or allowing themselves to be sold as experts. Academician should be the first to know that at least in social sciences there are no real experts, just as there are no credit rating agencies that can guarantee a consistently good result. Therefore academics should at least come with a warning sign that reads “Believing an academic to be an expert could be extremely dangerous for the health of your portfolio.”

Private schools compete quite well with public schools

Sir John Kay’s “How a television monopoly ended in mediocrity” July 24, though quite interesting with his book production analogy fails to make a case for his final statement that “A license-fee BBC is now the main obstacle to quality television in a competitive market.” It is not a bit like saying that public schools impede private schools to prosper?

June 23, 2009

The Fed has a conflict of interest if overseeing systemic risk.

Sir Frederic Mishkin in “Why all regulatory roads lead to the Fed” June 23 fails to mention the most important reason why the Fed should not be the systemic regulator, namely that as a regulator it is also a producer of systemic risks and has therefore a clear conflict of interest.

The current crisis occurred, primarily, because of those so poorly crafted minimum capital requirements for banks that originated in the Basel Committee and that created immense incentives for anything that could get hold of an AAA rating, such as AIG and the securities collateralized with subprime mortgages. The sole fact that most still speak of “excessive risk taking” while the truth is that the problems derived from risk adverse investors taking refuge in instruments that had been faultily classified as risk-free, is just an example of that peer solidarity among regulators that creates opacity and puts the world on a wild-goose chase it cannot really afford.

I would prefer to outsource any systemic risk vigilance to a totally independent entity, perhaps, given its global implications, even one paid and supervised by the United Nations, than having that function placed in the hands of regulators and that as far as this type of risk I trust even less than I would trust a Wall Street firm.

June 22, 2009

A minimalistic comment

Sir Peter Tasker’s “Japan serves up valuable minimalist lessons” June 22, reads so true and feels so timely.

Let us avoid subtle muddle

Sir I have participated for many years in the debate on the regulations for banks coming out of Basel but, in order to have an even fuller understanding of what happened, I recently completed all the requirements to be a mortgage loan officer and a real-estate salesman in the state of Maryland. From what I have been able to gather Clive Crook, and many with him, is wrong when he slips by some questions that seem to attribute much of the subprime crisis to Fannie Mae and Freddie Mac, “A thin outline of regulatory reform” June 22.

There might be other real problems with these “government sponsored entities” but the subprime avalanche was created by mortgage originators that managed to channel unbelievably lousy awarded mortgages into Wall Street created securities which had managed to hustle up AAA credit ratings, so much that even Fannie Mae and Freddie Mac fell into the trap of buying up some of this securities, as investors.

There might be other real problems with these “government sponsored entities” and there is a lot of pent up criticism of these by conservatives, and much of it might be valid, but creating regulatory reform in hard times like this is not made easier by subtle muddle being thrown into the debate.

In his article Clive Crook also asks “what would better regulation of the [credit rating] agencies look like? To this I would have to reply by asking? Why would we need better regulation that could make the credit rating agencies even more dangerous? Why do we not just take away the official powers they have had since only June 2004?

June 20, 2009

We must learn to celebrate pruning.

Sir you are absolutely right when in “Central bankers strike back” June 20 you remind that “Banks too large to fail... is only one source of systemic risk” Indeed the opinions of the rating agencies and that the regulators incentivized the markets to follow produced much more real losses than all the too large to fail as a group.

And you are also absolutely right also mentioning that “it is even more important to make it possible for even the largest ones to fail. Indeed we must learn to celebrate pruning. In May 2003 while being an Executive Director at the World Bank I told a workshop of some hundred regulators from all over the world that “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.”

June 18, 2009

We need at least one urgent change in the financial rule book.

Sir it matters little how you arbitrate a game if the rules in the rulebook don´t make sense and therefore, in matters of financial regulations, the Obama administration is right concentrating on what you title “Redesigning the financial rulebook”, June 18, before “rebuilding the regulatory structure”. I just hope they really change that truly crazy rule of the minimum capital requirements for banks that the Basel Committee concocted.

How would you arbitrate a game of hockey if depending on how some external consultants perceived the strength of the players to be each player had to carry different protective gears? The strong AAA players would have less protection, exposing them to additional risks, while the poor BB- weaklings would have to carry more protection weighing them down even further. And, if a hockey reporter how would describe the team? The protective-gear weighted strength of it?

June 17, 2009

The taxman must do better than create a cartel

Sir Matti Vanhanen is clearly being responsible with his “Europe will need to raise taxes in harmony” June 17 and he should be lauded for not ignoring the need for higher taxes to pay for the mess, and so that we do not have to pay it all through inflation. Having said that though, as a taxpayer I would beg that the search for new, better and more credible taxes adjusted to the realities of a global economy should be the driving force of increased fiscal revenues, and not the creation of a global taxmen cartel… or do we also need a global coalition of taxpaying citizens?

Does Soros want to eliminate private banks?

Sir I try to find something new and important in George Soros “My three steps to financial reform” June 17, but frankly the only think I find, though it is indeed surprising, is when Soros argues that “banks should not be allowed to speculate for their own account with other people’s money”. Is he now making a case for abolishing private banks?

The world needs to reach a sustainable bottom.

Martin Wolf sums it up very well when he ends “How today’s global recession tracks the great depression” with “The race to full recovery is likely to be long hard and uncertain” June 17. To this I would just add that the length of that recovery will depend a lot on those who by panicking impede the world economy from regaining a strong foothold from where it can work itself up.

June 15, 2009

The remedy for the creative industries is already in their name.

Sir Stephen Garrett writes that “Piracy is threatening the survival of creative industries” June 15 because governments have not been cooperative enough blocking piracy on the web. But, since there are many that hold that the creative industries are themselves a major threat to creativity that might not be entirely such a bad thing. That some jobs are lost while the adjustments to the new world order are made? Could be, but there’s were real creativity comes in. Anyhow no one would dare to order the wheels off the luggage in order to safeguard the jobs of porters… or would they?

But there is a minimum minimorum reform that the US health sector needs for a starter.

Sir being a foreigner living in the US I have thanks God not needed to get too acquainted with its so heatedly debated health sector; and I pray it stays that way. In this respect I cannot really comment much on Clive Crook’s “Medicare for all may be the best cure” June 15, but yet I feel the need to point out something that to me seems to go against any sense of justice, which is that the uninsured are often required to pay many times the price insurance companies pay for exactly the same medicine or treatment.

If beer companies compete that is good for beer drinkers and does not affect those who do not drink beer. But in the case of health services it is obvious that many of the cost reductions negotiated by the competing insurance companies end up being expected to be recovered from those uninsured.

If it was in my hand (and perhaps it is lucky that’s not the case) I would put up a prohibition to charge anyone more than 20% over the minimum price offered to any insurance company… and then take the reforms from there. Not doing so forces millions of uninsured who could pay reasonable fees into either swamped free service emergency rooms or into being financially abused.

Who could have thought the Financial Times would come to this?

The Basel Committee concocted some minimum capital requirements for banks based on risk assessments made by the credit rating agencies which establish for instance that if a bank lends money to a corporation with no rating it requires 8 percent of equity but if it lends to a corporation with an AAA to AA- rating then it only needs 1.6% of capital.

The above set in motion forces that over only some 3 years helped to channel around two trillion dollars, some 100 years worth of World Bank lending, to finance badly awarded mortgages to the subprime housing sector in the US just because these managed to dress up as AAA and which detonated the current crisis.

Sir given that among the seven recommendations for better financial regulations you make in “Last chance saloon”, June 15 , you do not mention that the regulators should stop interfering arbitrarily in the risk allocation mechanism of the market I guess you are alright with it. Who could have thought the Financial Times would come to this?

June 11, 2009

Please, regulators, more humility.

Sir Emil Henry could not be more right when begging everyone to be very careful on the issue of whether and how a systemic risk regulator SSR could monitor financial institutions, “Daunting decisions on a new risk regulator”, June 11.

The truth is that regulating for systemic risk could be the most dangerous way of creating systemic risk. To understand the above suffices to look at the minimum capital requirements for banks concocted by the Basel Committee and that amount to a direct arbitrary intervention in the markets risk allocation mechanism and that can be shown having been the number one driver of the current crisis.

In “Against the Gods Peter L. Bernstein (1996) writes that the boundary between the modern times and the past is the mastery of risk, since for those who believe that was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. Today, when seeing so much risk managing, I cannot but speculate on whether we are not leaving out God’s hand, just a little bit too much.

June 10, 2009

Martin Wolf’s savings are not much different from China’s or Germany’s

Sir Martin Wolf referring to the surpluses of countries China and Germany writes “they cannot have both safe foreign assets and huge surpluses”. Why not? It is obvious that persistent surpluses do create special difficulties but these are faced by all investor, even Mr Wolf if he runs a surplus. “It is in Beijing’s interests to lend Geithner a hand” June 10.

In fact had it not been for the misguidance produced by the credit rating agencies or the regulators intervening in the risk allocation process of the market by way of the minimum capital requirements for banks, the system could have kept on working for a very long time until other factors would have become important on the margin.

For instance, just a couple of years ago many were analyzing what would happen to China when they ran out of their labour surplus and salaries were not any longer so competitive. Sadly now we won’t know this for quite some time.

Wolf considers “China’s decision to accumulate roughly $2.000bn in foreign currency reserves... a blunder” What did he himself do? Spent it all? Kept it in pounds? Did he also blunder?

June 05, 2009

You, oil dictators, give us our (f……) oil revenues.

Sir Martin Sandbu and Nicolas Shaxson in “Give the people their resources wealth” June 5 write that “improved transparency, has hardly empowered ordinary citizens”. Of course not, with respect to oil revenues improved transparency is more like allowing the tortured to also be able to see when they extract their fingernails.

There are many places where citizens are finally waking up to the fact that the principle of that very well intentioned Extractive Industries Transparency Initiative and that states “We affirm that management of natural resource wealth for the benefit of a country’s citizens is in the domain of sovereign governments to be exercised in the interests of their national development”, is just plain wrong.

And if there is truly one single thing the US should regret in the US is not having taken the opportunity to promote oil revenue sharing of the citizens in Iraq. Trying to sow democracy in a land where oil resources are centralized would be laughable but for its tragic implications.

In Venezuela I have over the last two years published at least 40 articles on the subject of why we need to wrestle away the oil check-book from the Hugo Chavezes of this world, and I am currently trying to form a global coalition of oil cursed citizens, to see if we can help each other since, at the end of the day, there is no such thing as an oil-cursed politicians, oil-cursed governments or oil cursed policymakers, on the contrary they are all most often shining examples of oil blessings... there are only oil-cursed citizens.

Unfortunately, since we citizens do not have the oil revenues yet, few want to help us, they prefer helping the dictators to become more saloon respectful dictators, but I guess that’s life on the oil curse lane.

June 03, 2009

Hurrah! We managed to get out of the garage!

Sir Martin Wolf sounds like someone who taking a very long car trip reassures his wife with a “Honey we´re doing fine” after being able to manoeuvre out of his garage, “Rising government bond rates prove policy is working” June 3. There are thousands of treacherous miles left to drive in a used car that does not seem too trustworthy and we have recently been given evidence that we can’t even trust the GPS or the petrol meter or for that matter the mechanics or the traffic signs.

Does Wolf need an example of one of the trolls awaiting him round the bend? If a bank lends to a car company then the government requires it to have 8 percent of bank equity but if it lends to the government so that the government can lend to the car company then it is not required to have any equity at all.

Does Martin Wolf really have any idea of where the 10 year US bond rate would be without the quantitative easing of the Fed or the subsidies implied in the zero capital requirement for the banks when they hold such paper? I don’t think so, and so even for a fierce anti-deflationist like him it is much too early to shout out any type of Hurrah!

“Sharp tightening, but not yet”… that is indeed the battle cry of the baby-boomers “Après nous le deluge”