FT echoes accusations of “knowingly profiting from murder” against World Bank, but not mistakes by bank regulators?

Sir, Shawn Donnan’s “Lawsuit” of March 9, has left me dumbstruck.

In 2002-2004 I was an Executive Director at the World Bank (IFC) occupying the Chair that, among others, represents Honduras. In 2003, surely before Dinant and its late owner Miguel Facussé times, I have never heard about them, I visited some of those palm plantations in the Bajo Aguán region of Honduras.

In an Op-Ed I then wrote, I stated that I found these to be horrible, appalling; basically because to me it looked like that it “could be the mother of all poverty traps”, “ the borderline of lowest overall marginal cost, that is, where the least is paid to farmers for their labor”; and also because I always felt that “if we let globalization simply pursue the lowest marginal cost of labor, then Great Bad Deflation will inevitably come”.

But, as to the World Bank or the IFC “knowingly profiting from the financing of murder”? And of these being a detonator? “Lawyers lay out a build-up of violence before and after the IFC began lending to the company” I have to say no, no and no!

Could IFC, the World Bank, be lured into lending or investing in something that has something awful going on behind the curtains? Yes, that could happen to anyone. 

Could some individual from IFC and the World Bank be involved in something criminal? Of course, but from there to launch this type of accusations against the institutions as such, only damages without serving any purpose. How much seed of suspicions can you seed before you do irremediable damage?

Also could it not be that someone is knowingly exploiting some poor suffering Honduran farmers, in an ambulance chasing type of action? I do not know EarthRights, and I have absolutely no reason to suspect anything but good intentions on their part, but profiteering happens, and so one needs to always proceed with utmost care.

I am no longer an ED, and since I am no longer capable, in my profession, of making one to my conscience honest living in my Venezuela… I now belong to a Civil Society (don’t ask me to explain precisely what that means). And as a member of it I do my best to generate constructive advice to valuable institutions such as the World Bank (and, disclaimer, absolutely not only because my wife works there).

Sir, let me get back to how I have titled this letter: The Basel Committee for Banking Supervision has made some mindboggling and very dangerous mistakes. FT has not shown a willingness to clearly echo my concerns or even ask bank regulators for some very basic explanations. But, “without fear and without favour”, you now allow this against the World Bank to be published. How come the differential treatment? Could not bad regulations be a murder weapon?

PS. Nowadays I hope for robots to take care of those palm plantations; and by taxing a bit those robots, be able to provide the poor farmers of Honduras a better chance to place themselves closer to something more profitable for them, and foremost for their children and grandchildren.

@PerKurowski

Why can’t lending to female entrepreneurs be leveraged as much as lending to “infallible” sovereigns?

Sir, Gillian Tett writes about Goldman teaming up with the International Finance Corporation, the private sector lending arm of the World Bank, by putting $50m into a $600m fund that would extend loans to 100.000 cash starved female entrepreneurs, “Goldman discovers that money can buy respect”, March 7.

That represents a 12 to 1 leverage which, when compared to the 33 to 1 leverage Basel III minimum allowed by the 3% leverage ratio, seems extremely small, in relative terms. As I see it there is no doubt that a well diversified portfolio of loans to female (or male) entrepreneurs must be more productive and safer than a portfolio concentrated in loans to some infallible sovereign, to the housing sector or to someone of the AAAristocracy. If so the fund instead of $600m could be $1.650. 

In conclusion, Morgan and the World Bank should be able to do much better for women entrepreneurs by lobbying the Basel Committee… though I do understand that the publicity value of such efforts might not be that large.

“We need to learn how to fail”

Sir, in the first session of IFC’s and World Bank’s “Building Competitiveness” FPD Forum 2011, April 4, titled “Youth, Employment, and Revolution in the Middle East, Amr Shady, the CEO of T.A. Telecom of Egypt, said something like: “US entrepreneurs know how to fail, our entrepreneurs need to learn the skill of failure, so to have access to the resources we can pivot into successes”... That should be applicable to South Africa too.

That is a message that should urgently be conveyed to the Basel Committee for Banking Supervision and the Financial Stability Board where they keep insisting on raising the incentives for banks to lend to what is officially perceived as not risky and to avoid like plague what is officially perceived as risky. With it, instead of having the banks fish for something important and productive in risky deep waters, they make them waste their time fishing in unproductive triple-A rated shallow waters... where they nonetheless overcrowd and drown.

PS. Please free us from imprudent risk aversion 

Should not all banking be sustainable?

Sir Lawrence Summers, June 2, gives his “Six principles for a new regulatory order” for the financial system and the next day you publish a full section on “Sustainable Banking” and there is absolutely no connect between them. Should not the ordinary financial sector and its commercial banks also be sustainable?

Ever since the Basel Accord the only thing in the agenda of bank regulators has been to avoid bank defaults and that cannot simply be all the purpose there is to banking. What a big irony that FT and IFC the private sector arm of the World Bank Group can find the need to mention sustainability and even award prizes to banks based on something that does not even appear in Basel I or Basel II or even in the thoughts of bank regulators.

In just the same vein we now read that “World Bank calls for microfinance rules” June 3 saying that “lenders making small loans to poor people in developing countries should be subject to regulation to prevent abusive practices” and we need to ask, does that not apply to lenders making big loans to rich people in developed countries?

But why should we keep the financial sector caged?

Sir Martin Wolf explaining “Why it is so hard to keep the financial sector caged” February 6, gives us ground to ask… are we supposed to cage the financial sector?

Besides offering a safe passage for our savings is not the financial sector also there to assist the society in the generation of decent jobs and the distribution of opportunities?

We have for soon two decades been led by the bank regulators into a risk-adverse frame of mind that carries with it significant other risks.

I hold that instead of minimizing risks, which one could do at least on paper by not taking any risks; and instead of focusing only on the possible crisis event, we need a much more holistic view and that at least starts by measuring the full results of the boom-bust cycle to see if, on the whole, it was worthwhile for the society at large, and most specially for future generations.

The Financial Times has teamed up with the International Finance Corporation (IFC) which is part of the World Bank Group to offer "The Sustainable Bank of the Year Award” and where it recognizes "the bank that has shown excellence in creating environmental, social and financial value across its operations." It is a great idea but why not take that opportunity to reflect upon that none of those worthy goals receive any incentive from the regulator, who's only concern in life is lessening the risks.

Not to risk anything for nothing is much worse than to risk all for something. Let us never forget that risk is the oxygen of development and that “No woman no cry” was not written for us to stop crying.

The irony of it all is that the regulator in all their risk/adverseness also created those new sources of systemic risks that have acted as detonator for our current turmoil; namely the empowerment of the credit rating agencies as their outsourced bureaucrats in charge of measuring the risks; and whom the markets blindly followed into subprime quick-sand laden swamps.

FT Sustainable Banking Awards

The Financial Times and IFC have teamed up to create the following competition.

"The Emerging Markets Sustainable Bank of the Year Award recognizes the emerging markets bank that has shown excellence in creating environmental, social and financial value across its operations."

Sounds great but, if creating environmental, social and financial value across its operation is as I gather the promoters believe a worthwhile goal, then why do they not ask the regulators to send clearer signals about it to the banks in the emerging nations.

From what we can observe the regulators are currently signalling minimum capital requirements based exclusively on the reduction of risks as perceived by those outsourced risk surveyors we know as the credit rating agencies.

But if you want to give incentives so as to obtain the results the promoters seem to wish, then you might be better of sending clearer signals than those of a competition. For instance why do you not set up minimum capital requirements based on the rating of environmental, social and financial value creation? And, if you do, why not throw in something about job creation too, which also seems something quite worthwhile for the banks to do.

That is if course unless all what is meant when referring to sustainable is solely the sustainability of the banks themselves.

Please, pick the cherries!

Sir, Andrew Jack reports that “World Bank agency seeks to create African health funds” April 30, and that one concern about one of its agencies, the International Finance Corporation, launching an equity fund is to “ensure that for-profit healthcare services supported by the debt and equity funds in Africa do not simply back businesses that “cherry pick” richer patients but instead reach the poorest in rural areas in the lower income countries that suffer the most.”

Clearly we should try to find the ways to bridge the horrible needs of the poor in Africa, but while doing so let us not ignore that “cherry picking” is exactly one or perhaps the most important tool for achieving sustainable economic development. If the world had used more its development funds to help Africa to persistently service the health needs of their sweetest cherries, instead of having these go to Paris or London for their health treatments, then perhaps we would have allowed many more sherry seeds germinate into cherry trees and there would be more cherries in Africa.

It is amazing how sometimes development agencies are hindered from using what has proven to be good development tools in developed countries.