Ever more complex finance requires denser and duller, bordering on brain-less, hard-headed stubborn bank regulators.

Sir, Tracy Alloway writes “If the institutions which create these [sophisticated financial] products cannot correctly asses their value, then what hope is there for us?”, “Ever more complex finance parts way with economic reality” May 3.

Indeed but it is worse than that… because what hope can we have that our bank regulators understand those products? In 2003, when Basel II was being discussed I told some hundred regulators during a workshop the following: “Let me start by sincerely congratulating everyone for the quality of this seminar. It has been a very formative and stimulating exercise, and we can already begin to see how Basel II is forcing bank regulators to make a real professional quantum leap. As I see it, you will have a lot of homework in the next years, brushing up on your calculus—almost a career change.”

The truth is that regulators did not know what they were doing with simple Basel II and they know of course much less with Basel III, which is about a hundred times more complex and technical.

And this should lead us to the truth of regulations… the more complex the issue is the more dumb must the regulators act, like refusing trying to understand it all, and stubbornly holding to some simple rules of thumb… like 8 percent of shareholder’s equity against any asset.

The role of the regulators is not to control the banks for the perceived ex ante risks, the expected losses, that is the job of the bankers and, if they can’t do that they should not be bankers. The role of the regulator is to safeguard against eventual ex post risks, unexpected losses, and since the unexpected cannot be calculated, they can for instance allow themselves not having any knowledge of calculus.

God save us from the hubris driven intelligent besserwisser spread-sheet equipped regulators trying to outsmart bankers.

The best is to name every single investor as super-duper sophisticated.

Sir Gillian Tett in suggest a new intermediate level of financial sophistication, college level perhaps, to handle the protection of those investors who might find themselves in the no man land of in between, “Sophisticated investor debate takes on a new dimension” May 7. I do not agree one category suffices the “super duper sophisticated”. Give each investor notice they have been considered to belong to this category and let the investors take it from there in the knowledge that when push comes to shove they are on their own.

And in the debate about bankers´ fiduciary duty the best way is for them to declare, in each operation, on behalf of whom they act, whether the buyer, the vendor or just themselves, which is also in their right, and then hold them strictly to that. What is worse is misrepresentation or lack of representation.

A really scary title… coming from a former Federal Reserve chairman

Sir it is frightening a former chairman of the US Federal Reserve like Alan Greenspan titling an article with a “We will never have a perfect model of risk” March 17, since he should know that if we even came close to believing we had such a model, then this would constitute on its own the greatest risk machine ever seen.

Greenspan is right when in his conclusions he argues that “our most reliable and effective safeguards against cumulative economic failure [is] market flexibility and open competition” but which is also why Mr Greenspan should now at least have the decency to repent from having helped to impose the opinions of some few credit rating agencies upon the markets.

This is a mark to the markets anticipation of a crisis crisis

Sir Wolfgang Münchau tells us that “Central bankers cannot stop this contagion” March 10 and he is right; how could they?... when no one is really sure about what is going on in that no mans land between the primary financial asset such as a subprime mortgages or municipal loans and their final expression in the financial markets in the form of some type of sliced and diced derivative contract.

For instance Münchau speaks about a “hugely contagious solvency crisis … spilling over into municipal debt, corporate debt” though we have yet to see any significant municipal or corporate debt defaults. This is not a mark to market crisis; it is more a mark to the market’s anticipation of a crisis crisis.

Therefore, central bankers should stop throwing real money at anything virtual that hurts, like blindfolded children trying to hit a piñata; and carefully keep their monetary munitions for the many real world problems that could break out down the line… like those very real subprime mortgages that have already started to default.

FT should not lend support to the sophisticaters!

Sir in “The start of the great unwinding” January 26 you say “Complexity also adds to the dangers that any part of the hyper-financial system can bring down the whole” and you are right. Nonetheless, you follow it up by saying “Monoline insurers exemplify this kind of reef under the water” and this is clearly wrong; since having some undercapitalized insurers selling coverage while their good fortune last has nothing to do with complexity.

Many of us warned repeatedly about the counter-party risks with agents such as the monoline insurers and the reason it was hard to get that message heard was that it was so easy for them to find in their sleeves the sophistications that confused the issues and killed the debates. FT should not help the market to hide within the complexity in order to hide the simplicity, and perhaps a non-Davos retreat to reflect on what are the simple and time-honoured truths that lie behind the current turmoil could be a good place for you to start.

Could our economic weapons be slightly passé?

Sir Samuel Brittan’s “We have defences against a slump” January 18 reads like a brilliant general discussing what to do in the current war, with the weapons from the last war. Our problem now is that we have not yet been able to really identify the exact strain of the current economic hardship’s virus so as to know what could best work.

For instance, nothing of those reckless borrowing and reckless lending in the subprime mortgage sector would have gone anywhere had it not been for the credit rating agencies having been appointed as financial commissars by our bank regulators. Does this now mean we have to start by radically extirpating these agents from our system or do treatments suffice?

A leap into the darkness defines 2007

Sir Gideon Rachman in “Five events that have defined 2007” December 18 unable to identify one single event gives us a list of them and argues that all are loosely linked together by the strain they put on the US. I do not agree with him. Among Rachman’s candidates is the “August: the credit crunch” and since even now, at the end of 2007, the supposedly most sophisticated financial machine that our knowledge economy has ever known does still not have a clue about where they find themselves, no one could have doubts that this event, almost a leap back into the dark ages, must by far be the most defining event of 2007.

Relying on financial pre-screeners could be dangerous to your financial health

Sir Ira Sohn suggests that we should “Insist on pre-approval for novel bank processes” November 30, so as to stop bad financiers from exploiting opportunities in regulatory arbitrage. I wish it was that easy. The fact is that most of our current financial turmoil arose from the use of old time tested instruments called mortgages but that were turned into something very explosive and dangerous when they were bundled up and sent away to the financial markets carrying the approval stamp from the credit rating agencies and who found no reason to look closer at the individual quality of the mortgages. There is no pre-screening in the world that would save us, on the contrary, what we have to do is to reduce the power that our current screeners, the credit rating agencies, which only lends itself to lull the world into a false sense of safety.

Too many monkeys with razorblades!

Sir Stephen D. Young states quite strongly that “Professionals recognise that blindly following any model is foolish” and he is absolutely right but which leaves us with the problem of what to do when so many that are identified as professionals do. I have no problem with finance using sophisticated mathematical models, that’s what these tools are there for, but sometimes I get the impression that our professionals are sent too early to the frontiers without enough basic Boot Camp training. What are you to do if in the trenches your laptop suddenly stops functioning?

In my country, whenever some one goes out in real life believing too much in the tools he takes with him or having too much power for the knowledge he possesses, we usually refer to him as a “monkey with a razorblade”. May I suggest that too many monkeys with razorblades have joined the professionals?

Incest and irony

Sir, by reading your “CPDOs add more complexity”, March 30, that states “The rating agencies are key to creating the [financial] products” and that “The “agency is working with numerous banks on various deals”, one must realize how the rating agencies have in fact themselves become more and more a part of the same product they are rating. This does present the potential for some very incestuous relations and given that so much of the decision power about where the financial flows in the world should go has been (stupidly and arrogantly) deposited in the hands of very few credit rating agencies, this is without any doubt something extremely dangerous.

Now also, while observing the ever growing financial complexities, one cannot but reflect on how ironic it is that the whole financial world is currently holding its breath, just because some extremely primary and basic mortgage lending seemingly went haywire. Could it be time to ask all those experts that work so diligently in their financial laboratories, to take a short respite, and walk around in the real world for a while?

Valium or placebos?

Sir, Lawrence Summers with “A lack of fear is cause for concern”, December 27, put his finger where it really hurts since many of us never imagined possible the huge discrepancies that exists between how nervous most investors seem to feel, in private, and how little of this risk perceptions the market seems to be transmitting through its public pricing.

Somehow it looks like either the market has lost the connection with the investors or that someone somewhere is peddling some real potent valiums or extremely credible placebos. At least when Summers says “As institutions have become more sophisticated in their approach to risk they have felt comfortable in taking positions they might have been reluctant to hold even a few years ago” we know someone has been gulping down a lot of medicine lately. So let us now pray it is what the doctored ordered and that it does not have too bad side effects.

Summers risk fear

Bank ghostbusters?

Published in FT September 12, 2006

Sir, David Skeel ("The ghost of a crisis in equity funds hides real benefit", September 5), tells us the reason equity funds and hedge funds are "the ghosts of the market's future" is that they "may increasingly assume many of the functions traditionally handled by banks" and "use a wide array of financial instruments now available to hedge the kind of risks traditionally borne by the banks". If he is right then that would make them more like the ghosts of banks past and also turn the banking regulators in Basle into some slightly foolish-looking ghostbusters.