Timothy Geithner should start by increasing the capital requirements for banks when lending to the government.

Sir Krishna Guha in “Bankers´ pleas on rules rebuffed , October 5, reports that Timothy Geithner said of the banks “These are the institutions that told the world and told the shareholders and told their creditors and told their customers they knew how to manage risk and that they were better at this than their supervisors were ever going to be”.

Does Mr. Geithner really believe that the supervisors will ever be better at managing risks than the banks? Is he suffering from amnesia? Has he already forgotten that it was the minimal capital requirements which the regulators authorized the banks to have whenever the regulator´s own outsourced credit risk supervisors, the credit rating agencies, awarded their AAAs which detonated the crisis?

Of course regulatory overkill is a risk for a recovery which urgently needs risk-taking to awaken. Nonetheless if Mr. Geithner needs to show himself off as a real regulatory macho man why does he not increase the capital requirement for banks when lending to his own government?… it is currently zero!

Or does Mr Geithner also believe that public bureaucrats are better at taking investment decisions than their private counterparts?

The value of our cash is diluted in an ocean of cash, which effectively makes of “quantitative easing” just another tax.

Sir, Krishna Guha in “Easing by world’s central banks take a variety of forms” April 2, mentions that “Expanding the money supply creates relatively little inflation risk in the short term. But this could change when the crisis turns.”

The above is right of course but, let us not forget that however we dress it up “easing” signifies an easing only for those whose instruments are being bought, whether it is the government or the holders of the distressed securities. For the rest of us it just signifies that the real value of our cash gets to be diluted in the ocean of cash produced by the “quantitative easing”, which effectively makes it just another tax, though a much less transparent one.

How to start putting the socks back on the market

Sir, the current crisis did not arise because the market took speculative positions in Argentinean railroad bonds, it resulted from having followed whom it had been informed by their regulatory agencies were the utmost experts on risk, the credit rating agencies, into one of the least risky countries, the United States, and into a very well known market, housing finance. No wonder the crisis has scared the socks off of the market. There is nothing so scary like not understanding what has happened, and though it is nice to see so much being done to help out, it is equally scary not seeing any real efforts to avoid repeating the mistakes.

Therefore “politics and policies” and “a decline in commodity prices” could indeed be helpful to “prevent a downturn becoming a depression” as Chris Giles, Krishna Guha and Ralph Atkins discuss in “Can we go up again? The world economy”, November 6, but if full confidence is not re-established, fast, it will most probably not suffice.

How can we put the sock back on the market then? First and foremost by having the regulators guarantee they will do their utmost that never again so many will follow so much the opinions of so few. In this respect, the bank regulators, after a proper mea culpa, should announce their intention to swiftly move from a system of minimum capital requirements based on vaguely defined risks and that has induced some dangerous regulatory arbitrage, and to immediately stop imposing the opinions of the credit rating agencies on the banks and, as a result, on the markets.

FT… how come?

Sir I refer to your Special Report World Economy 2008 published with occasion of the meetings of the World Bank and the International Monetary Fund in Washington this week.

In it Paul J Davies in "High noon chimes for collateral with no name" says "A system that simply trusts in collateral without regards to its particulars is one that fosters the creation of ever more hideously complex problem". Since the principal reason for the current turmoil is not that the system trusted too much the collateral but that it trusted too much others to do their job of analyzing it, I would have worded it instead as "A system where participants are led to believe so much in the opinions of some few credit rating agencies…"

Also Norma Cohen in “Race against the storm” mentions that “The infection in the credit markets, by all accounts, began with mortgages, specifically those to borrowers with poor and patchy credit” but this completely ignores the fact that most of the market did not lend to borrowers with “poor and patchy credits”, most of the market bought AAA rated securities.

UNCTAD for instance is perfectly clear about what has happened and in their policy brief titled "The Crisis of the Century", released on October 6 they state "There are a few quick regulatory fixes that can be taken at both the national and international levels. The first is to reassess the role of credit rating agencies. These agencies, which should solve information problems and increase transparency, seem to have played the opposite role and made the market even more opaque."

Now in your 12 page special report, surprisingly, the credit rating agencies are referenced only once, and that is when you have to report on the opinions of Christine Lagarde, France’s finance minister.

How come? What strange and dark silencing forces are in action at the Financial Times? They seem to be much present at the World Bank and IMF meetings too.

I have saved a copy of this Special Report by the Financial Times as evidence… though I do not know of what, yet.

What U.S. risk is FT exactly referring to?

Yesterday, September 10 FT had on its first page a report signed by Krishna Guha Michael Mackenzie and Nicole Bullock that spoke about “the cost of insuring against a US default crept higher” and referencing a price for insuring that “implied that the US was more likely to default on its obligation than” several other countries.

Today, September 11, John Gapper in “Take this weekend off, Hank” apparently also finds a need to mention “that credit rating agencies had to declare to the investors that the Fannie and Freddie bail-out would not affect the country’s triple A sovereign rating.”

Given that US debt is issued in dollars, what exactly does this U.S credit risk insurance that you are talking of cover? The risk that they will run out of paper and ink at the US Bureau of Engraving and Printing?

Sometimes formal limits signify fewer limits

Sir Krishna Guha in “Call for investment bank rules to change” April 18 mentions that Bear Sterns had a debt to equity ratio of about 30 times and that "experts argue that the investment banks should be subject to the same capital requirements as commercial banks - requirements that in effect limit their leverage. Not necessarily so!

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.

We are all in this together

Sir Krishna Guha, in "The world's currency could become America's problem" November 10, describes several scenarios for the decline of the dollar but steers clear from the big question of whether the markets will keep their confidence in our current monetary and financial system if the dollar goes haywire.

After the dollar gave up the last appearances of gold backing in 1971 (Guha might have only been a child then) the world basically accepted a system based on the capacity of their governments, or politicians, to guarantee some sort of financial discipline and which so clearly amounted to an act of faith that it was made explicit by including the "In God we trust" on the currency.

In this respect if the markets come to completely lose their trust in the word of the US governments and their politicians this does not necessarily imply that they will have more trust in the word of other governments or politicians but it could in fact lead them to lose their confidence in all of them, at which point the dollar-yen-yuan-euro value becomes utterly irrelevant, leading to a global scramble for assets to barter, at any price, and perhaps having the prices of the shares on Wall Street quoted in ounces of gold.

And so what do we do now with this piece of knowledge? Unfortunately very little, since while the markets keep having trust in the system there is no major benefit being short of faith. Whether we know it or not we are in fact all in this together.

Do we then need two world banks?

Sir, Krishna Guha and Eoin Callan, September 13, in reference to a report on the role played by the World Banks internal anti-corruption unit, the Department of Institutional Integrity (INT) were told by Paul Volcker, the main responsible for the report, that “his inquiry had ‘reconfirmed’ there was ‘ambivalence’ in the bank as to whether they really want an effective anti-corruption program or not”. Wrong! Having been an Executive Director at the bank (2002-2004) I sincerely believe that an overwhelming majority of the bank staff clearly comes out in favour of more and better anti-corruption efforts but that these do not come into fruition only because part of the management, rightly or not, believe that these could hinder the bank from operating efficiently… at least as they wish for it to operate for whatever reason efficiently.

If we discuss “ambivalence” then perhaps we should also discuss what the report does not touch upon and which frankly I consider being the single most outstandingly ugly blemish on the World Bank’s reputation. Sir, please search out INT on the external website of the World Bank and click on the list of Debarred Firms and Individuals. There you will find, duly named and shamed, a list of names of individuals that one way or another after a due process have been considered to be involved in corruption, but that list does not include the name of one single of those officers of the World Bank that presumably must also have been involved in corruption one way or another. Susanne Folsom the Director of INT, on a Q&A session on that same site mentions, “We’re often asked why we don’t publicly name Bank staff who are terminated for fraud and corruption as well. The Bank’s rules don’t allow such disclosures….” What credibility can you get naming others while not being willing to name your own?

Sir, it might very well be that the “ambivalence” on anti-corruption in the World Bank is insurmountable but if so perhaps what we need is to have two world banks since the world definitely needs one that comes out completely and unabridged against corruption. And mind you I am far from being a zealot on this issue, since life has taught me well that zealousness frequently carries within its own even more dangerous breed of corruption.