February 25, 2011

It is time we give our banks a purpose different than that of surviving.

Sir, Mort Zuckerman in “How we can get America working again” February 25, as so many do, identifies the lack of jobs as one or perhaps the most serious challenge facing all here, there, and everywhere.

If that is so and our banks are supposed to allocate capitals why do we not throw out those capital requirements for banks based on perceived risk, and which obviously did not serve us well, and adopt capital requirements based on job creation potential as certified by job creation rating agencies?

February 23, 2011

Asking the pusher for help?

Sir, Martin Wolf holds that “Ireland needs help with its debt” February 23. But when looking at the help Ireland currently gets by way of crazy bank regulations one could also ask, what more help can it need?

Ireland’s credit rating was recently downgraded to A- and which means that banks are still allowed to leverage their capital more than 60 to 1 when lending to Ireland, while in comparison they are limited to about 12 to 1 when lending to a small business or an entrepreneur. And, before March 2009 the banks because of Ireland’s AA or better ratings, needed no capital at all when lending to it.

Without doubt what most caused the over-indebtedness that set off the current crisis was the minuscule capital required by the regulators of banks whenever these entered into operations connected with prime credit ratings. That Mr. Wolf can insist in that “the big failure was the behaviour of private lenders and borrowers”, without also referring to the out the “out-of-control” bank regulators who acted as the pushers of debt, is just amazing.

PS. When Ireland gets downgraded to B, then the risk-weight applied will instead of 20% be 50% which means that all banks need to post 2.5 percent in additional capital on all their exposure to Ireland… and that is why Ireland has not been downgraded to B.

February 22, 2011

A lottery for the rich!!!

Sir, Peter Orzag the former director at the US office of Management and Budget recently wrote about the role of lotteries in raising savings… and I presume implicitly, the fiscal revenues, “Taking a chance can be a better way to save”, February 17.

One of the criticisms he referred to was that these lotteries were usually a regressive form of tax since it mostly attracted the poor who had the most to gain from it. Today when reading Kara Scanell, Justin Baer and Haig Simonian reporting "US arrests Swiss banker in tax probe” they make reference to an amnesty programme for US individuals who would be granted leniency in exchange for their co-operation… and I could not refrain from thinking about a lottery that could interest the richer segments of the lottery market.

When democracy dies in the cradle

Sir, Arvind Subramanian is absolutely correct arguing that democratic forces stand no chance against the economic rents of a State, “Arab spring will not see an economic bloom”, February 22.

As an oil-cursed citizen (Venezuela) and therefore an expert on the issue let me assure you that societies where citizens are not paying directly for most of their government expenses, and are mostly positioned as receivers of government favors, there is absolutely no chance to develop a functional democracy. The most one can do is to hope for an illuminated oil-dictator, in the sad certainty that sooner or later one will have to suffer a truly dysfunctional one.

If for instance in Iraq oil revenues were shared out directly in cash to citizens the political dynamics there would have been different, and real democracy could have had a chance to be empowered. As is they are just waiting for the next petro-autocrat, and who could then perhaps even count on an oil production that doubles the highest under Sadam Hussein´s regime.

By the way even taxes can produce a tax-curse, if these are not transparent enough. Currently the UK taxman perceives through taxes on petrol consumption more per barrel of oil than those who give up that non-renewable for ever… and few UK motorists are really aware of how much they pay in these taxes.

February 19, 2011

Martin Wolf and the rest of us baby-boomers might soon be invited to visit an “ättestupa”

Sir, Martin Wolf looks to explain “Why the world´s youth is in a revolting state of mind” February 19. He fails to sufficiently transmit the seriousness of the issue something that you might understand better when reading reports about the millions after millions of young men in the Middle East who because of a lack of job opportunities will not ever have the means required to start a family.

Wolf would do well placing all the demographic challenges the world faces in the perspective of the fact that the only objective for our banks their regulators have set, is for the banks not to fail. Perhaps the regulators have been appointed by the baby-boomers with the instructions of making sure their assets are safe while they are still around, in the best “après nous le deluge” style.

No! Our youth deserves our banks perform their capital allocation function freely and without regulatory interference. Otherwise we older, Martin Wolf included, might with reason be invited by the youth to take a walk to the nearest “ättestupa”… meaning those cliffs from which according to a Scandinavian myth the elders threw themselves down when they no longer were useful. But perhaps it is that Mr. Wolf is counting on himself being lucky enough to find himself among those with “resource wealth to buy off their young”

February 18, 2011

Current banking regulations is a venomous potion for smal businesses

Sir, Vince Cable the UK Secretary of state for business, in “Private recovery is the only potion for growth” February 18, worries about “growth being undermined by costly, limited bank finance for smaller business”

Excuse me! Does the UK Secretary of state for business not know that limiting and making more expensive the finance for smaller businesses is a direct consequence of the subprime banking regulations that so odiously and regressively discriminates against perceived risks?

Does the UK Secretary of state for business not know that while banks are required to hold important levels of capital against lending to the small businesses, it needs to hold basically no capital at all when lending to the government?

What the UK Secretary of state for business should be doing is to protest the venomous regulatory potion that attempts against real private recovery… and not leave that to Sir John Vickers’ banking commission, which does probably not care one iota about small businesses.

About lights and regulations

Sir in “Regulating finance” February 18 you refer to “But the light is here”.

A fixed lamppost giving light is regulation, a regulator illuminating with a lantern where he thinks bank should go (like allowing for a 62.5 to 1 leverage whenever there was a AAA rating involved) that’s pure intervention. When will you grasp the difference between those lights?

February 16, 2011

We share John Kay´s miseries

Sir what John Kay describes in “Public projects obscured by private finances” February 16, is very much what happened in many developing countries when we were subjected to the privatization crusade of our utilities and infrastructure.

Instead of the good project engineers, we were told we would get to run the operations efficiently, we were assaulted by financial engineers searching for how to squeeze out the most of what de-facto were most often safe monopolies, and that should ordinary have been financed at very low rates by orphans and widows. And, the cleverer these wizards structured the projects, the more they could pay upfront for the rights of executing them, and so the happier were our authorities too.

And now we are stuck with it, having to find consolation reading John Kay and seeing that at least our miseries are shared. The saddest part though is that it has so unnecessarily given the private sector a bad name. Looking at how doomed-to-fail these projects often were structured makes one suspect that it could almost have been done so on purpose.

February 11, 2011

The “exceptionally low costs of borrowing” are not for everyone.

Sir, Martin Wolf in “A strategy for growth that dares to be radical” February 11 speaks of “using the current exceptionally low costs of borrowing as an opportunity to promote a much enlarged programme of investments in infrastructure”. Since those “exceptionally low costs of borrowing” for the government are partially the result of bank regulations that allow for minimal capitals when lending to the government, compared to quite high capital requirements when lending to small business or entrepreneurs, why not just level the field a bit and allow the private sector to help out?

Martin Wolf would do well walking down main¬-street asking those borrowers perceived as riskier by the credit rating agencies, or so small that they are not even perceived, whether their borrowing costs are exceptionally low. In relative terms, they are exceptionally high.

A proposal for strengthening the sustainability of the dollar as an international reserve currency

Sir I refer to the recent discussions on international reserve currencies.

There are only two possibilities for an international reserve currency, it is either backed by something physical or it is backed by some sort of metaphysical faith. In the latter case it would be really hard to envision an international organization being able to substitute for a nation in generating the required faith, since that would really have to mean it becomes stronger than any country. I ask, except for in some global citizen´s dreams, when will the IMF or even the United Nations mean more than, for instance, the USA? The SDR´s recently being much re-discussed are based on a predetermined mix of some countries, and as an average, it all finally depends on the how the individual members of the basket do.

And so the fact is that, for the time being, the world has deposited its faith in the USA, which on its currency declares in its turn having deposited its faith in God. And that´s it! While the music plays, as someone recently spoke about a different situation, you have to keep dancing, no matter how untenable it all can seem to be… that is of course unless you want to try to create chaos by decree.

Meanwhile if there is anything we could do, that is to discuss how the faith in the currency of a country could be better harbored, so as not to provoke some of the difficulties for the trusted country, which could provoke the world losing its trust in it earlier than necessary.

In this respect I believe that the most important part to achieve more sustainability is to make a clear distinction between the long term faith in a country and its economy, and the short term faith in its government, perhaps with a sort of a Chinese wall.

Since even the safest harbor can become dangerously overcrowded the US should think of having the Fed collecting a toll from anyone wanting to anchor in their safe-dollar harbor, and not pass along that toll to the US government by means of lower interest rates on its debt, and as is currently the result. That safe-haven toll would align much better the incentives, especially for the US citizens, because no citizen would like to have his government´s finances subsidized by foreign interests. It would in fact be an effective way to combat the safe-haven resource curse.

There would be no problem in having the Fed later sharing the revenues of the toll with the government but those revenues would then be seen as being generated by the strength of the nation and not by the strength of the government.

February 10, 2011

The IMF and the World Bank did not listen then… and, unfortunately, they still do not listen enough

Sir Alan Beattie in “Watchdog says IMF missed crisis risks” February 10 makes reference to ignored warnings such as those delivered in 2005 by Raghuram Rajan, the then chief economist of the fund, and which mentioned the threat of widespread financial instability.

Mr Rajan was far from being alone in that. I myself, as an Executive Director of the World Bank, in a formal statement at the Board in 2004 said: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

No one wanted to listen then… the real problem though is that most still don’t. (And this would include also FT)

Perhaps it is the regulator we need to bring home

Sir, Robert W. Jenkins in a letter titled “Call the bankers’ bluff in this cat and mouse game” makes some good comments about the implied threat from bankers moving to “greener pastures”, if regulations home get to be too tough.

Mr. Jenkins should not forget though that part of the problem is that the regulators themselves moved out, to Basel, from where, with their risk-weights which determines the capital a bank needs to have in order to back up its different assets, they manage the risks of our banks, in splendid isolation. Perhaps it is the regulator we should call back home, if only for an urgent reality check.

The regulators should regulate against unforeseen risks, not manage the foreseen.

Sir, you say that “Some crisis may be inherently unpredictable. Being aware of what we do not know should encourage a policy of taking precautions even when we see no danger” “The IMG goes to the confessional” February 10. Precisely, and that should be the role of the regulators.

Compare that with what the Basel Committee currently does, which is to act as a financial risk manager for the world, allocating risk-weights that determine the capital requirements for banks based on exactly the same information already available to all bankers, namely the credit ratings. To leverage the perceptions imbedded in the credit ratings as the Basel Committee does, is not an act of futility, it is, as proven, an irresponsible and dangerous act with serious consequences.

And please do not accept the argument that these were unforeseen consequences. The Financial Times in January 2003, long before Basel II was approved, published a letter that I wrote which concluded in “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds.”

February 08, 2011

Mr Issa, then do something about it!

Sir, Darrell Issa writes that “assuming government can allocate resources and spur growth more effectively than market forces is a mistake America must never allow to happen again” “Obama´s Keynesian failures must never be repeated” February 8. He might not be aware that America and much of the world has hardwired such an assumption into their financial regulations.


When a bank is required to have 8 percent capital when lending to a small business or an entrepreneur, but does not need any capital at all when lending to the government, it is precisely that the government can put the savings of the nation at better use what you are assuming. And the US Congress recently passed 2000 plus pages of financial regulatory reform without showing the slightest intention of reneging on such an assumption.

For the umpteenth time, the current system of capital requirements for banks concocted at the Basel Committee is stealth communism.

February 06, 2011

The regulator was the noisiest!

Sir, Justin Baer in “Noise of the financial herd will drown out risk concerns? February 5 writes that the crisis exposed flaws in the way Wall Street measures and limits risks. That might be, but let us never forget that the biggest flaws of them all were those present in the bank regulations of Basel II, which allowed banks to leverage their capital 60 times and more just because a triple-A rating was involved in the operation, like in the case of most of those collateralized debt obligations referred to in the article.

If there was a margin of 1 percent in the operation, then the returns on capital could be catapulted into over 60 percent a year. Talk about real noise!

February 04, 2011

To avoid risks, take risks.

Sir, Paul Collier in “Forget Plan B. It’s Plan A+ that Britain needs” February 4, leaves all stimuli to be done to the Government; suggesting to constrain the market’s nervousness with some deft now you see it now you don’t magic.

What about opening space for the private sector, by for instance reducing some of the capital requirements for banks when lending to what is perceived as risky, and that has obviously had nothing to do with this financial crisis. Getting rid of the odious and regressive regulatory discrimination of what is perceived as risky is the least risky way to proceed.

To keep on risk-weighing UK public debt at zero percent, while risk-weighing an unrated UK small business at 100%, is a sure recipe for disaster.

February 02, 2011

Those at the nucleus may not even know they´re there.

Sir, John Kay writes that “Those at the nucleus may not have the best view” February 2. Indeed, but that is so much worse, when those at the nucleus are not even conscious they´re there.

For instance the Basel Committee which with such hubris took upon itself to act like the risk-managers of the world, assigning the risk-weights that determines how much capital the banks need to hold for different assets, according to their credit ratings, is not even aware of that by doing so it determined Ground Zero for other risk-managers; and continue therefore to complain about the ability of bankers.

Our future is (hopefully) not this!

Sir, Martin Wolf titles his article assessing the financial crisis “How the crisis catapulted us into the future” February 2. I am not so sure of that since it seems that in many important aspects, our past has just catch up on us, and we´re still stuck in it. Let me explain.

This crisis was caused by regulators, who with hubris took upon themselves to play the role as the supreme risk-manager of the world, and created an unstable ground zero for the rest of risk-managers, by authorizing for instance banks to leverage over 60 times their capital, just because a triple-A rating was involved.

Prominent names, like Martin Wolf, have not yet even begun to question the wisdom of that… and surely (hopefully) our future should have no room for such regulatory meddling and distortion of the markets.

February 01, 2011

Why don´t regulators stop helping the banks from doing what they do not want them to do?

Sir, Philip Stephens refers to Christine Lagarde, the French Finance minister as saying that banks should “contribute properly to economic recovery, to curb bonuses and to bolster their own capital”, “Critics will shut up when the banks pay up” February 1.

I wonder why the “formidable” Lagarde does not simply request the Basel Committee to eliminate those capital requirements for banks that so discriminate in favor of what is perceived as having a low risk of default; allowing for 60 to 1 and even higher bank leverages when triple-A ratings are involved? That is what has hindered and hinders the banks from allocating capitals more efficiently in order to create a more sustainable economic recovery; that is what has allowed and allows generating the huge bank profits which breeds huge bonuses; that is why the banks have been able and are able to grow too-big-to-fail with little capital.

The era of regulatory distortions should draw to a close

Sir, Richard Dobbs and Michael Spence write “The era of cheap capital draws to a close” February 1. Given the current losses, would not this era, in these terms, be more accurately defined by calling it the era of “capital cost postponements”?

Also, given that if banks had been limited to more traditional leverages, we would never had seen the credit expansion that occurred, was it really cheaper capital we saw or was it not an era of regulatory distortions?

It was arbitrary regulatory discrimination which caused bank credits to be relatively very cheap for anything that could dress itself up to be perceived as low risk, as bank equity could then leverage more than 60 to 1, and relatively much more expensive for what could not do so, and for which bank leverage was kept to a 12 to 1. That is what pushed the world into financing houses in the US and other “safe” places and away from infrastructure and machinery and other “unsafe” ventures.

If there is anything we should ask for now, that is for the financial regulators to immediately stop acting with such hubris as the risk-managers of the world.

For markets to work the regulator needs to act as a regulator and not as a risk-manager

Sir, “Time finally to make banks safe” you correctly write on February 1, yet you fail to understand that for market discipline to be restored, it is imperative that regulators keep their hands out of the markets, instead of, with their capital requirements for banks based on perceived risk of default and as risk-weighted by the regulator, acting with incredible hubris as the self appointed risk-manager of the world.

In other words you can order whatever basic capital requirement you want for banks… 9 percent or 100 percent… but that will not mean anything if you then water down some of these capital requirements by applying minuscule risk-weights. In fact the higher the basic capital requirements for banks are, the higher will the distortions produced by different risk-weights be.

The regulators set “Ground Zero” for most of the risk management of banks… and we need that “Ground Zero” not to be a distorted reflection of their arbitrary and regressive regulatory risk-adverse bias.

Ps. Truly I do not understand what little Per Kurowski might have done to FT, for FT to decide they prefer to shut him up, before having his opinions heard.