Tame the tamers!

Sir, John Plender’s “How to tame the animal spirit” September 30 leaves me utterly confused. What animal spirit does Plender refer to? 

That spirit which caused trillions to invest in AAA rated securities that offered a couple of basis points more or those who leveraged their investments in AAA rated securities because the regulator allowed them to do so by requiring ridicule small capital requirements on these?

As I see it those we really need to tame are the tamers, and in fact, looking at the global challenges the world needs to confront, perhaps we could benefit immensely from a little bit more of that old fashioned real animal spirit.

The wrong lessons learned.

Sir Martin Wolf ends his review of Carmen Reinhart’s and Kenneth Rogoff’s book “This time is different” with “Crisis will always be with us. But maybe this realization will reduce their frequency”, September 28.

Why is that Mr. Wolf? That seems to be the wrong lessons learned. I would hope this realization would lead us in a complete different direction of where the Basel Committee is taking us, and instead make us increase their frequency so as to try to reduce their magnitude.

On our own

Sir flooding can occur because excessive waters overflows the levee, which is what Wolfgang Münchau is most concerned about; or because the levee breaks down in a point and channels too much water to one single place, as occurred when the AAA ratings opened a whole and the subprime mortgages sector was drowned, and which is what I have been more concerned about.

Today Münchau, in “At last, recognition of the deep roots of the crisis”, September 28, sounds like an ignored child who finds great consolation in that his mother has at least noticed him. As one of the subjects of Münchau’s jealousy, one who received too much attention as the “world’s most powerful leaders [were] obsessed with the minutiae of banking regulations, let me inform him that the sad truth is that mother’s attention wavers from one to another of her sons, not because of love for both but because she has not the faintest idea of what to do, and prefers thinking of the crisis like a measles that will just go away on its own.

Meanwhile, Brother Wolfgang, the levee is still exposed to disasters, of both kinds, and we are still on our own.

There is a not so secret “low-risk” leverage-enrichment facility in Basel.

Sir excuse me if I insist on it but after some hundreds of letters to you, I am still looking for the words that could help FT understand what was really the origin of the current financial crisis and why we will not be able to get out of it without getting rid of a paradigm that has chained our financial regulators, that of having the capital requirements of our banks depend on risk-weights.

Henny Sender in “Washington is the cheerleader but sentiment remains fragile” September 26, quotes a private equity executive saying “CDO´s destroyed prudent lending in America. It was like a nuclear bomb to good lenders”. What does prudent lending mean? Shying away from risks? No! Prudent lending means investing according to your risk tolerance and getting the right reward for it. In this respect prudent lending should have its own financial returns and not returns derived from arbitrarily set lower capital requirements.

What is the worth of one dollar invested in an operation perceived as having a higher risk? One dollar! What is the worth of one dollar invested in an operation perceived as having a lower risk? Also one dollar! Then how on earth can anyone sustain that a dollar lent to a BBB+ to BB- rated corporation is worth one dollar, while a dollar lent to an AAA to AA- rated one only represent 20 cents? Well this is exactly what the regulators did with their capital requirements for banks based on default risks and as assessed by human fallible credit rating agencies.

When a bank invests $1.000bn dollars in anything related to an AAA then that is subject to an arbitrary risk-weight of 20% and so the “risk-weighted assets” are reported as only $200bn, leading to low reported bank leverages, and which after a short while fooled even the designers.

And this is what has been produced in the not so secret “low-risk” leverage-enrichment facility in Basel and that has been proven to be so explosive and that I have been describing in http://theaaa-bomb.blogspot.com/

Sir it is so unimaginably risky to fool around with risk. Please consider that even if all the credit ratings had been absolutely precise, the world could still go so very wrong, as nobody in his sane mind will hold that the world’s future lies so much in areas perceived as having low financial default risks, that the investment in these areas have to be given especial incentives.

Friends, we need to urgently rid ourselves of regulators that can only dream about a world without bank defaults and put in their place regulators that dream of a better world, and who know that in order to reach such a world you have to learn to embrace risk… in a prudent way.

The world has had more than enough with this imprudent prudence!

Cheers

Per

Why don´t Europeans agree first...they seem worlds apart!

Sir Peer SteinBrück, the German finance minister, in “A tax on trading to share the costs of the crisis”, September 25, proposes a tax on financial transactions of 0.05 percent that could “yield up to $690bn a year.

But, Bernard Kouchner, the French minister of foreign affairs in “A tax on finance to help the world´s poor” September 17, he spoke about a tax of 0.005 percent that would “raise €30bn”.

Why don’t the Europeans agree first among them what they want to propose to the world? Now, they seem worlds apart.

That said before any tax of this sort, the world´s poor, and most of the rest of the world, would benefit more from taking away that financial tax that the current capital regulations for banks represent in that, above of what the market already charges for risk differentials, it creates arbitrary costs, far from minuscule, that directly taxes those more prone to be considered as more risky, like the poor and the development countries. http://bit.ly/4yX7k1

Mr Zoellick, as the president of the World Bank, has an even more important issue to bring up in Pittsburgh.

Sir Robert Zoellick, the president of the World Bank, makes an inspired call for that “Pittsburgh should be a turning point for the poor” September 24, 2009.

Sadly, and though it should be the prime responsibility of a development bank to draw the attention to the issue, he completely ignores to mention that current bank regulations introduce an arbitrary regulatory bias in favor of the rich and the developed, and against the poor and the developing. This is so because the capital requirements are based on perceived risk of defaults as measured by credit rating agencies, and we all know where these perceived risks tend to live.

For example if a bank lends to an AAA rated sovereign it is currently required to hold zero percent in capital and if lends to an AAA rated private corporation only 1.6 percent, but when lending to a BB+ to B- rated sovereign or any unrated corporation it is required to hold 8 percent in equity. The significant different costs derived from these regulations, are to be added or deducted from what the markets would normally charge for financing different risk levels, and as a result these arbitrary regulatory interferences only makes the differences wider.

The World Bank should be the first one interested in putting on the agenda the fact that the world could have been better place had not some bank capital requirements empowered the credit rating agencies so much so that with their AAA could, over just a couple of years, mislead trillions of dollars over a precipice of financing a basically useless house price boom in the US.

The World Bank should also be the first one to remind the world of the fact that risk-taking is indeed the oxygen of any development and that therefore taxing it can prove truly disastrous for the world.

The regulators, thinking themselves Gods, misinform the markets and the experts

Sir, when is FT going to do an “Analysis” on what the risk-weights signify for the reported bank-leverages. The sooner the better, since that could save many experts (including some of your own) from making fools out of themselves.

Andrew Kuritzkes and Hal Scott in “Markets are the best judge of bank capital” September 24 quite correctly state that “We need to complement regulation with more effective market discipline. This requires better information”.

But, in their discussion of bank leverage and even though they mention the possibility that “capital requirements are imperfectly linked to bank-risk taking” they seem unable to realize that the reason the capital requirements relative to risk-weighted assets turned out to be so faulty, had nothing to do with the basic 8 percent level established, and all to do with the risk-weights used.

The use of arbitrarily set regulatory risk weights, like those which give only a 20% weight to an AAA asset misinformed the market and experts like Kuritzkes and Scott, making them all unable to understand what was going. The sooner we free ourselves from regulators playing Gods calibrating risks, as if they possess the whole truth on risk, the better.

Is it not more important to make sure we would want to send our banks flowers?

John Gapper in “Where there’s a will there’s a way” September 24 discusses the issue of having banks draw up their testaments, a will, so as to make their possible disappearance a more orderly affair.

Of course all that sounds so very neat and tidy and reasonable but frankly, before discussing their funeral arrangements should we not give a little bit more thought on how the banks are supposed to live their lives? I mention this since in all the 347 pages of the bank regulations known as Basel II there is not one single phrase, much less a paragraph that has anything to do with establishing a purpose for our banks.

http://www.bis.org/publ/bcbs128.pdf

Mr Caruana and his fellow regulators deserve months of humbling community service and being banned for life from any regulatory activity.

Sir when a previous member of the Basel Committee like Mr. Jaime Caruana says “Basel II is evolving” and was not a contributory factor to the crisis, and that “You don’t see a correlation with the adoption of Basel II and the difficulties” as is reported by Patrick Jenkins in FT on September 21, this is indeed an insult to our intelligence and to humanity.

Mr. Caruana is well aware that when the Basel Committee demanded from the banks a capital requirement of only 1.6 percent, which is equivalent to authorizing a leverage of 62.5 to 1, when the banks were involved with a client or a security rated AAA by the credit rating agencies, they set off a world-wide race in search of the AAAs; and which, over just a couple of years, led trillions of dollars over the precipice of the subprime mortgages in the US, and created misery for hundreds of millions of people all over the world.

The least Mr Caruana and his fellow regulators deserve, is six months of a very humbling community service and, of course, being banned for life from any regulatory activity.

Is regulation really rocket science?

Sir as is published in my “Voice and Noise” 2006, on May 2, 2003 at a Risk Management Workshop for Regulators at the World Bank, I said the following:

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore 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. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

And so when I now read William White´s “Some fires are best left to burn out”, September 17 I can´t but agree and since I see that he is a former economic adviser at the Bank for International Settlements, the home of the Base Committee, I would ask him whether he does not believe the regulators should not have been aware of all this, in a timely fashion… is regulation really such a rocket science?

Mr Bernard Kouchner, you better beguine by taking away the tax on the world’s poor.

Sir I do not believe that the markets´ capability to arbitrage away disequilibrium would be seriously compromised by a minuscule tax on financial transactions and so I do not oppose it, in fact I support it as “a time for a second thought tax” helpful for everyone. And of course I do not reject the idea of “A tax on finance to help the world´s poor” as argued by Bernard Kouchner, September 17.

That said let me be absolutely clear that the world´s poor, and most of the rest of the world, would benefit much more from taking away that financial tax that the current capital regulations for banks represent in that, above from what the market already charges for risk differentials, it creates arbitrary costs, far from minuscule, that directly taxes those more prone to be considered as more risky, like the poor and the development countries.

And so, Mr Bernard Kouchner, I would much prefer you forget your well-intentioned tax and instead eliminate your non-intentional tax.

John Kay is utterly lost!

Sir over the years I have often commented on John Kay’s articles, sometimes I have agreed, sometimes I have disagreed. But now I have been utterly disappointed discovering that Mr. Kay does not really know what he is talking about. In “Narrow banking can help protect the taxpayer” September 16 he writes “An 8 per cent capital cushion is inadequate as the amounts for winding up these banks will show”. Absolutely wrong! For those credits not perceived as risk-free and for which the banks took their ordinary precautions the 8 per cent equity requirement was most probably quite sufficient. What was highly insufficient was the only 1.6 percent capital requirement allowed by the regulatros for any operation involving an AAA rated security or client.

It was not the risky which provided the explosive material for this crisis but the not-risky, something that Mr Kay proposes we pursue even more, burrowing ourselves into narrow banks, so that once again we can feel the bliss of believing we are safe… so that once again we place ourselves further away from the risks we need to take in order to move forward.

No, Mr. Baby-boomer Kay, move over and let the future take over, even if it entails risks.

Madame Guillotine could be better than assisted euthanasia

Sir, Martin Wolf is absolutely right when in “Do not learn the wrong lessons from Lehman’s fall” September 16 he writes that “No normal profit-seeking business can operate without a credible threat of bankruptcy”. But then he goes into some mumbling about living-wills and assisted euthanasia and though it sounds kind and gentle both these alternatives start when it might already be too late, and so we should not forget that what we could really require is for Madame Guillotine to enter swifter into action.

Even governments represent counter-party risks

Sir in “The legacy of Lehman Brothers” you write “Policymakers must own up to the fact that there are some institutions they can never credibly claim they will let fail. They must identify who they are implicitly backstopping so that they can charge a fee for that insurance” September 14.

This is indeed truly dangerous talk when what we need is for our regulators to be much more trigger happy, allowing bad institutions to fail; and when we know that the fees for such eternal life insurance would never be set objectively nor would it be set apart in a reserve, and so that, sooner or later, the final failure of any of these supreme institution, could bring the State down with it.

The economy does not need more government insurances than the ones currently awarded to individual depositors up to limited amounts, and to give more is counterproductive to the well-being of all of us, since an insurance is only worth as much as the insurance company is worth; and we do face a counter-party risk even when dealing with governments.

Not safer, better!

Sir once again in “The legacy of Lehman Brothers” you talk about the need of “a strategy for making finance safer” September 14 and you are wrong. What we need is a strategy for making finance serve our needs better. An absolutely failsafe bank can be an absolutely useless bank.

FT don’t be such a wimp. How can we get better regulations of the financial sector without, like the whole Basel regulations, speaking a word about the mission of the banks?

But be careful of not adding to the confusion

Sir it sounds so utmost reasonable what Joseph Stiglitz mentions in “Towards a better measure of well-being” September 14 that I guess no one would, in principle, argue anything different. That said, there is clearly room for a warning, especially with the recent evidence provided by the crisis, on what can happen when someone arbitrarily plays around with the numbers.

The regulators fed up with adding AAapples with Bbbananas as fruits decided to give the first a risk-weight of 20 percent and the latter one of 100 percent when calculating the capital requirements of the banks and we ended up with such a confused world that most experts, FT, included had no idea of what bank leverages they were talking about, in fact most still don’t know.

And so whatever we do to measure what we want better, and a lot of improvements are indeed needed in this area, let us see that we just do not add to that confusion the politicians love to hide behind.

Markets price risk solely in interest spreads which is why the regulators’ “risk weights” only brings confusion.

Sir with respect to Martin Wolf’s “Turner is asking the right questions” September 11, and who I see is now much closer to accept that this crisis was caused more by bad finances than by the abundant economic disequilibrium that existed and still exist, my very fundamental difference in opinion is the following.

Because the market prices risk solely through interest rates spreads, the interference of the regulators pricing it by means of “risk weights”, which lead to different capital requirements, creates much confusion in the risk allocation mechanisms; and we therefore need to eliminate all regulatory risk-discrimination. In other words, between a Tobin tax that can function as a speed bump and provide some “due diligence”, and capital requirements that “forcefully” channel funds into different risk territories I am all for the first and all against the latter.

As a consequence the credit rating agencies should revert to their traditional role as risk informers instead of being the risk decision makers the regulators turned them into.

Since Basel has become too one minded to regulate we must break up the regulator too

Sir not only do I agree with Philip Augar and John McFall in that “To fix the system we must break up the banks” September 11, but perhaps we need to break up the regulators too…because Basel has become too one minded to regulate. (It is probably not comme il faut to quote from another newspaper, but it is such a small paper so here I go.)
In February 2000 in the Daily Journal of Caracas, Venezuela, in an article titled “Kafka and global banking” I wrote:
A diminished diversification of risk. No matter what bank regulators can invent to guarantee the diversification of risks in each individual bank, there is no doubt in my mind that less institutions means less baskets in which to put one’s eggs. One often reads that during the first four years of the 1930’s decade in the U.S.A., a total of 9,000 banks went under. One can easily ask what would have happened to the U.S.A. if there had been only one big bank at that time.
The risk of regulation. In the past there were many countries and many forms of regulation. Today, in Basel, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.
Excessive similitude. By trying to insure that all banks adopt the same rules and norms as established in Basel, we are also pushing them into coming ever closer and closer to each other in their way of conducting business. Unfortunately, however, nor are all countries the same, nor are all economies alike. This means that some countries and economies necessarily will end up with banking systems that do not adapt to their individual needs.
Sir and I hold that I am still right.

Greed comes in many shapes and forms

Sir in “more comment online”, “Roubini cameo” we read about a documentary Oliver Stone is preparing on bankers and greed. September 11. Well greed comes in many shapes and forms, not just pecuniary but also ideological. Oliver Stone has for instance recently shown much ideological greed (who knows, perhaps pecuniary greed too) filming a documentary on Hugo Chavez, “South of the Border” where he does not even mention such facts that Chavez cheats the poor of Venezuela, to the tune of about 10% of GDP, by selling petrol at about two US dollar cents per litre (gas at 10 cents per gallon)

And my warnings were silenced by the FT establishment

Sir Dirk Bezemer, in “Why some economist could see it coming”, September 8, argues correctly that many did indeed see it coming but that “they were ignored by an establishment”. FT should know about that.

In February 2000 in the Daily Journal of Caracas, Venezuela, in an article titled “Kafka and global banking” I had written:

A diminished diversification of risk. No matter what bank regulators can invent to guarantee the diversification of risks in each individual bank, there is no doubt in my mind that less institutions means less baskets in which to put one’s eggs. One often reads that during the first four years of the 1930’s decade in the U.S.A., a total of 9,000 banks went under. One can easily ask what would have happened to the U.S.A. if there had been only one big bank at that time.

The risk of regulation. In the past there were many countries and many forms of regulation. Today, in Basel, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.

Excessive similitude. By trying to insure that all banks adopt the same rules and norms as established in Basel, we are also pushing them into coming ever closer and closer to each other in their way of conducting business. Unfortunately, however, nor are all countries the same, nor are all economies alike. This means that some countries and economies necessarily will end up with banking systems that do not adapt to their individual needs. http://bit.ly/HIi3x

And, in January 2003, the Financial Times published a letter I wrote and which ended with “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.” http://bit.ly/5i1Bu

But then, I was shut up by the Financial Times establishment, who had perhaps decided there were only some macro economic problems and not any problems resulting from bad financial regulations, and wanted to hear no monothematic contradictions on that.

Basel regulations increase the world’s Gini coefficient

Sir from reading your “Capital ideas for financial reform” September 8 I get the feeling that you have not understood the real problem, as you are not at all clear about the how the equity of banks has to be increased.

It is not a question of just increasing capital requirements, across the board, but of increasing them only for those operations that were benefited with extraordinary low capital requirements.

Currently a normal loan to an unrated client requires the bank to hold eight percent in equity, which is not a low capital requirements at all, and which I bet you has proven to be more than sufficient to cover for any losses sustained in operations with non-rated clients, but, for a loan to an AAA rated client, the banks is only required to hold 1.6 percent in equity. As a result the clients perceived by credit ratings as having a higher credit risk are currently effectively shouldering the responsibility for the banks having capital, and thereby subsidizing those who are perceived as having a lower default risk… as if default risks is all what finance is about.

Let me explain it some harsher development terms. The current minimum capital requirements for banks based on risk assessments increase the world’s Gini coefficient and are only compatible with a world full of risk-adverse baby boomers who want to lie down and die.

Mr Geithner, and the rest of you regulators… you are so wrong.

Sir Timothy Geithner writes that “Stability depends on more capital” September 4, and he is so wrong. Stability depends almost exclusively on getting the right sustainable growth since with the wrong kind of growth you would need 100 per cent of capital and even then you probably only your real stability until you find yourself ten feet under the ground.

The hard truth Geithner needs to understand, and come to terms with, is that even if the credit rating agencies had been absolutely right in their ratings, the end results for the economy would be wrong; because subsidizing risk adverseness and taxing risk-taking, that is something that only a society that has had enough and wants to lie down and die does... and we can’t expect the whole world to be baby-boomers... can we?

Of course the regulators need to increase the current capital requirements for banks, but only for those operations where they decreased them so dramatically, like for instance allowing a 62.5 to 1 leverage when lending to anyone able enough to hustle up an AAA.

Mr Geithner please give us one single reason for why the regulators should specially favour banks lending to clients rated AAA. To me that is a pure senseless discrimination that will not lead us anywhere except over the next subprime cliff.

Jean-Claude Trichet sooths his own nerves.

Sir I feel a bit bad about Jean-Claude Trichet, the president of the European Central Bank, having to go out and affirm that he is a good and responsible parent, “Europe has mapped its monetary exit” September 4. Somehow one gets a feeling he is whistling in the dark so as to sooth his own nerves. Of course he should have an exit strategy for the current financial measures that looks to deliver price stability, and of course he should be willing to apply it, at least a priori, but both we and he know that this is just the beginning, since in any disciplinary approach a lot will depend on the children’s response.

Perfection is indeed the enemy of the good

Sir, Samuel Brittan in “We do not prosper by income or happiness alone” September 4 writes about Amartya Sen book “The idea of justice” in which the author proposes, among other, the “the piecemeal removal of specific injustices in the absence of an ideal society." That is absolutely right. 

In my book “Voice an Noise”, 2006, where I described some of my experiences as an Executive Director at the World Bank I held that, at sixty years of age, that institution “should perhaps be renewing its vows in order to move up from “knowledge” into wisdom and instead of trying to advance impossible agenda like justice and social responsibility might do better settling for fights much easier to monitor, such as one  against injustices and social irresponsibility. 

Also in El Universal, Caracas Venezuela, 2004 in “McPrisons” I wrote: “Justice is something very difficult to understand with precision, since it is situated along a continuum that becomes finite only when it reaches Divine Justice. 

On the other hand, injustices are much easier to identify and, in our countries, prisons themselves represent one of the greatest injustices. In terms of the use of scarce resources, as an economist I am convinced that programs of Judicial Reforms would be better served by improving prisons than by investing in Supreme Court buildings.”

Why should our regulators favour our banks to lend to AAA rated clients? Senseless discrimination?

Sir Martin Jacomb in “Regulators and bankers must share the blame” September 3 is so close to the truth that it hurts. He pinpoints exactly “the singular regulatory error: the failure of the Basle international rules to impose weighty capital requirements on the super senior tranche of securitized mortgage obligations” but then he describes it more as a mistake made and does not question the capital requirement for banks method itself; and this is wrong.

The really hard truth we need to understand and really grapple with is that even if the credit rating agencies had been absolutely right the end results for the economy would be wrong; because the method subsidizes risk adverseness and taxes risk-taking, and that is something that only a society that has had enough and wants to lie down and die does.

No, give me one single economic reason why we should favour banks lending to clients rated AAA? That, to me, is pure senseless discrimination.

The Fed should not pay negative rates but charge an access to the safe-haven fee.

Sir I am not sure Central Banks should charge interests below zero like Wolfgang Münchau writes in “Central Banks can adapt to life below zero” August 31, mainly because those negative rates should not permeate to other areas of the economy, and much less so to the public debt.

Instead, as I have proposed some time ago, the Fed should start charging an access to the safe-haven fee. The final negative return to the investor would of course be the same, but the reason why, would be more transparent, and we would save ourselves having to listen to politicians saying “they trust us so much they even lend us moneys at negative rates”. That would also improve the possibility of avoiding the risk of overcrowding the safe haven and turning it utterly unsafe.

Taxing the speed of capitals with a Tobin tax is a thousand time better than directing the capitals with capital requirements

Sir Tony Jackson in “Putting a rational spin on inefficient markets and irrational investors” August 31 writes “just because markets are inefficient, it need not mean investors are rational.” Right on. What happens if driving the car your GPS or radio, suddenly announces a roadblock ahead and recommends taking an alternative route? Rationally you do so though that could prove to be highly irrational if all others do the same at exactly the same moment.

That is why I sustain that taxing the speed of capitals with a Tobin tax is a thousand time better than directing capitals with Basel type capital requirements for banks based on credit ratings that could be wrong or that could change whether one second too early, one second too late or exactly in the right second.

Jackson refers to a paper by Paul Woolley and Professor Dimitri Vayanos titled “An Institutional Theory of Momentum and Reversal” which draws special conclusions about “assets with high idiosyncratic risk. And I wonder Sir, have you ever come around something with a higher idiosyncratic risk than an AAA-rated asset?

You have to root out the monsters in their homeland first

Sir Stefan Wagstyl should perhaps have expanded the title “Stalin still looms large over eastern Europe” with the “because he still looms large over Russia” August 31. Wagstyl rightly points us to see that the way countries victimized by foreign monsters can overcome such events starts with how the monsters´ homelands overcome being just that. Since Germany has done so much more in accepting the horrendous realities of a Hitler, than Russia those of Stalin, Germany has been more able to overcome its own demons and shames, and, consequentially the world has been much more able not to hold it against it. Besides, these monster´s, if not pulled out completely, with all their roots, can rot and infect and propagate.

Better putting some sand in the wheels than building channels that deviates the flow of capital.

Sir perhaps if there was a tax on responding an email during the first ten minutes of receiving it many unnecessary embarrassments could have been avoided. And that is primarily the role of a Tobin type like tax proposal, to slow things down, to give us a little more time, to put a lid on the trading of any small arbitrage opportunity becoming a purpose and not a tool. And, of course, in this I agree with Avinash Persaud’s “Time to put sand in the wheels of the market” August 28. Also, when you are allowed to put huge taxes on so many other goods and services, why should a minuscule tax of this nature be the source of much more dangerous inefficiencies?

But, having said that, let me point out the irony with so much being discussed about what a Tobin tax, with its little sands in the wheels of the market could do, compared to how little discussion, or none at all, there has been about the construction of the huge channel that the current capital requirements for banks made in Basel signifies, and that deviates trillions from what is perceived as risky to what is perceived as less risky. That is indeed a humongous tax, that is indeed a source of crazy structural inefficiencies, and that is what we are now paying for with the current financial crisis. Compared to that a Tobin tax is only a footnote

Do financial regulators have a legal right to discriminate?

Sir, Benjamin Friedman writes that the activity of so many of our young well educated luminaries working in finance “adds no economic value” “Overmighty finance levies a tithe on growth”, August 27. My first question is how does he really know it is because they are well educated and not because they work in a quasi-monopolistic environment? My second, if so are we not to blame professors for it? And third, should the world sue Harvard and other for their teachings?

Of course Friedman has a point but what really levies a financial tithe on growth are the various tolls on financial risk. Regulators for instance order banks to have more equity for clients perceived as more risky, and credit cards financiers are more than happy to have the credit rating scores create the illusion they charge the right level of interests to their customers.

Anyway I would argue that much more important than what the financial sector has earned in profits (before the losses of the crisis are netted out) is to think on what other growth opportunities could have been financed with those trillions of dollars wasted in the housing sector only because some hustlers managed to hustle up some credit ratings made overly important by the regulators.

A question to the Professor, when the regulators impose on the banks an 8 percent capital requirement when lending to unrated citizens and zero if lending to the government... are they not exceeding their mandate? Do they have a legal right to discriminate this way?

The Peter Principle needs an addendum

Sir John Kay writes “Banks brought down by a new Peter Principle” August 26, and scores good argumentative points. That said the banks and the financial sector have also been severely affected by the Peter Principle that operated in the financial regulatory world.

In this case the Peter Principle could have been activated when allowing PhDs to move from financial modelling directly into the financial application of models, without having to dirty their hands with for example some old fashioned inventory finance. But, if so, this also calls for an addendum to the Peter Principle since that would indicate that it is not only about individuals moving up until they find their level of incompetence, but also about competent individuals moving into areas where their competence is outright dangerous.

Who but a deskbound PhD could have come up with such a crazy notion that you could outsource so much regulatory powers to the credit rating agencies without these being subjected to capture… ipso facto.

A prudent regulatory reform might be to see to that the PhDs are always in minority wherever decisions affecting life on main-street are taken.

What we need are central bankers that knowing the risks and problems dare to do their best.

Sir Stephen Roach in “The case against Ben Bernanke” August 26 sums up with “The world needs central bankers who avoid problems, not those who specialize in post crisis damage control” He is absolutely right with the second part, but neither does the world need central bankers who avoid problems, it needs those that knowing the problems try do the best out of it.

We have had enough, for a very long time, with those problem and risk avoiders that got together in the Basel Committee. Look where the banks ended up egged on by their minimum capital requirements based on risk and the lousy supreme risk-sentries that they anointed.

What quality-of-spending rating do the bureaucrats merit…an AAA?

If a banker lends to someone who wants to risk his money on for example an environmentally sound project but has no credit rating, then the bank has to put up 8 percent in capital. If instead it lends that same money to the Government and it is the Congressmen who decide which are the environmentally sound projects to be financed, the bank does not have to put up any equity at all.

If the world is going to keep assigning so much importance to the credit ratings then it must complement this with some quality-of-spending ratings, since the risk for the society in any financing is not only getting its money back but, even more importantly, that it is well spent.

Nouriel Roubini in “The risk of a double-dip recession” Augusts 24 gives about ten reasons for ongoing economic problems, but he does not even mention the above ongoing regulatory mindlessness; and he also writes in relation to the “risks associated with exit strategies from the massive monetary and fiscal easing; policy makers are damned if they do and damned if they don’t”. Mr Roubini, honestly, when was the last time you saw a really damned policy maker? As I see it they are all having the time of their life!

No Mr Münchau, the world remains unstable and all the toxic fumes are ever so dangerous

Sir Wolfgang Münchau titles “How toxic finance created an unstable world” August 24 but writes that “there is no way the [financial sector] will recreate the pre-crisis levels of securitization, even if we make no changes to financial regulation”. He is wrong. That at this moment, after the monumental indigestion recently suffered the appetite is not the same, is of course right, but the truth is that the credit rating agencies are still out there waiting to be sequestered by the next generation of sub-primes (public debt?).

In fact, every day a client perceived as less risky by the credit rating agencies receives a lower funding cost through a regulatory subsidy, while a client perceived as riskier has to pay more than the market requires would otherwise require; all this courtesy of the capital requirements imposed on the banks by the Basel Committee, we live in a system rendered more unstable than needed. As if the world was not unstable enough.

But it is clear why Münchau remains confused. He says “Dollar-rich Chinese, Japanese and German investors invested in opaque product that they mistakenly deemed to be as safe as US government bonds”. Mistakenly? These instruments were rated AAA and this was considered by their financial regulators and their financial experts as a sign of a very transparent total lack of risk. Blaming the small guy aren’t we? Defending your buddies aren’t we?

Journalists are just as “complicitous silent”

Sir Gillian Tett in “The financial doublethink that needs to be eliminated” August 21, comes down quite hard on politicians and regulators accusing them, in terms developed by Pierre Bourdieu, of “complicitous silence” and urge them to start thinking more about power structures, vested interest – and social silence”. As a journalist Tett could use herself a little spoonful of the medicine she prescribes.

In her interesting and very readable book “Fool’s Gold”, Tett manages to be very “complicitous silent” about the financial regulations coming out of the Fed and the Basel Committee; which did so naively ignore that by assigning so much power to the credit rating agencies to decide how much equity the banks needed, the regulators set the agencies up for big time capture.

If banks invest $1.000 billion dollars in AAA rated instruments they have only to put up $16 billion as equity… because the opinions of the credit rating agencies cover the other $984 billion even though for these opinions there are no capital requirements at all. Compared to the above, the other and indeed absurd paradox she refers to in her article could be regarded as of a secondary importance.

P.S. Gillian Tett and many other in FT know I have been writing about this serious issue, but they have preferred to be silent perhaps because of some “power structure” reason of their own, excusing themselves with the utterly stupid argument that I write too much.

Why we need to regulate the regulators sooner, not later

Sir Kenneth Rogoff belongs to those “influential” economist who had their expertise on financial matters been closer to their fame should have been able to timely warn the world about what was going on. The concerns he expressed in his “No grand plans, but the financial system needs fixing” in the Financial Times, February 2007, about “global hedge funds proliferate and increasingly influence key markets ... Capital flows are once again rushing into emerging markets” would have been almost laughable now had they not helped to divert the attention from the real regulatory failings. Like old soldiers they should perhaps fade away.

Now in “Why we need to regulate the banks sooner, not later” August 19, Rogoff mentions bank leverages of “three dozen” to one, and the dangers of it, but he does not admit the simple fact that had more known about the existence of 36:1 leverages, and higher, all kind of alarm bells would have sounded much earlier. As is, this did not happened because the financial regulators fooled the whole world, and of course first and foremost themselves, with that crazy concept of risk weighted asset and that, for instance, reduced the exposure to an AAA rated security to only 20%. In other words, a one trillion dollar exposure to AAA rated securities collateralized with subprime mortgages and only 16 billion dollars in equity, instead of a 62.5 to 1 leverage, would (and is still) reported as a 12.5 to leverage.

Any common sense dictates now that what we need to regulate the most, the sooner the better, are the regulators themselves.

If the net oil revenue that goes directly to government exceeds 5 percent of GDP, then oil is a curse

Sir Moisés Naím writes that “Oil can be a curse on poor nations” August 19 and of course he is right. That said I would hold that when net oil revenues amounting to more than 5 percent of GDP of a country goes directly to the government, making it independently wealthy, then simply put, the oil is a curse, on any nation, and any evidence to the contrary is just waiting for a disaster to happen.

You see when people hear about oil they think of richness and the citizens expect that richness to be distributed to them by the government, without really knowing how much they should get, and then all start jockeying for positions to be favoured by the mighty, and society breaks down.

I am the President of an NGO in Venezuela, Petropolitan, which starting in the last millennium has been working among other for oil revenue sharing. Notwithstanding more than 100 articles published on the subject our agenda has not move a lot forward and so lately we have been calling out for help to other countries trying to establish a global alliance of oil cursed citizens.

Do you know who represent some of our major obstacle? Strangely enough some of those well intentioned groups like Revenue Watch Institute and the Extractive Industry Transparency Initiative (EITI) and who, by somewhat naively pushing the illusions of good partial solutions, play right into the hands of our oil autocrats.

What about the “lucky” 47.000?

Sir Joanna Chung reports that most probably UBS will hand over to the US tax authorities a list of about 5.000 tax-dodging clients of theirs, out of 52.000, “150 US clients of UBS investigated”, August 19.

My question is simple how do you pick out the 5.000? Lottery, profiling? Is there any auctioning out of the 47.000 not picked slots? If there is one who does the auctioning and to whom do the proceeds go… or are they split fifty-fifty? I mean, knowing this sort of information would be helpful in order to predict future USB profits or the path of the US fiscal deficit. Are these the innovative exit mechanism some big public spenders have been talking about lately?

No matter how guilty I might have felt were I among the 52.000, which I am not, phew, I am sure I would be extremely upset about finding myself among the 5.000 without understanding the how come.

Now for all the others out there, are these 5 out of 52 the odds they should include in their financial and tax models, or do you believe these odds will vary much depending on who are the negotiators and on whose behalf they are negotiating?

There should also be a list of countries where the tax-payers are allowed to use safe-havens.

Sir you request “Closing the havens” August 17, because citizens should pay their taxes. Quite right! But from a global perspective, the question of whether the non-paid taxes that have escaped to safe havens have been put to better use than the taxes that were paid lingers on.

In some places that is not the case, in some places, sadly, the most patriotic thing to do seems not to pay the taxes; and safeguard the resources so as they can be used in better times, with different governments, and, for those countries, the existence of tax-havens are a blessing and they should be kept open.

So perhaps countries should be indexed on a how good use the government makes of the taxes and other revenues, and any citizen from the 100 worst should have the right to access a safe haven, for at least ten years. Of course, this exclusion privilege should be renounced by anyone in public service.

There are though many criminals using the safe-haven facilities and that should be stopped and so what could be needed is for the banks requiring from the citizen that qualify for entrance to a safe-haven, to evidence that the funds indeed originate from tax evasion.

If the Financial Times wants to live up to its motto of “Without fear and without favour” then it should not forget the citizens so easily and so automatically side with the tax man… (that is, of course, unless it has some own dirty laundry to hide). If there is an argument for tax-evaders losing sleep, the same argument should be used for tax-wasters.

So, Sir, help us put a little pressure on Governments and prepare that list of countries where tax evasion should be permissible… I mean aren’t we all for better accountability? Constitutions are written to guarantee that the citizen is not abused by those in power, and given ever more intense globalization it would seem like we are in need of a global constitution, before those in power team up against us small fry.

The financial regulatory front lies concentrated in Basel and not fragmented in nations.

Gillian Tett feels that the pending war between the regulators and the “too big to fail” will keep on pending because the first are “badly hampered by being fragmented along national lines”, “Why the idea of ‘living wills’ is likely to die a quiet death” August 14.

She is wrong. The main sources of “too big to fail” growth resides squarely in the regulations coming out of Basel, and the real problem is that the regulators do not know how to handle Basle without risking amputating a part of themselves in the process, or worse, without prematurely using up their last “it was the Basel Committee’s fault” excuse card.

Oil revenue sharing stands the best chance of stopping wasteful energy use in the Gulf.

Sir Jim Krane in “America can stop the Gulf’s wasteful energy use” August 14, lambasts the United Arab Emirates “with their monster 4x4”, and wants the US, with its own so very heavy carbon foot print, to lean hard by means of nuclear energy agreement on the UAE´s ruling oil sheiks, to move it away from the fossil fuels.

One of Krane’s doubtful arguments is that although “raising energy prices would help” that is impossible because since the ruling sheiks “do not give their subjects a vote they must keep them happy in other ways”. For his information, in Venezuela, the citizens have the right to vote, but yet the price of gas-petrol, around $11 cents per gallon, is about 15 times lower than in UAE.

No, the best way to stop the gas-petrol waste is to allow the citizens to participate directly in the oil revenues… so that its waste hurts the citizen´s own pockets... but that would mean putting an end to oil-autocrats in UAE and Venezuela. Yes, and so what? An extra bonus... good riddance!

Is Iceland´s debtor´s prison different from Argentina´s?

Sir Jóhanna Sigurdadóttir’s “Iceland are angry but will make sacrifices” August 14, writes about the problem of trying to make good “hundreds of thousands of UK and Dutch savers” who lost their money when attracted by high interest rates they place their money in a private bank in Iceland. 

I can’t help to think about the hundreds of thousands of probably much less sophisticated small Italian savers that lost their savings in Argentina… and I wonder are there some standards for responsible behaviour? 

There is no debtor´s prison for individuals but is there a debtor´s prison for countries even when given home for jail? Would the world be better off with some global standards that apply to all countries? 

And what about all those who lost their money because they followed the advice of the credit rating agencies, those appointed as the official risk sentries by the financial regulator in Basel?

What a great diversity of worries and concerns.

Here I am concerned with issues such as climate change dangers; how society will cope when the genetic maps of citizens are found on facebook; the 100.000 Kalashnikovs spread out by Chavez in Venezuela and more of that sort while George Magnus is losing sleep thinking about how to replace the financial leverage and the increased number of women working as engines for growth, “How to release the next boom” August 14. Are we humans not a wonderfully diversified lot?

Not captured… raptured!

Sir in Mr Michael G. Mimicopoulos letter “Regulators too close to the regulated”, August 12, again we read about regulators being captured by the regulated. We sure wish that was all there is to it.

The real problem though is no that the regulators were captured but that they were raptured by the silly idea that they could control for risks with their capital requirements for banks based on a vaguely defined default risk and have the credit rating agencies do the risk-surveillance for them.

So raptured were they that even two years into the crisis they seem still as enamored with that idea as the first day it crossed their naïve and gullible minds.

Having to read, almost on a daily basis, serious frowns declaring about “risk-weighted” bank assets, as if those risk-weights were God sent and really meant something, drives me mad.

The reformers of the health sector need to go to Basel.

Sir in reference to “Debating US health reform”, August 12, I hold that instead of town hall meetings the reformers should go and visit the Basel Committee. There they could learn about empowering health rating agencies to check up on the citizens and thereafter place some special capital requirements on the insurances of the unhealthy; by which they can provide a very fiscally sustainable and Darwinian solution to the whole problem.

The signs pointing towards “risk-free” land are still there; and to some they still mean exactly the same.

Sir Tony Jackson admonishes us “Don’t believe bubbles have been scientifically abolished” August 10. Of course not! How can we be that stupid? Especially since all those risk-free AAA signs that led so many over the cliff are still there and taken to mean exactly the same as before, at least by the regulators.

But when Jackson suggests that “the aim should not be to prevent [the next crisis] but to contain its effect next time around, may I humbly add... and what about giving a little more purpose to the boom?

The originally “risky” are being diabolically squeezed

Sir Gillian Tett in “Pipes remain clogged even as liquidity is pumped in” August 7, writes that “now most banks seem unwilling to use spare liquidity to engage in activity that regulators or shareholders might deem risky”. This is not surprising, anything risky requires more regulatory capital, and the banks have more than enough with all their currently outstanding loan and investments that require more capital when they are downgraded, and so even though the banks have liquidity they cannot afford more risky business.

This is placing an excruciating squeeze on the weak and more risky clients of the banks, because even if these are performing much better than the originally “risk-free” banks might choose to liberate capital by getting rid of these exposures without booking losses so as to be able to keep on the books AAAs turned into junk and that if sold would hit the banks harder.

Also let us not forget that the capital requirement for any investment in an AAA rated public instrument is 0%. In all, with their minimum capital requirements for banks based on risk, the regulators have created a monster.

It was more comfy to ignore the warnings

Sir Samuel Brittan in Economists shuffle the deckchairs August 7, quotes a letter to Her Majesty written by Professors Tim Besley and Peter Hennessy stating “many people did foresee the crisis” but clarifying that “no one foresaw the form it would take and its timing, onset and ferocity”. This sure sounds to me as a lame excuse for inaction, like a mother having been warned of the dangers of leaving her child alone at the side of the road complaining that no one told her exactly when and where and by whom her child would be overrun.

Indeed plenty of persons warned about the dangers in quite clear term and I myself wrote in a letter published by FT in January 2003 saying that “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.”

If there is an explanation for why the warning were unheeded it is because of too much utterly misplaced solidarity among peers and the fact that we allowed our financial regulations to be captured by a small group of fanatics in Basel.

The speed of a deflation does matter

Sir again you hold that deflation is dangerous, August 7, and that doing too little is a greater danger than doing too much. From the perspective of a baby-boomer that certainly seems to be correct... “Après nous le deluge”, but let me also remind you that although a slow deflation is surely hell a fast one might be bliss, since when touching bottom there is only one way to go.

Don´t point fingers at the economists

Sir, I refer to Robert Skidelky´s “How to rebuild a shamed subject” August 6. There should not be any finger pointing of the economists specifically. Many are to blame, including the financial press. 

This crisis has nothing to do with economics and all with the lack of ordinary good common sense. Given the strong incentives of the minimum capital requirements for banks concocted by the Basel Committee for to follow the opinions of some few credit rating agencies, everyone should have known that, sooner or later, something was doomed to go wrong.

I, as an Executive Director at the World Bank (2002-2004) said so over and over again; and FT even published a letter where I, in January 2003 said that “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.” 

Now why could we not react and stop what was being done? Because the whole regulatory debate was captured by some regulatory gnomes in Basel, who let no outsider question anything in their cozy little mutual admiration club. 

By the way, in the context of this crisis, please stop talking about a black swan or, at least, as a bare minimum, clarify that it was a black swan fabricated by the regulators.

What we need is to pay bonuses for the right kind of risk taking!

Sir the world is definitely confused. Lucian Bebchuk writes “Regulate financial pay to reduce risk-taking” August 4 even though as a Harvard professor he should now that we as a society need risk-taking if we are going to move forward, and so the issue should obviously be more that of regulating financial pay so as to promote the right kind of risk taking.

Also let us stop from hiding the truth. Had the regulators not created the risk arbitrage opportunities derived from the minimum capital requirements and their excessive trust in the credit rating agencies billions of temporary artificial profits would not have been generated and with that there would have been so much money to pay the bonuses to begin with.

The Central Banks’ independency has to be balanced with more criticism.

Sir in your sermon “The value of bank independence” August 3, you mention that “the era of economic theocracy, in which unelected experts ran the global economy is over”. Over? Where, how and when? The fact the central banks have taken a less prominent role while the fiscal spenders are doing their juggling act do not make them less independent. In fact, if anyone at this moment would have to take a bet on the central banks losing their independence or continuing to be the mutual admiration club their independence have turned them into I would advice to bet on the latter.

Also though you quite correctly opine that “risks are greater when a regulator plays God, deciding which banks should live in a crisis” why did you never say a word when the regulators also played God and with their minimum capital requirements for the banks arbitrarily decided to sort of call it quits by subsidizing risk adverseness and taxing risk-taking?

Finally you keep being stubborn and wrong insisting on the role of “too low interests” in the credit bubble. Have you any idea at what rates these subprime mortgages that defaulted were contracted at? Is it so hard to see that the problem was how these lousily awarded mortgages morphed into no-risk AAA instrument to be discounted at so much lower interest rates?

Of course the world needs independent central bankers but more than that it needs independent minds and, of course, a more critical financial press much less prone to suck up to the independent authorities.

Default risk-weights and purpose-weights are used to establish capital requirements for banks in Venezuela.

Sir on July 29, in Venezuela, the financial regulator, Sudeban, issued a normative by which the risk weights used to establish the capital requirements of the banks were lowered to 50%, when banks lend to agriculture, micro-credits, manufacturing, tourism and housing. As far as I know this is the first time when these default risk-weights and which resulted from the Basel Committee regulations, are also weighted by the purpose of the loan.

The way it is done Venezuela seems to lack a lot of transparency and it could further confuse the risk allocation mechanism of the markets (though in Venezuela that mechanism has already almost been extinguished) but, clearly, a more direct connection between risk and purpose in lending is urgently needed.

In this respect the Venezuelan regulator is indeed poking a finger in the eye of the Basel regulator who does not care one iota about the purpose of the banks and only worry about default risks and, to top it up, have now little to show for all his concerns.

I can indeed visualize a system where the finance ministry issues “purpose-weights” and the financial regulator “risk-weights” and then the final weight applicable to the capital requirements of the banks are a resultant of the previous two.

Does this all sound like interfering too much? Absolutely, but since this already happens when applying arbitrary “risk weights” you could also look at this as a correction of the current interference.

Stop subsidizing status-quo and taxing development.

Sir Mario Monti in “Watchdogs of the world, unite!” July 29, makes a powerful case for the need of strong antitrust enforcement to keep market competition alive, capitalize on “creative destruction” and minimize “destructive conservation”.

In the same vein I would also request the competition agencies to look into the anti-competition implications imbedded in the capital requirements for banks, by which borrowers who can dress themselves up as having a “low default risk”, when compared to the “higher default risks”, are subsidized by the cost savings that are produced by some extremely low capital requirements. That signifies a subsidy for status-quo (the known) and a tax on development (the unknown). This exaggerated conservative risk-adverseness has already taken us over the cliff of the subprime mortgages… with nothing to show for it.

Systemic risk, here, there and everywhere

Sir when you in “At your own risk” July 28, write about forecasts as “self-fulfilling prophecies” you are precisely describing a systemic risk in regulations. Systemic risk does not only signify a part of the system that becomes so large as to endanger the system, as that concept seems to have been exclusively interpreted lately, but it also includes the risk of introducing a threat to the system, a virus... like the concept of forcing upon the banks the use of credit rating agencies.

Now when you lecture University presidents about how the “public’s intellectual virtues – curiosity about other fields, aversion to dogma could do the discipline some good”, instead of “public” you could use “readers” and apply it to yourself. The ease, by which on a whim you exclude the opinions of some of your readers like me, shows you share the same problem.

What if I would send you an exclusive and mindboggling story? Would you have to let it go? Have you hijacked yourself? That is sure a systemic risk? Don’t you agree?

The credit rating agencies made mistakes, the regulators showed lack of judgment

Sir Arturo Cifuentes concludes “Time to start rating the full influence of bond graders”, July 28,“Leaving [the credit markets] at the mercy of the [credit rating agencies] that showed so much bad judgment in what was supposed to be their core competence seems like a terrible idea.” I must correct him. The credit rating agencies just made mistakes instead it was the regulators who, by giving the agencies the powers, showed a total lack of judgment.

Is Mr Robert Picciotto a closet central planner?

Sir Robert Picciotto a Council Member of The United Kingdom Evaluation Society in a letter titled “Competition will not cure rating industry ills” July 27, writes: “Objective evaluation is a quintessential public good that is unlikely to be generated by the market”.

I sure hope Mr Picciotto is defending a business interest of his own, because the alternative would make him an extremely fanatical and dangerous central planner. How can he write such nonsense precisely in the midst of an economic crisis that resulted directly from the global bad risk information that was requested by those financial regulators who believe that our financial markets should be guided by some very few experts?

“Objective evaluation”? Hah! They have not even agreed what exact risk is to be evaluated or for what purpose exactly.

Let the government charge for the protection racket services it already provides.

Sir your “Vice of necessity” July 25, where you start hinting at legalizing drugs so as to raise the taxes fighting this crisis needs, opens up our eyes to a lot of unexploited taxing opportunities.

Among these: charging for the protection services already provided to intellectual property right holders; imposing a special tax on government created monopolies and oligopolies such as those of the credit rating agencies; and finally a big special tax on all bonuses derived from capitalizing all those splendid arbitrage opportunities that the financial regulators provide.

Alternatively of course, and like what you seem suggesting, is to get out of protection racket altogether so that much of the illicit and informal economies that most probably are still growing at healthy rates, can join the rest of the economy and be taxed as all of us.

What does not seem logical though is to remain in the wishy-washy middle ground.

The investors know very well what is going on.

Sir Gillian Tett in “Investors are floundering in post-traumatic syndrome” July 24, writes that “the number fretting about inflation is similar to those concerned about deflation – with almost no one sitting on the fence”. No wonder, to be sitting on the fence presupposes governments know what they are doing and if they did why are we in this crisis to begin with?

Personally I am convinced we will fall over to the inflation side because the public debt will become unsustainable; there are other bottlenecks like oil out there; and I do not see sufficient political will to stop the printing press from working overtime.

What I do not agree is when Gillian Tett says that “investors lack the intellectual framework to make sense of what is going on”, they know perfectly well that it is the governments and the regulators who lack the intellectual framework to make sense of what is going on, as evidenced by the lack of efforts to ascertain we will not have a new cull of subprime financial regulators in Basel.

What are we doing to save ourselves from subprime financial regulators in Basel?

Sir Prof Lawrence J. White in “No monopoly on credit wisdom” July 24 writes “Credit wisdom is not located solely in Moody’s Standard & Poor’s and Fitch”. He is of course absolutely right, though the real question are: Should not our financial regulators have known that before they sent the market on a wild and crazy AAA chase guided by just three credit rating agencies? How unwise can we allow our financial regulators to be?

Frankly we did not need this crisis to know that and let me remind you that on January, 12, 2003, the Financial Times published a letter I wrote and that ended with “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

What are we doing in order to save ourselves from a new cull of subprime financial regulators in Basel? Not much, if anything at all.

FT is at long last very close to getting it, come on just one more push!

Sir about six years and 300 letters of mine later you are finally asking to “cut back the credit rating agencies quasi-public authority” Raters berated, July 23. A bit slow, and thick, but, nonetheless, well done!

Having said that when you refer to the EU’s recent directive on capital ratios I see you are still harbouring some confusion. Let me try to explain it again… letter 301?

The regulators arbitrarily imposed distortions in the financial markets when they decided, for instance, that in order to lend to a non-rated borrower a bank needed 8 percent in equity while for a triple-A rated only 1.6 percent is required. Even if the EU now rules that the banks cannot, no matter what, leverage themselves over some maximum figure, but leave otherwise intact the current structure of minimum capital requirements then, on the margin, all the distortions remain. You see in finance and in so many other things in life it is the marginal decision that counts.

By the way… is a job in a triple-A rated company more worth to defend than a job in a B- company? The regulators in Basel seem to think so.

The too few to follow is more dangerous than the too big to fail

Sir I refer to John Gapper’s “Squeeze the leviathans of finance” July 23. I go way back fighting the “too big to fail”, even when they were thought of being “too smart and expert to fail”, but let me assure you that a thousand small banks following one credit rating agency are still much more dangerous than the too large to fail with thousands of analysts.

And by the way the problem with the Basel minimum capital requirements is not so much that banks end up holding little capital but that these regulations discriminate among borrowers and who therefore go through all strange convolutions to dress up in AAAs.

Mark to market the government’s bail-out efforts

Sir Jonathan Guthrie in reference to the bailout of General Motors writes that if he was a US taxpayer “I would tell Fritz that I wanted my $50bn back”, “An industry running on romance alone” July 23. And he is fully in his right to demand that… but only after he had paid his share of the tax of course.

Perhaps what the US should do is to turn around and give a 50% tax credit for anyone willing to pay 100% of face value for whatever the government has received from GM in return for that assistance and then let these papers trade to see what the market considers them to be worth.

Problem though is that government would never dare themselves to be marked to market that way.

Shear madness or superb lobbying?

Sir as Joanna Chung and Aline van Duyn reports in “US rating agencies escape overhaul” July 22, the financial regulators seem intent to have the financial world and the banks to keep on following the opinions of the credit rating agencies as if nothing has happened. Is this the result of shear madness or superb lobbying?

R.E.S.P.E.C.T.

Sir, in “An exit will have to come, but not yet” July 20, by reducing us to some “sick” jokers worrying about inflation when there is so much “excess capacity and high and rising unemployment” you show utter disrespect to those of us who do worry about inflation resulting from hitting serious energy, public debt and climate change bottlenecks. 

I would say, whoever wrote this editorial must be a baby-boomer, living up to the motto “Après moi, le déluge”.

That said, on the theme of quantitative easing, let me remind you that just as a company repurchasing its own shares, its main problem is that while doing so, it really does not know how much the market values its shares.

Let the bankers earn their bonuses, through competition

Sir David Blake goes overboard titling “Why banking’s bonus culture should be defended” July 18. Yes, regulators should not try to micromanage the bonuses but “defend the culture”? No, what is evidenced by the extraordinary gross earnings available for bonuses is that the banks are not operating in a sufficient competitive environment, and much so because of the regulators.

It is the trading of non-transparent instruments in non-transparent markets; and the profitable arbitration of the risk weights concocted by the regulators that help to create those gargantuan gross earnings that need to be distributed. How the bankers and the shareholders then share the almost loot, well that is entirely their business.

We might have been better off with no regulation whatsoever, but while they regulate let the regulators respond to investors, borrowers, and taxpayers for those mind-boggling bonuses paid out to the bankers, or those mind-boggling shareholder value of banks that we have seen the last decade.

How do you get seignorage out of security?

Sir, in “Cheer up, Britain”, July 18, you describe how the UK is a safe place to live. Since in the market of safe havens there are many niches what the UK now needs is to find out how to get the most seigniorage out of that kind of security.

Taxation through reverse mortgages?

Sir in “Adapting to mediocre prospects” July 17 Martin Wolf writes “Let the cash-poor but land rich borrow their tax payments from the government and demand repayment on death”. Is Martin Wolf trying out as a modern Sheriff of Nottingham proposing the taxation through reverse mortgages?

Why does Mr. Wolf not go after the cash-rich to begin with? What does Mr. Wolf have especially against landowners? Why does Mr. Wolf for instance not go after all those intellectual property owners who are granted monopoly rights and protection by the state without paying anything special for that?

Safer does not mean less risk

Sir Martin Wolf in “Adapting to mediocre prospects” July 17 writes that the UK “must start by making finance safer”. Has he not learned anything? It was exactly doing this that the regulators, with their minimum capital requirements based on risk and the appointment of official risk surveyors, the credit rating agencies, led the world massively into the safest assets, houses, the safest country, the USA and the safest instruments, the triple-A rated securities.

If you want to get out of this crisis, even settling for mediocre objectives, the financial world has to learn to embrace the right risks and learn to avoid the unsafe safeness

Beware wasting scarce resources on green placebos

Sir I refer to your “Winds of change” July 16. For every dollar spent fighting climate change with green placebos such as hybrid cars, photovoltaic solar panels and sometimes even wind-energy, we have one dollar less in resources to fight climate change for real. This fact, quite astonishingly, often seems to matter the least to those for whom fighting climate change seems to matter the most.

We are climbing a ladder made of whipped cream

Sir Martin Wolf writes “After the storm comes a hard climb” July 15, and the title is indeed optimistic as it seems to imply as a first Hurrah! that we already hit bottom and as the second that we have got ourselves a good ladder. I am not at all sure the first Hurrah is true, let’s pray it is, but what I do know is that the ladder we are currently using is not solid enough for any sustainable growth. I would say the current ladder looks and feels like made out of whipped cream, and most probably is.

The remittances immense economic importance is rewarded with minimum political relevance

Sir in reference to your “Survival lessons for developing countries” July 15 and that discusses
the vital economic importance of remittances for developing nations I would like to contrast that to their almost non-existent political importance.

For instance, in the case of Honduras the remittances signify 25% of the GDP of Honduras. If we assume that the migrant workers remit 20% of what they earn we can then calculate that their gross earnings represents 122% of Honduras GDP. And so, if we divide the 122% by the net 75.5% GDP that was produced domestically, in Honduras, then we have that the Honduran migrant workers outside Honduras produce a bit more than 1.6 times what is produced in Honduras.

In other words it is the Honduras migrant workers that with immense sacrifices carry their poor homeland on their shoulder but yet no one asks their opinions in relation to the recent events in Honduras. Shame on the Hondurans back home, the minimum one could in such circumstances expect is that the migrant workers had at least 30 percent of the seats in the Honduras Congress.

The same Basel induced temptations keep plaguing the banks

Sir since it was the extremely low capital requirements that were authorized for banks whenever the risk perceived by the credit rating agencies was non-existent that started the stampede into subprime land, John Plender is absolutely right when he writes “Banks let off the hook as flawed model is preserved” July 15. It does not matter much if you increase the minimum capital requirement averages if, on the margin, you keep on interfering in the same arbitrary way in the risk allocation mechanisms of the market.

Today, the banks are still authorized to leverage themselves 62.5 to 1 on the loans they give to corporate borrowers rated AAA to AA- or need to capital requirements at all when lending to sovereigns rated AAA to AA- and so, today, all the temptations to head off in the wrong direction are still there.

A mystic crusade against debt?

Sir, there is too much debt because debt has been given huge fiscal incentives; that banks have in some circumstances been authorized to have extraordinarily high leverages; that consumer debt pushers have been able to act freely with an impudence that any drug dealer or casino owner would kill for; and that markets followed faulty risk rating signals that indicated some borrowers were risk-free no matter how much debt they contracted.

And there is nothing “mystic” with that, as the almost embarrassing manifest of Nassim Nicholas Taleb and Mark Spitznagel “Time to tackle the real evil: too much debt” July 14 would seem to indicate. The authors call for economic demystification by calling for a mystic crusade against debt.

I have professionally been involved with many debt to equity conversion operations and of course they are often very useful but let´s face it, at the end of the day, a loss is a loss is a loss, whether you are holding debt or equity, just that the latter usually allows you to bluff yourself a little longer.

“Small children small problems big children big problems”

Sir John Kay in “Our banks are beyond the control of mere mortals” July 8 discussing the qualifications of those in charge of our financial institutions concludes that “we would be wiser to look for a simpler world, more resilient to human error and the inevitable misjudgements”. I guess anyone except those puritans who expect our bankers to be from another world would tend to agree with that.

Nonetheless given that the world is not simple and that we should perhaps not want it to be simple either, the best we can hope for is first for no one to accumulate so much power that the results of any inevitable misjudgment will bring the system done; and second that the resilience to human errors does not hide the human errors while they are still small. In other words exactly what the very unwise regulators did when they invested so much regulatory power in the three amigos, the credit rating agencies.

Narrow banks could lead to a narrow future.

Sir Prof Sol Picciotto on “How to create narrow banks with purpose” July 3, suggests requiring from “any bank that benefits from state support to engage only in classes of transactions that have received regulatory clearance”. Sound great but what kind of transactions of those who got the banks into problems did not have regulatory clearance and of these which would not have received regulatory clearance? Those with AAA ratings?

We continue trapped in the belief that there was some sort of excessive risk taking that got us into this crisis while in fact what happened was that the financial world was authorized to engage into an excessive risk-aversion and that turned out so bad when the officially appointed risk-surveyors failed.

We continue trapped in the belief that there was some sort of excessive risk taking that got us into this crisis while in fact what happened was that the financial world was authorized to engage into an excessive risk-aversion that turned out bad when the risk-surveyors failed.

If we want a better world then let the banks be banks but if all we want is to desperately conserve then I guess we have to go for “narrow banks”.

Just don´t pay Harvard cash-up-front!

Sir Lucy Kellaway answering “Am I mad to invest in a Harvard course in a downturn?” July 2, does not tackle the real madness of it which is the way that the course would seem to be contracted with terms of $ 60.000 cash-up-front.

I would suggest a better offer to Harvard would be $3.000 up front to cover for your marginal costs and then 20% of any additional earning produced by the graduate during the next 5 years, even if that comes to be much more than $60.000. I mean that would make the so much recently discussed incentive structures better.

The Constitution of Honduras contains some strange things.

Sir I refer to your reports on the current situation in Honduras. Are you aware that one of the articles in the Constitution of Honduras actually states that you will “lose your conditions as a citizen if inciting, promoting or supporting continuance or the re-election of the President.” This, though sounding a bit crazy, could be indicative of that the whole issue of a re-election, towards which Manuel Zelaya was undoubtedly striving, is more of an existential issue in Honduras, and which if so would oblige us as a minimum to look much more carefully into what is really happening there.

Should there be an automatic sentence of the co-responsible?

Sir John Gapper is right when describing the sentencing of Bernard Madoff as “both necessary and rare” July 2. That said justice was not totally served. Had there not been a SEC you can be sure that the people who lost their money with Madoff might have lost even more money, in many other ways, but would certainly not have lost that same way with Madoff. Therefore perhaps all regulators involved should receive an automatic sentence for co-responsibility. One percent? One and a half years?

The too few credit rating agencies opinions to follow are a larger source of systemic risk than the “too big to fail”

Sir, with respect to the “too big to fail” at a workshop on risk management in the World Bank in 2003 I told the financial regulators that “knowing that the larger they are the harder they fall on us, if I were a regulator, I would be thinking on a progressive tax on size” I can therefore evidence having stood up against the big while they were still believed invincible and few dared to do so. 

That said it is clear that this crisis, though it did hit some of the big especially bad, was not caused by these banks but by the “too few credit rating agencies opinions to follow” that were imposed on the system by the financial regulators. 

But as we can read from Martin Wolf’s “The cautious approach to fixing banks will not work” July 1, slowly and surely we are getting to the truth. Martin Wolf now informs us that the median leverage of commercial banks in Europe in 2007 was 45 to 1 and of course it is “insane”, anyone knows that, so the real question becomes why did not anyone, including Martin Wolf, say so? 

The answer lies in the risk weighting of the assets that was done and in this aspect Wolf still has something to learn. When he says “the required bank capital must also not be risk-weighted on the basis of bank models, which are not to be trusted” he blithely ignores that the bank models has little to do with that because the essential parts of the risk-weighting is derived from the arbitrarily rules on minimum capital requirements concocted by the regulators and from the opinions of the appointed supreme risk surveyors.

PS. Incentives matter. The escape valves of risk weighted bank capital (equity) requirements, cause banks’ risk models to be more about equity-minimizing/leverage-maximizing, than about analyzing bank assets’ true risks. That’s life!

There is regulatory financial protectionism of what is seemed as having a lower risk

Sir John Plender writes “Protectionism is coming at us from all directions” July 1 but fails to mention that financial protectionism that has been around for just a couple of years and that discriminates among lenders. On top of what the market charges for risks an unrated borrower has to pay for the cost of the bank having to put up 8 percent in capital while a triple A rated company gets away with the cost of only 1.6 percent. And then we ask why do inequalities grow?

Has this financial protectionism served us well? Absolutely not! I have even read Nobel-prize winning economist who though standing in front the monumental losses derived from financing the safest assets, houses, in the supposedly safest country, the US, and in instruments that carried the best credit ratings, still describe our current crisis as having originated by excessive risk taking. Ridiculous, they are either intellectually lazy or they have no idea of what they are talking about. It should be crystal clear that this crisis resulted from of an excessively misguided risk-adverseness and which got a tremendous boost from the regulators protecting what should not be protected.

Since it was an excessive risk-aversion that caused the crisis there is nothing wrong with a little more of risk-taking.

Sir the commissioner of Japan’s Financial Services Agency Takafumi Sato warns that “Tightening capital rules could increase risk-taking” July 1. Given that the current minimum capital requirements concocted in Basel authorize a marginal leverage of bank equity of 62.5 to 1 if the borrower has an AAA to an AA- rating it is hard to even comprehend what increased risk taking he refers to.

Excessive risk taking was not the problem. It was the excessive risk-aversion of the regulators that created an amazing regulatory bias in favour of what was perceived as being of little risk which brought this crisis upon us. In this respect we might in fact need some increased risk-taking.

This crisis did not originate from risky Argentinean railway projects but from investing in the safest assets, houses, in the safest country, the US, in securities rated AAA. Do you call that excessive risk taking?

Madoff got a sentence of 54.900 days. Should not the regulators spend one day in the slammer just for the sake of justice, just to help us restore some minimum accountability?

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?

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!

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.

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?

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.

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?

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.”