But what were the regulators smoking?

Sir in “Double or quits for the eurozone” April 29, you say that “Credit raters made things worse by again following the markets they are supposed to advise”. Would you care to expand a little bit on that?

To me it was really the regulators who made things worse by telling banks to have capital in accordance to what the credit rating agencies say... and for instance allowed the banks to stock up on Greek public debt with only 1.6 percent of capital... in other words authorizing the banks to have a 62.5 to 1 leverage when dealing with Greece! What were the regulators smoking?

Triple-A securities did not turn into junk, they were junk made into triple-As, simply because there are not enough real triple-As to go around.

Sir John Gapper writes “this crisis was of a severity beyond others in the past, and triple-A securities were at its heart” ‘Time to rein in the rating agencies” April 29. The first letter of mine, and that you published on January 12, 2003 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”. At last count I have sent you 391 letter more on this topic and so it would seem that after a definite statement like Gapper’s I should now be able to let it go. Not yet!

When Gapper in his quite comprehensive article states “If all the subprime mortgage securities they rated triple A had not turned to junk…” he completely misses the point. It was the shear existence of the credit ratings that, when combined with absurdly low capital requirements for banks when lending or investing in triple-As, which provided all the incentives for the markets to manufacture the “junk”.

Given the possibility of accessing a triple-A rating the worse the mortgage, the higher the interest rates, the larger the difference between the real and the perceived value and therefore the larger the profits.

Sir, please grow up and face the facts of life. There are not enough true triple-A investment opportunities to go around for all the coward capital that exists in the world. Pursuing triple-As too much will either lead us to false triple-As or to absolutely unproductive triple-As, like putting your savings in a mattress and having it stored at Fort Knox, paying a custodial fee.

If the incentives are correctly aligned all bonuses make sense.

Sir, John Kay in “When a bonus culture is just a poor joke” April 28, that he would have felt insulted if as a teacher he were to receive a bonus from a student on the successful completion of a course.

Why should he feel that way if the incentives were well aligned? You see it is really not the completion of a course that matters, as Kay seems to believe, but what you do in life with that completion. In this respect let me share with Kay some brief paragraphs I posted on one of my umpteenth blogs a couple of years ago.

Don’t give your teacher an apple; offer him a couple of basis points in your earnings instead.

Parent and students need some way of sorting through the reams of college information in order to make rational investments, but may I remind you that even when finding the absolute perfect college that you might benefit from aligning the incentives better.

In this respect what I am currently recommending my young friends when they take off for their MBA is that they offer a couple of basis points on their first 10 years earnings to those teachers they feel could best advance their careers…it makes wonders! 

Aligning the incentives could in the long run also be the best way of getting information for the picking of a college to, as education should in fact be a joint venture between students, teachers, and colleges.

I refuse to follow Martin Wolf down the road to financial obscurantism

Sir when comparing the ease or even gusto with which Martin Wolf has supported government spending to bail out the economy, imposing no public debt to taxpayers willingness ratios at all, with the way he now wants to strictly limit the banks’ lending activity, I am truly shocked, “Why cautious reform of finance is the risky option”, April 28.

Wolf, after years of receiving, acknowledging and ignoring my letters about the excessive leverage ratios allowed to banks on assets perceived as having low risk, like 62.5 to one on anything related to an AAA rating, now suddenly goes into full reverse and opines that “Leverage ratios of 30 to one are crazy. Three to one looks far more sensible”.

Well let me assure you that just even searching for a three to one capital ratio for banks world, would make us lose all our hopes of trying to solve the rest of the world’s urgent problems, and most certainly lead us to financial obscurantism with pure gold bartering and no credit at all. I refuse to follow Martin Wolf there!

In fact the 12.5 to one capital ratio, allowed to banks when lending to small businesses and entrepreneurs, and which of course had nothing to do causing this crisis, should perhaps even be increased slightly, now when we are in so much deer need of jobs.

Plain stupid or shameless… have a pick

Sir on your front page in “Moody’s admits to failings over crisis”, April 24, Stephanie Kirchgaessner and Kevin Seiff report that “The chief executive of Moody’s admitted to a Senate panel yesterday that the US credit rating agencies failed to anticipate the severe deterioration in the US housing market that led to the financial crisis”.

If Raymond McDaniel does not know what role the AAA ratings had in creating the worst part of the bubble in the US housing market and which had to explode, then he is plain stupid, but, if he is not that stupid, then he is just shameless… Have a pick!

Why should George Soros be licensed to kill and not the bankers?

Sir George Soros in “America must face up to the dangers of derivatives” April 23 describes these as “a licence to kill” and he is wrong.

Just as a gun a derivative can do good or bad depending on who pulls the trigger on what and with what accuracy. In this respect, and given that in matters of investment George Soros could also readily qualify as just another gunslinger perhaps he should hand in his licence to kill too.

Undue influence?

Sir amazed I read on FT’s front page “”Bankers influenced rating agencies… unduly” April 23. I ask, did not the regulators unduly influence banks and investors to give undue weight to many unduly prepared opinions of the credit rating agencies? Is not overselling one’s product something perfectly normal? Why would the credit rating agencies’ opinions be more covered by the 1st Amendment’s freedom of expression rights than the opinions of the bankers?

Don’t fight it… accept it… on the subject of the hundreds of letter I have sent you denouncing the very subprime bank regulations that were concocted by the Basel Committee and which that caused this crisis… you have let yourself to be unduly influenced by the undue opinions to withhold from the general public my very correct opinions by some of your own opinionated writers.

I expected the Canadian bankers not wanting to live in never-risk-land.

Sir when the heads of the six major Canadian banks, those banks which better health makes them the object of envy of so many regulators and taxpayers in the world, issue a joint communiqué, we should read it very carefully “It is time to press on with bank reform” April 22. Unfortunately, my expectations were too high and I was disappointed.

Not only did it read almost like a Julia Child recipe... a little bit more of Tier 1 capital here.... and some more leverage testing there... but it also showed that neither they have a clear idea of what hit us.

Though they correctly state “Regulators do not need to specify which businesses banks should enter” they do not realize that is exactly what regulators do when they risk-weigh assets. Markets discriminate risks by charging different interest rates and so, when regulators award the lending to some assets lower capital requirements, because these are perceived by the credit rating agencies as less risky, they are actually instructing bankers to go to “risk-free” land. And, our problem, as a society, and though we do appreciate the efforts of lowering the risks in banks, is that we are not sure our best interests or future really lies in Never-risk-land.

They also write that if no distinctions, in terms of capital requirements, between low-risk and high-risk assets, something that I much favour, this “would encourage financial institutions to take more risk, which could make the system less stable”. Are they blind? Have they not wakened up to the fact that this crisis resulted from capitals stampeding in the search of AAA ratings, precisely as a consequence of the low capital requirements?

Where are the bankers who want to have the right to lend to their traditional client small businesses and entrepreneurs on their way to capital markets, without being distracted only because regulators favours what is perceived as having less risk? I had hoped these bankers were in Canada, now I am not any longer sure of that.

Why, for a change, not listen to those who proved beyond reasonable doubt they knew?

Sir, in November 1999 I wrote in Economía Hoy, Caracas the following:

“The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the OWB (the Only Bank in the World)... Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversity risks, is to create a tax on size.”

And you of all must be aware of the literally hundreds of letters that I, though accused of boring and monothematic, have sent you about the extremely faulty financial regulation that were produced by the Basel Committee… and this before the current Big Bang.

That is why I read with much satisfaction that Martin Wolf titles his article “The challenges of halting the financial doomsday machine” April 21, better late than never. Since he is planning to address what to do about it the next week, I do hope he will consider some of what I have written to FT and to him… if only because I sure gave evidence of that I knew and know what was and is wrong… and this even though I am not a member of his group of great influential economists with their PhDs.

ABACUS 2007-AC1: The whole truth and nothing but the truth!

Sir I refer to the extensive report by Patrick Jenkins and Francesco Guerrera, “Goldsman versus the regulator” April 19. Yes Goldman Sachs might have behaved unethically and even illegally but the whole truth and nothing but the truth would in this case have to include the following facts, no matter how politically or agenda inconvenient they might be.

IKB the German bank bought the two tranches of ABACUS 2007-AC1 almost exclusively because of the following two reasons:

First both tranches, the A1 paying Libor plus 85 basis points, and the A-2 paying Libor plus 110 basis, points were rated Aaa by Moody’s and AAA by S&P when purchased by IKB.

Second, in order to invest $150 million in these securities, which because of their ratings were risk-weighted by Basel II at only 20%, IKB needed only to have $2.4 million of capital, 1.6%, when compared to the $12 million it would be required to have if lending that amount to unrated small and medium sized German companies.

If IKB had known that Paulson had had his hand in the picking and known fully about his motives then they might have asked for a slightly higher interest rate, perhaps 10 basis points, and still bought the securities.

If the securities did not have the splendid credit ratings assigned to them by the credit rating agencies then they would probably not have bought them even if Mother Teresa had done the picking.

If the regulators had placed the same type of capital requirements on all assets then IKB would have stayed home, probably lending to their traditional clients, instead of going to California to dig prime rated subprime gold.

And so while naturally we should lend all our support to efforts to eliminate wrong-doings like those described in the action by the SEC against Goldman Sachs that should not signify we take our eyes of the unfortunate truth of the world having been saddled with grossly inept regulators who created grossly bad regulations.

PS. The truth was even worse. Years later I found out the EU authorities, in a gesture of misunderstood solidarity had assigned Greece a 0% risk weight, which meant European banks could lend to Greece against no capital at all.

Where were the regulators on April 26, 2007?

I just read in the Washington Post that the CDO discussed in the suit against Goldman Sachs, ABACUS 2007-AC1, and in which investors lost more than $ 1 billion, was created on April 26, 2007

Just out of curiosity I went back to my blog TeawithFT and found the following letter:

On March 19, 2007: Let us pray the estimates are wrong

Sir, let us pray for that the estimate that 2.2m of American families could lose their homes and that John Gapper mentions in “The wrong way to lend to the poor” is totally wrong. If not, then let us prepare for the worst, as the political consequences of such fallout in the sub-prime mortgage market would by far surpass whatever all other thorny issues such as Iraq and the illegal immigration could all produce, together.

What I miss in this scarily good saddening and scaring article, is some words of how it came about that some 2.2m obviously individual shaky loans could have, when all was said and done, produced the sufficiently good ratings needed to attract so much money. The credit rating agencies sure must have some explaining to do, as has those Bank regulators responsible for giving the credit rating agencies so much power to begin with.

You can find it here http://bit.ly/9clEC9 ... but that’s not all friends;

On April 13 I responded to an article of Gillian Tett in FT titled “Subprime proposals could broaden litigation risk all around” http://bit.ly/d9I0rt

Also on April 13, 2007 I responded to an article in FT by Richard Beales titled “A whiff of double standards” http://bit.ly/d2vopp

And on April 18, 2007 I responded to a comment in FT by Desmond Lachman titled “Housing bubble burst into American elections” http://bit.ly/cxKT3P

And so there obviously has to be so much more to it? Where were the regulators on April 26, 2007?

Growth requires a willingness to take risks!

Sir Martin Wolf holds like most would do that “Growth is the fix for British Finances” April 16. To that effect he mentions among other, the interesting possibility of ending interest deductibility, though that could create some serious transition problems while markets adapt such a dramatic change.

But what he does not mention is the need to completely overhaul the current bank regulations. These regulations, by means of allowing special and low capital requirements for banks when involved with anything related to an AAA rating, benefits what already benefits from being perceived as having low risks. In doing so, the regulations quite explicitly discriminate against the risk-taking that is required to achieve what Wolf wants, namely growth, promotion of exports and a healthy manufacturing sector.

Plain “bad” regulators!

Sir Gillian Tett is obviously right in that this crisis was not the fault of “maths” or “economics” but of the “bad” maths and economics that was used and abused, “What happen to markets when numbers don’t add up”, April 16.

The question is why we cannot equally accept that the problem was not the lack of regulations but the existence of truly “bad” regulations. Is it really so impossible to imagine that the world landed in the lap of a particularly inept bunch of regulators, who were allowed to unsupervised empower credit rating agencies too much and concoct venomous capital requirement potions? The evidence of that being the case is overwhelming… and it really behoves us to act accordingly.

ps. Below, as part of the “overwhelming evidence” I refer to above, are some examples of how financial regulators set the capital requirements for the banks depending on whom they lent to.

Sovereigns rated AAA to AA were given a risk weight of 0% which results in a cap.req of zero percent.

Corporations rated AAA to AA were given a risk weight of 20% which results in a cap.req of 1.6 percent.

Small businesses or entrepreneurs, unrated, well they were risk-rated at 100% which results in a cap.req of 8 percent.

It is not that 8 percent is high but, when given the opportunity of zero or 1.6 percent capital… where did you think the banks went?

Should bank regulators not known that sovereigns and AAA corporations already have access to the capital markets and so that the first role of our banks is to help those small businesses or entrepreneurs who provide dynamism to the economy and the jobs we need, and to support them on their way to the capital markets?

Should regulators not know that in a world of coward capitals those perceived as being low risk are already favoured by lower interest rates and do not really need the assistance of further benefits given to them by regulators?

Should regulators not have known that by adding another layer of benefits to the AAAs they could create a stampede, turning safe-havens into dangerously overcrowded havens?

Should regulators not have known that sooner or later credit rating agencies would make mistakes or be captured?

EITI, unwittingly, is an obstacle to other cursed-citizen's requests.

Sir I refer to your Oily transparency April 15. In the debate on what to do with an oil curse the Extractive Industries Transparency Initiatives occupies so much space it does not leave much room for others who like me want the oil revenues distributed directly to the citizens.

In fact EITI is more of an obstacle since it states as its 2nd Principle“We affirm that management of natural resource wealth for the benefit of a country’s citizens is in the domain of sovereign governments to be exercised in the interests of their national development.”

When seeing how much oil-richness has been wasted in the hands of oiligarchs, petrocrats or plain thugs it is truly amazing such a principle should exist. I guess it is because it is always more fun to talk to an oil blessed politician or technocrat than with a poor oil cursed citizens.

http://theoilcurse.blogspot.com/

But freedom does not require formality and survives even in prisons

Sir Russell Napier holds that “Tower of debt will force a roll back of the free markets” April 14. I do not understand where he gets such an outlandish idea… if anything the markets, whether free or controlled, will topple the growing public tower of debt.

He also says “Commercial bank’s new capital adequacy ratios already require banks to hold higher levels of government debt”. Well no, the already quite old capital “inadequacy ratios”, allow banks to hold higher levels of debt if these debts are without risk and bank capitals are right now under enormous pressure because these public debts are being downgraded.

In fact that public debt has received such an unjustified preferential treatment by the financial regulators was just their pay-back to governments for giving them their independence and leaving them alone in their secluded quarters in Basel.

And so when Napier writes that “Western governments are left with no option but to restrict and corral markets and force capital private sector capital into action is support of public debt markets” what he is describing is not necessarily an exit plan but how we got into the mess to begin with.

Yes governments might be tempted to impose “capital controls”… perhaps like those China has and which allows it to keep an undervalued currency… but, as I see it, that could just lead to accelerate the rate by which the world goes informal, illicit and illegal, in order to survive their respective governments. The more capital controls the more are the havens worth… ask China… whose government does not even dare to spend its own money in China.

What a great short phrase!

Sir it is always a pleasure seeing someone able to describe perfectly a difficult situation in just one sentence. Therefore I would wish to congratulate Jennifer Hughes, The Short View, April 13, for saying it all summing up the market reactions to the “Greek bail-out” with: “In essence, investors appeared less relieved yesterday than they were worried last week”.

It is all there in only 87 characters and so that after adding 7 with the space for “Greece” she would still have 46 to go on her tweet!

Zapatero is just another Rolly Polly Doll

Sir we read in you interview of Spanish leader José Luis Rodríguez Zapatero, “A legacy in limbo” April 12, that he is “ready to be judged on plans to take control of public finances”. Are they not amazing these Rolly Polly Dolls when they with so much bravura announce they are willing to be held accountable on how they get us out of the mess they helped to get us into? They do all sound and act like financial regulators.

Secretariat of the European Systemic Risk Board… wow!

Sir on April 8, 2010, in the Financial Times I read the European Central Bank seeking candidates to occupy several positions in the Secretariat of the European Systemic Risk Board, “established with the purpose of identifying, monitoring and assessing potential risks to financial stability in the EU that arises from macroeconomic and financial developments”. I had to say wow! ... and cut it out to save it as a memento.

When will they ever learn? They set up the Basel Committee, which allowed those truly miniscule capital requirements like 1.6 percent so that helped already big banks grow to be the too-big-to-fail banks and they empowered the credit rating agencies so much that half of Europe followed them to dig nonexistent subprime gold in California… and they do not yet even know, much less accept, that they were themselves the largest creators of systemic risk.

And ECB wants to send out a message that they’ve got Europe’s systemic risks under control? Who is going to tell ECB that the candidates most likely to be useful in such a monumental quest are probably the least likely to be accepted by them?

When spotting bubbles, make sure you look at the right one!

Sir Kenneth Rogoff writes “Spotting the tell-tale signs of bubbles approaching” April 8, but ignores the risk of looking at the wrong bubble. Take the so called real estate bubble in the US for example.

If the triple-A credit ratings on the securities collateralized with the subprime mortgages had been correctly awarded, then the increase in the prices of the houses would perhaps not have occurred or, if they did, those prices could have reflected a reality of supply and demand and not a bubble. This is so because the real bubble we had was a mega bubble of unjustified trust in the credit rating agencies; and which started when the bank regulators foolishly and trustingly outsourced the risk watching to these agencies to such an extent that they allowed the banks to hold only a meagre1.6 percent capital if the rating was a triple-A.

Right battlefield, wrong combatants!

Sir John Plender in “Rules will decide the New York vs London Battle”, April 7, considers that one reasonable safe bet is that a new Basel agreement… will provide the basis for a level playing field on capital and liquidity” though “where the balance will fall between the two financial centres on all this is anyone’s guess”. Are we going to fall again for the same trick? It was with the excuse of reducing regulatory arbitration between banking centres that Basel created the regulations that served as growth hormones for the big banks. It is not about New York against London, Basel might be the battlefield, but the combatants are the too-big-to-fail banks and the underdogs, the too-small-to-matter-to-the-regulators banks.

Mexico needs to speak out against China´s renminbi manipulation

Sir I find myself 100 percent in agreement with Martin Wolfs “Evaluating the renminbi manipulation” April 7, since manipulation is what it clearly is. But that said perhaps more than the US talking and taking actions, others like Mexico, being the most affected, as it is their exports that are being displaced, should also do their share of loud screaming and hollering.

Financial Times, if you do believe in small state and open markets, you are certainly not showing it.

Sir in your editorial of April 7, “The UK must look beyond the crisis” you state with some hubris “The Financial Times stands for a small state social justice and open markets”. Sincerely, if that’s so, you’re not showing it.

Current Basel regulations require a bank to have 8 percent in capital when lending to a small business or an entrepreneur but if lending to a government of a sovereign rated AAA to AA- the banks needs zero equity, and this with any lens used is a clear expression of an immense bias in favour of the state.

On November 18, 2004 you published a letter I wrote that said “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

But since that, and after almost some 100 letters more on the same issue; and after you must have seen sufficient evidence of how banks all over the world, and especially in Europe, loaded up on public debt, not once have I seen express your disgust over something that most clearly goes against “a small state and open markets”.

And how would US’s California stand up to EU’s Spain?

Sir Spencer Jakab makes a very valid point in “California and Kazakhstan – just who is the underdog? April 3. Sadly though, he used an oil cursed nation to make his case and that is a bit like comparing apples and oranges.

Having much experience in debt restructurings I am used to look not only at the possibilities of default but also at what could be left “the morning after”. In the case of Kazakhstan, if it goes down the tube, most likely it will disappear as the nation it never really became but in the case of California it will still be California, a vibrant state of the US that is of course unless Mexico makes an offer no one can refuse.

It would be interesting if Spencer Jakab repeated the analysis comparing the California of the US with the Spain of EU.

But the AAA-ratings-bubble was the fault of very few!

John Authers is correct in that “Bubbles are the fault of the many – not the few” April 3, but that is of course with the exception of the AAA-ratings-bubble and which when it blew up caused the current crisis.

That bubble was the fault of only 3 credit rating agencies and of those very few regulators who empowered the credit rating agencies with so much credibility when they made their credit risk analysis of the clients of the banks, determine how much capital the banks should have… even to the extent of allowing the banks to hold a truly minuscule 1.6 percent in capital when lending to a private AAA client and, good grief, no capital at all when lending to a sovereign AAA.

The financial regulators should parade down 5th Avenue wearing their cones of shame

Sir David Roche writes “Watch out for sovereign black holes in the credit universe” April 1, as if the world should have to be warned now.

When regulators came up with the idea that if the sovereign was rated AAA to AA- then your local bank needed no capital at all when lending to its government, compared to the 8 percent required when lending to your unrated local entrepreneur… the future was there for all to see. Exploding public debt and black holes made up by the lack of bank equity. Just like what happened when banks were only required to have 1.6 percent in capital when lending to a triple-A rated company.

Where were the Financial Times and all other experts when their opinions could really have mattered? What percentage of the regulatory experts, or schemers, had an inkling of what was doomed to happen if they regulated the way they did? Does that not tell us something about the quality of the regulators? Should they, as a bare minimum, not be made to parade down 5th Avenue wearing their cones of shame?

A German Eurozone would suffer the reserve currency curse.

Sir Martin Wolf (who seems to be as obsessed with lacking German demand as I confess to be with the lousy Basel regulations for banks) writes “If the Eurozone itself became Germany, I cannot see how it would work”, “Why Germany cannot be a model for the eurozone” March 31.

It would work, with the Euro at 3 dollars, making it much harder to export the Eurozone would suffer like the US from the reserve currency curse... the safe-haven curse. That it would seem impossible for this to occur, on that I agree though.

P.S. I invite you to read what I wrote in Daily Journal of Caracas in1998 a couple of weeks before the adoption of the Euro… it explains what is happening now. http://bit.ly/9nuavy

But Greece should insist they only speak with ECB... for now.

Sir in “Europe manages a wise compromise” March 27 when you quote Churchill in that “the eurozone makes the right decision in the end, though not before exhausting all other alternatives” someone could interpret you as naively believing that the Greece problem has been ended, and we wouldn’t want that, would we?

Since in fact Greece is living an economic impossibility and since IMF represents hair that cannot be cut, if I was Greece I would much prefer calling IMF for help after a restructuring, not before.

By the way, if you were a young Greek and Greece were set upon making good on their debt no matter what, would you stay in Athens or go to Hamburg?

What we need is to face up to the shattered myth of a rational regulator!

Sir here we stand before the ruins of a financial regulatory system that limited its purpose to avoid defaults and put too much trust in credit rating agencies allowing for minuscule capital requirements whenever AAAs were present… and mostly discuss the myth of a rational market? What about the myth of a rational regulator?

Justin Fox commences to hint at what we really need arguing in that “Cultural change is key to banking reform” March 26. I support a drive to simplify regulation and not to complicate them even further as is evidenced by the reforms currently suggested by the Basel Committee and the Financial Stability Board.

Justin Fox, though also supporting simplification, argues this might not be enough, as shown by Lehman Brothers´ faking the balance which is evidence of “ways to subvert even the clearest of the rules”. He is right but let us not forget that Lehman Brothers´ what they were up to was hiding and trying to redistribute the losses while the regulators, pushing so much toward supposedly risk-free land, were creating losses… and that is no doubt a lot worse.

There are many looking for the Holy Grail of the “vision thing”.

Sir, amen was all my initial response to Martin Wolf’s “Back to the future imperils Britain” March 26, but then, thinking about the need of the “vision thing” I remembered something I had written in my book “Voice and Noise”, in which I recounted some of my reactions while an Executive Director of the World Bank.

“Strategic Plan

Suppose the country was an island and that the only boat with which you could leave it for the next thirty years was scheduled for departure today. If you were an ambitious and hopeful 15-year-old who loved his country and that has just read the country’s Strategic Development Plan, would you stay or would you take the boat?

When we read these plans, we are left with two lingering doubts:

What’s in this plan that separates this country from all the rest? As it is obvious that all developing cannot occupy exactly the same place under the sun or find jobs in agriculture, what more is there to lead us—except for an “If it’s Tuesday it’s got to be Tanzania!”

Yes! All the basic necessary tools are included in the plan: macroeconomic stability, brushing your teeth, better governance, eating your breakfast. But, where are you really heading and where is that green valley that will motivate and inspire your efforts?”

It looks like countries share much more than what is believed too many of them seem to be looking for the Holy Grail of the “vision thing”… and Tanzania is not even an island.

Greece would be nothing compared to the big AAA-bomb already dropped!

Sir, of course Goldman Sachs´ Erik Nielsen is correct saying that “ECB must re-examine its dependence on rating agencies”, March 25, since “no country would hand the controls of a nuclear device to a third party”.

But this has really very little to do with Greece as that would be just a minor tactical puff! The real big AAA-bomb already exploded in the subprime heart of the Empire, causing a couple of trillions of dollars in damages and radiating many harmful after-effects that we are just beginning to tally and comprehend.

The AAA-bomb

The resource cursed citizens merit more sympathy and respect

Sir, you have published some quite thoughtful articles on the resource curse lately but, though I tried hard, I could not find one single valid argument why the “Resource wealth need no longer be a curse” in the article by Mats Berdal and Nader Mousavizadeh published on March 25.

The resource curse have millions of people suffering horrors so it is somewhat upsetting to see it being taken as lightly as some acne that could disappear if only instead on private investors it is governments like China or other similar hopefully western states” are to invest in natural resources with long-term commitments dubbed “macro-finance”... resource curse exploiters are just what they usually end up being.

The resource curse is a cancer, for so many... and you just do not go around speaking lightly and self-servingly about easy cures to cancer. Please the resourced cursed citizens merit more sympathy and respect.

Just another oil cursed citizen

But it is also high time to stop rewarding perceived prudence.

Sir John Plender is very right in that “It is time to stop punishing prudence” by treating equity more fair when comparing to how debt is rewarded by the tax deductibility of interests, March 25.

But equally we also need refrain from rewarding perceived prudence, which happens when bank regulators, on top of all those benefits that already accrues to what is perceived as having lower risk, generously (and stupidly) layer on some minuscule capital requirements for banks any time they are involved with anything that can display a good credit rating.

As we have seen, and should have known, that undermines stability even more.

But some excessive virtues might not be a too bad vice for the world economy.

Sir yes, yes and yes I would absolutely agree with Martin Wolf that Germany must increase its demand, if only he could be able to hint at exactly what the Germans could be demanding more of in order to achieve a sustainable growth, “Excessive virtue can be a vice for the world economy”.

Perhaps, taking advantage of their currently quite green mindset, we could convince them to make a helicopter drop of resources on some green projects… that virtue, even though sounding a bit excessive, would perhaps not be a vice for the world economy.

But might the US have become sicker now?

Sir the more divided a nation is, the sicker. I as a Venezuelan should know. That is why I cannot join you in such unchecked felicitation for the US having passed their health bill, “Obama secures his place in history” March 23.

Since the only thing that a nation can truly unite around is something which can easily be understood, a more than 900 pages long bill unfortunately evidences that those involved did not care sufficiently about the health of the nation. That, for us foreigners who are convinced that so much of our descendants’ wellbeing is much dependent on the health of the US, does not make this truly a day to celebrate… and this even if we agree with the reform.

But there are some glimmers for hope though. Having lived in the US for more than seven years now, the only aspect related to health sector reform on which I felt there was almost total consensus about was tort-reform. That according to the bill is now to be studied by individual states, receiving quite modest grants of up to $500.000, with the idea of providing Congress a report on the issue in December 2016 and so, hopefully, then some source of unity could be provided for, but, why the wait?

Yes we need regulatory dynamism... in the right direction of course

Sir I much appreciate Tony Jackson’s call “Let’s get some dynamism into dynamic provisioning” March 22. He is absolutely right, as I have been arguing for more than two years, now is the time to lower the capital requirements for banks, at least for those small businesses and entrepreneurs and though they caused the largest regulatory capital needs had nothing to do with causing this crisis.

What two years? I have been on this much longer

http://teawithft.blogspot.com/2004/08/towards-counter-cyclical-basel.html

Regulators, please do no harm, you’ve done enough!

Sir Viral Acharya in “Why bankers must bear the risk of ‘too safe to fail´ assets” March 18, points out that “though AAA –rated tranches and repo financing are relatively safe, their entire risk is systemic in nature” and therefore [bank] regulations “should be more concerned about seemingly fail-safe assets… rather than worrying much about riskier assets”.

As you must have been able to gather from my many (unpublished) letters making the same argument I believe he is absolutely correct. My deepest concern though is how we all landed in the hands of bank regulators so naive as to believe that in a world of intrinsically coward capitals disaster looms where risk is perceived as high and not where the risks are perceived as low and therefore create conditions for stampedes towards safety and that could dangerously overcrowd even the ex-ante safest haven.

Again, for the umpteenth time, we need for our regulators to be fully aware that their regulations could be the source of the worst kind of systemic risk and, if they’re not, then we are much better off without any sort of regulation.

When selecting the regulators we must reduce the risk of a systemic fault or similarity in their thinking process. Now we have only single-minded gnome clones.

Those who cannot handle a test failing never test

Sir Tim Harford correctly proposes that “Political ideas need proper testing” March 18. What he fails to understand though is that the main reason for the politicians not wanting to perform tests on their proposals is that if they fail they would not know what else to propose and that is as we know a nightmare for these professional besserwissers.

Take as an example financial regulations. The regulators came up with what they thought was the splendid idea of rewarding banks with lower capital requirements if they kept themselves doing more operations deemed as having lesser risk by some external and supposedly independent credit rating agencies. Because it naturally led to the dangerous overcrowding of traditional safe-havens, like mortgages, the results were absolutely disastrous. But the same faulty regulatory paradigm is still applied, only because the expert regulators kept in their places have no clue about what else to do, and that they cannot allow us to see.

But Germany could always make an offer no one could refuse!

Sir Martin Wolf in “China and Germany unite to weaken the world economy” March 17, writes that “Since… Germany… has no chance of expelling any member it disapproves of from the eurozone it would have to leave itself”.

I am not at all sure about that. Germany could always make an offer to Greece and to Greece´s creditors that no one could refuse, especially if things go from bad to worse.

Germany could for instance guarantee 20 percent of Greece current debt in Euros if creditors are willing to convert the remaining 80 percent into New Drachmas at reasonable rates and with reasonable maturities. This would allow Greece to devalue and perhaps even keep the option of returning to the euro-fold at a more propitious moment.

It’s good but please do not call it a financial regulatory reform!

Sir you are correct in what you hold in “Reform is in sight” March 17, namely that “When money is loose and prudential rules are lax, banks will find dubious assets to stuff leveraged-financed balance sheets”. The current crisis is a result of the regulators authorizing banks to leverage up to 62.5 to1, if their appointed risk surveyors, the credit rating agencies, deemed these assets all but dubious.

But precisely because of that you should perhaps better refrain from referring to proposals such a Senator Chris Dodd´s bill as a reform, since it contains nothing that truly addresses the above. To do so might cause the impression that the work has been completed when in fact it has almost not started.

Play it maestros!

Sir I do agree with all of Martin Wolf´s good and absolutely cut clear “Chermany calling”, March 17, except for his last phrase “Forget all the self-righteous moralizing. Try some plain common sense instead.” That call unfortunately carries also a ring of self-righteous moralizing, since what common sense really tells us is that what is on the line is not the avoidance of some truly harsh adjustments, but more the timing of those. Are they to occur during our baby-boomers' time or after we have retired from the scene?

The world has two alternatives, one is to grow itself out of the crisis in the hope that it will find a sustainable economic down the road, the other is to readjust in the hope it can find a political sustainable and decent way to do that. Which way you prefer depends much on your starting point. Deficit countries are naturally more inclined to go for growth, surplus countries less so, if only because they have not the same keen urgency. Again, as usual, little will be done… until, as they say, the shit hits the fan, or the music stops.

Meanwhile I would be glad, and honored, to sit in a chair on deck, next to Martin Wolf, listening to some hopefully not too bad music we can both whistle to.

Why do you have to sound so envious of Germany?

Sir you might be absolutely right but with yours “Europe will not save its way to growth” March 16, you come out, for the umpteenth time in some few weeks sounding just envious of Germany. Though Germany might indeed have benefited more than its fair share from the conditions previous to this crisis there is no way you could blame German frugality for causing it.

If instead you spent some time trying to point out a seemingly viable way to sustainable economic recovery I am most certain that most Germans, or all of those non Germans that lay their hands on Germany’s savings, will gladly help out to take us there. But, just in case let me remind you that sustainable recovery does not seem to have a great chance in a world where China buys even more cars than the US.

Is a bailout the right pillar for a political union?

Sir Martin Wolf is quite clear on that much of Germany´s strength is based on other´s weaknesses and so he reaches the conclusion that in order to be able to manage difficulties such as the one Greece is having within the EU, “Germany must become less German”, “The eurozone crisis is now a nightmare for Germany”, March 10.

This is the classic dilemma, shall we put those students who study hard in the same group as those who do not in the hope that the average becomes better... or might we risk spoiling all by doing just that?

In normal circumstances I would probably agree with Wolf but given there are new recently discovered limits to sustainable growth, like climate change and lack of oil, I am not sure having Germans consume like American points in the right direction.

And then there is also the fact that the Germans do what they do because they´re Germans while the Chinese do what they do because their governments orders what they are to do, and so before China gives in I truly dislike asking the German to do so.

Is a bailout a good pillar for a political union? If the answer is no then perhaps we need to analyze more in detail the real implications of a eurozone breakdown before making our minds up. Whatever, at the end of the day, I would still prefer a German eurozone crisis´ nightmare than the Greek or Spanish version of it.

FT seems to be seriously obfuscated by some European issues.

Sir, in a world where there seems to be no sustainable way of taking average world per person consumption to even a frugal German level, I must say that I find your editorial of March 7, “The burden of German thrift” and in which you actually demean those not consuming as much as they could be consuming, to be outright irresponsible.

Yes, the economic variables need and will sooner or later be realigned so as to take care of the current disequilibria that are more the result of Greece having abused the strength of the Euro than of Germany abusing the weaknesses of the Euro. But, to be so obfuscated so as to prefer the Greek economic model to the German one points to some very serious underlying European issues in FT, and that I sincerely hope they can sort out for the good of all.

Naïve regulators went to sleep like babies.

Sir in “Do not rush to switch off the life support” March 4Robert Skidelsky and Marcus Miller refer to “flaws in regulatory philosophy that stemmed from the belief that the banks could safely be left to regulate their own risks”. That is simply not true!

The fundamental flaw was that regulators replaced the hard-work that financial supervision ensues with a naïve belief in some capital requirements based on risk they concocted and in the capability of some credit rating agencies to adequately measure risks… and then went to sleep like babies.

Had they left the banks to their own design and not influenced them with absurd low capital requirement for what was perceived as having low risks of default... something else might have happened, but not this crisis.

What we need more than anything is to get rid of the current bunch of regulators who have entrenched themselves in the almighty and to no-one responsible Basel Committee and which’s has in the Financial Stability Board its first line of defence.

If you can pay out on a credit default swap you are not naked.

Sir Wolfgang Münchau opines that it is “Time to outlaw naked credit default swaps” arguing that “the case for banning them is as strong as that for banning bank robberies”, March1. I must say that the simile provided is quite unfortunate not only because it is not more bank-robbery than the robbery that can be carried out by the bankers inside a bank but also because though bank robberies have always been banned that has not prevented them from happening.

The real risk with naked credit default swaps is that it permits someone to collect upfront the insurance premiums without necessarily having to capacity to pay up when the incident occurs, in other words the counter-party risk. If all those who are now selling a five years CDS contract covering Greek Bonds for €394.000 per year could immediately pay out the €10m they had obliged themselves to do then nothing would have happened except for a redistribution of moneys… and of course there would be no robbery involved.

In this respect we should not outlaw the CDS but instead assure these CDS are traded through clearing houses that apply rules which really guarantee the payouts, and make sure that our banks are required to have so large capital requirements against their CDS positions so as to remain banks instead of becoming bookies. AIG went wrong not because of its bets but because of the unlimited credit that because of the AAA-ratings it received as a bookie.

Sincerely, what could be more naked that the fact that our banks can hold zero capital when lending to sovereigns rated AAA to AA-? That has helped to cause the huge public debt overhangs much more than any consequential CDS trading has done and so, if something real is to be done about it, let us go for the jugular.

But I’d better whistle in the dark or sing too!

Sir there we are, sky-walking on a slack-wire over a high ravine in windy weather with no safety net under us, and Martin Wolf comes along with his timely advice telling us we could hurt ourselves by falling on either side, “How unruly economist can agree” February 26. Thanks! Now, how are we to remain calm?

Wolf recommends a very active use of a balancing pole which on one side (hand) has the closing of “structural current deficit relatively rapid”, to keep our faith in the sustainability of the public debt, and on the other, “credible temporary offsets, particularly via spending on investment and tax holidays”, as a stimulus for the economy.

Sounds swell but, since I am absolutely not as daring as a Maria Spelterine, I’d better also start doing some whistling in the dark or singing to stop me shaking like a leaf. “I’m singing in the rain.... what a glorious feeling...”

Bank regulators need a better understanding of risk

Sir Martin Wolf holds that “The world economy has no easy way out of the mire” February 24. Who could argue with that... except perhaps in terms of it being an understatement.

Wolf holds that, ceteris paribus, we will not get out of the crisis unharmed and that either through a bigger financial crisis in the future or the “the fiscal rope” running out we will ultimately have a “sovereign debt crisis”. No doubt he is right. And as the only possibility for avoiding collapse he argues, quite correct again, having the world to grow out of its debt overhang.

But what I have not been able to convince Martin Wolf about, no matter hundreds of letters is that to grow out of the debt overhang we need a completely different paradigm with respect of how we regulate our banks. The current one, based exclusively on risk-avoidance, will not take us anywhere and on the contrary will just help to reinforce the dangerous fairytales that there are enough safe-havens and AAAs to go around for all, and that it is in safe havens you can generate real growth.

Martin Wolf quotes William White former chief economist of the Bank of International Settlements referencing “the explosion of the balance sheet of the financial sector and increase in its exposure to risk” as one of the imbalances that led to this crisis.

If our bank regulators were more capable of performing what Arthur Koestler labelled as bisociation they would have long ago discovered the irony in that the explosion of the balance sheet and the exposure to risk that occurred and failed was almost all in supposedly risk-free AAA rated operations.

Smoking more so as to be able to quit smoking more sounds like the wrong way to go.

Sir Wolfgang Münchau makes reference to a paper co-authored by the chief Economist of the IMF that proposes increasing the inflation target from 2 to 4 percent and is correct when titling the article “Inflation must not become a moving target” February 22.

To talk about higher inflation target so as to have more room to manoeuvre is like increasing the cigarettes smoked just to make it easier to cut the number of cigarettes smoked.

We could perhaps understand if what could be labelled as a “pro-growth” proposal had come from a development institution like the World Bank, but to hear it come from the IMF just evidences the utmost confusion this financial crisis has caused.

Also defaults, restructurings and high inflation are, though nasty and unwelcomed, quite effective tools when taking care of debt overhangs but, that said, what you least do is to preannounce them since that allows for the build-up of defensive positions that will only make the final battle so much bloodier.

Obama heads in the absolute wrong direction!

Sir Tom Braithwaite reports “Obama to renew call for stricter capital levels” February 19. This is just what the US, and the world, least need now.

Allowing the private banks to help out the economy by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is much better than having government bureaucrats do the lending or decide on fiscal spending.

A dollar spent by a bureaucrat is a tax dollar spent but a dollar lent by a banker does not necessarily mean a future tax dollar spent and this is what anyone concerned with a fiscal deficit should know by now.

The flaws of the euro were part of the plan for a Europe

Sir in November 1998 I expressed clearly my surprise on Europe entering a monetary union before being a political union and especially about there not being a single word on how to proceed if any country wanted to retire from the Euro. But even though the article described exactly the difficulties that are now being confronted I titled it “Burning the bridges in Europe” because I felt it was an effort to bluff history and generate the conditions that would make a political union unavoidable.

That is why I do not agree with Samuel Brittan when he argues “Greek spotlight on a flawed project” February 19. All possible risks with the euro must have been known by its promoters, when even I knew them, and so this euro project was launched with the clear purpose of creating a political union... and, whether it fails or not, is yet to be seen.

Do I hope the burning of the bridges produces the expected results? Of course I do? Do I believe they will? I am not sure... but it is sure giving Europe a good run for its money.

Reflect on the dangers that the very real possibility of a bad global coordination could signify.

Capital is intrinsically coward and loves anything triple-A rated. Therefore, when on top of this natural love, the regulators awarded the triple-A rated additional benefits in terms of these generating much smaller capital requirements for banks... the demand for triple-A rated instruments soared. As should have been expected the supply mechanism of the market started to fabricate triple-A rated instruments in enormous volumes... something that should be by definition anathema to a low risk.

There were of course many other economic imbalances that aggravated the final result but this, the excessive belief in that risk should and could be avoided, is why the current financial crisis came to happen.

In February 2000 in an article titled “Kafka and global banking” published in the Daily Journal of Caracas I wrote: “The risk of regulation: In the past there were many countries and many forms of regulation. Today, 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.”

But 10 years later when the above has unfortunately been proved to be too true, Dominique Strauss-Kahn of the IMF, in “Nations must think globally on finance reform” February 18, keeps on going as if nothing has happened writing that “the work of [the Basel Committee and the Financial Stability Board] must be accelerated to harmonise rules that limit excessive risk taking”.

IMF, please, before going forward, reflect more on the dangers that the very real possibility of a bad global coordination could signify to the world.

Are there not any other routes and, if not, when do we get to the point of no return?

A dollar spent by a bureaucrat is a dollar spent but a dollar lent by a banker does not necessarily mean a dollar spent.

I believe that allowing the banks to help out the economy by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is much better than having government bureaucrats trying to do it directly.

And it is because calling for the first available tool, fiscal stimulus, might make it more difficult to identify alternative options that I mostly differ with Martin Wolf when he states his case for the immediate short term need of fiscal looseness, “How to walk the fiscal tightrope that lies before us”, February 17.

And then of course is the fact that no matter how sure you are of the direction of where you are heading, sooner or later, one reaches the point of no return... and that must make a difference. Where is that point in this fiscal walk?

The small businesses are unfairly discriminated against by the regulators

Sir, Richard Milne in “The cogs are clogged” February 16 writes about the difficulties of the smaller enterprises to secure the funding they need but fails to even mention the regulatory discrimination they are exposed to.

One of the banks’ historical responsibilities has been to nurture the small businesses until they’re big enough to enter the capital markets, but that ended when the regulators, acting entirely on their own, decided that the most important role for the banks was to avoid taking risks and to that effect set up a system of capital requirements dependent the risk of defaults as perceived by the credit rating agencies.

In effect a bank when doing business with one of those entities that because of an AAA rating should not even need the assistance of the banks must put up only 1.6 percent in equity while, when doing precisely what it is supposed to do, helping the small businesses, it is required to have 8 percent in equity.

At this moment, when all the faulty AAA ratings ate up all the capital of the banks, those small businesses are discriminated more than ever, by this regulatory double whammy of not only having to pay for the additional risk premium the market ordinarily charges, but also having to pay the costs of the higher bank equity requirements.

That this issue of unjustifiable risk-discrimination is not among the first things currently discussed when considering financial regulatory reform is truly mindboggling to me.

We need more solidarity among the free.

Sir Gideon Rachman rightly calls China´s manufacturing sector a headache to Mexico naming it as one of the reasons “Why Mexico is the missing Bric”, February 16. But to then jump to the conclusion of Mexico´s “economic underperformance” hides the fact that China´s competitiveness is not exclusively based on economic performance but on foreign exchange manipulations. For a still so much communistic country like China it is much easier to keep their currency artificially low than for a country like Mexico that, no matter their Carlos Slim, is an immensely freer country.

The free countries need to show more solidarity among them in order to defend themselves from the not so free.

But a piñata is made to be broken!

Sir James Rickards’ “How markets attacked the Greek piñata” February, 12 represents a truly provocative piece of advice… until we run into the difficulties of defining what risks should be allowed as insurable… you see, a piñata is made in order to be broken… and so perhaps we need to prohibit anyone not having a direct interest in Greece to lend Greece the funds that loads their piñata... is that it? Also, if the Greek piñata breaks, who is to tell us with absolute certainty that it is not Greece that would most benefit from it?

Yet, again, it is indeed provocative to somehow go down this route of allowable speculations, and at least prohibit the profiting from others misery, like having an interest in people defaulting on their mortgages... though I much prefer the Danish principle of awarding mortgages with such a care that no one really dares to bet against them.

What is ‘socially desirable’ to regulators can be very ‘socially undesirable’ to us

Sir, Sir Martin Jacomb holds that “views on what activities are ‘socially desirable’ should play no part in the regulatory structure” but fails to see that this is exactly what happens when regulators discriminate bank capital requirements based on what is socially desirable to them as regulators, namely that of reducing the risk of bank default, “Hurried reforms will not get banks lending” February 11.

I ask again, for the umpteenth time, what is socially desirable about banks not defaulting if banks do not perform as society should have reasons to expect? Personally I have always argued that the lack of bank failures points to a lack of needed risk-taking, and to anyone who counters with pointing at the many bank defaults in this crisis I tell them these were not the result of bank failures but of regulatory failures.

If bank regulators had not favoured with some truly minuscule capital requirements those operations that they found ‘socially desirable’ having triple-A ratings; or empowered the credit rating agencies way too much, this very ‘socially undesirable’ crisis would not have happened.

But of course, with Sir Martin Jacomb’s general point on the importance of getting the banks to lend, I totally agree. To me it is truly surrealistic to observe how much leeway we are willing to give government bureaucrats to spend our children’s future taxes, when compared to how much we demand the regulators to rein in the banks.

Mexico should be up in arms against China and its weak renminbi.

Sir Arvind Subramanian, based on Dani Rodrik’s estimates, makes a solid case for how “It is the poor [emerging countries] who pay for the weak renminbi” February 4. The argument gets to be even clearer if using specific examples.

Mexico, should be USA’s China, had it not been for the fact that China’s political system makes it so much easier to manage a weak renminbi than Mexico’s a weak Mexican peso.

Please tax me too with this too big to fail tax!

Sir as an Executive Director of the World Bank during a risk management conference in 2003 I told the regulators “Knowing that the larger the banks are the harder they fall on us if I were a regulator, I would be thinking about a progressive tax on size”.

What I now see reported by Patrick Jenkins and Brooke Masters in “US impetus drives Bank regulators” as a tax of 15 basis points on assets more than $50bn, is not what I had in mind. 15bp for what seems to be the right of officially being termed too big to fail, clearly earning a triple-A rating is ludicrous, most small businesses or entrepreneurs, would gladly pay much more if given the chance.

To understand the magnitude of the tax we might use how the bank regulator seems to value the difference between an ordinary fallible business and a triple-A rated entity. When lending to the first, a bank is required to have 8 percent in equity while when investing or lending to anything related to a triple-A rating it is only required to have 1.6 percent. Supposing the cost of bank equity is 5 percent more than the cost of deposits, then the previous difference of 6.4 percent in equity amounts to a cost difference of 32 basis points; and which strangely enough the regulator feel should benefit those already benefitted by being perceived as having low risks and affect those already affected by being perceived as more risky.

How much less would a bank deemed as too big to fail be required to pay for its funds when compared to the rest of the humanly fallible banks? If we are to tax the too big to fail banks is it not supposed to hurt them instead of benefiting them?

Without understanding the regulatory arbitrage one cannot get the real measure of the banks

Sir John Gapper in “Volcker has the measure of the banks”, January 28, quotes Viral Acharya, a professor at New York University’s Stern School, saying that “the crisis was caused by a ‘general underpricing of risk’ that led many banks into taking on more trading and investment risk to boost their returns”.

“Underpricing of risk”... by the banks? No! Who really underpriced risk were the regulators when they allowed the banks to hold less capital when “holding triple-A mortgage-related derivatives”, and which thereby artificially increased the returns of these assets. In other words the banks were receiving what they perceived as good returns only because of regulatory arbitrage.

I am truly amazed how, now soon two years into the crisis, some experts can still not see what some of us knew was going to happen, before the crisis happened. Without understanding the role regulatory arbitrage had in the crisis, forget about Volcker, Acharya, Gapper or anyone else getting a grip on any real measure of the banks.

First reform the regulators!

Sir I agree fully with Martin Wolf when in “Volcker’s axe is not enough to cut banks to size” January 26m while referring to the latest reforms of banks proposed by Obama presumably upon suggestions of Paul Volcker deems these to be “in important respects, unworkable, undesirable and irrelevant to the task at hand.”

As Wolf implies, what seems to have been ignored is that huge financial losses can cause huge economic damage independently of whether the government has guaranteed them or not… and so having some small capable of failing banks surviving when a huge shadow sector, formal or informal, goes bankrupt, can also provide for calamitous economic effects and in fact even create similar fiscal problems if tax bases are eroded.

The number one golden rule financial regulators should apply is that of “doing no harm” and that was exactly the golden rule regulators violated when, with their silly capital requirements for banks based on risk, they empowered too much some few human fallible credit rating agencies to presumptuously serve as the global experts on risks… which caused the world to go over the lousily awarded mortgages to the subprime sector cliff.

The proposed reforms do nothing to solve the problem above; which evidences that the first and most urgent reform that is still required is the reform of the regulators. Throw out the current bunch of them! We cannot afford having the needed reform of the financial regulations hijacked by those wishing to hide their blame in causing the crisis.

Regulations should not confuse the market.

Sir you say in “A declaration of war on Wall Street”, January 22, “The government’s key policy lever should be to make sure that institutions hold enough capital to reflect the risks that they run and the threats that they pose to the rest of the financial system.”

You are right about “enough capital” but very wrong when you expect these “to reflect the risks” because that is exactly how you drag the regulator into the type of risk discrimination game that provided the wrong set of incentives by artificially increasing the attraction of the AAA rated instrument and which led to the current crisis.

Set a general capital requirement for all type of activity of banks, which could fluctuate somewhat depending upon where in the economic cycle we find ourselves, and then let the market act upon that. Do not allow the regulators to confuse the market with their risk discriminations.

Other financial reforms are much more needed than rebuilding of Glass-Steagall styled walls.

Sir “Obama’s bank plan is a start” by Viral Acharya and Matthew Richardson, January 22 though describing in much detail the “highly geared bet on credit, especially tied to securitised pools of residential non-prime mortgages” misses out so completely on putting forward the two main causes for the disaster that one almost become suspicious about the intentions.

First, the explosion of the “securitised pools of residential non-prime mortgages” happened because those securities achieved AAA ratings and what can be better than to sell long term high interest mortgages as AAA safe investments. A 30 year 11 percent mortgage of US$ 300.000 if sold to yield 6 percent is valued at US$ 510.000 providing a US$ 210.000 immediate profit.

Second, for the banks to hold these AAA rated securities on their books they had, courtesy of the regulators to put up only 1.6 percent in equity, compared with the 8 percent of equity required when lending to small businesses, entrepreneurs or ordinary citizens. No wonder that “When the market and liquidity risk materialised as a result of the collapse of housing prices, they had no capital cushion to bear it”

And what have those causes for the disaster have to do with “the lack of Glass-Steagall-style restrictions”? Almost nothing!

And now I can’t find the link to this article in FT!!!???

Here's another reference to that article, two days later.

International coordination is not necessarily good coordination

Sir Gillian Tett writes “during the past few months, dozens of faceless bankers and bureaucrats have been scurrying around, in joint international committees, trying to hammer out regulatory solutions to matters such as bank structure, capital charges or derivatives regulation. And as they have done this dull, complex work, their guiding mantra has been the need to act in a coordinated fashion”, “Pitchforks take on Terminators”, January 21.

But the world does not need dozens of faceless bankers and bureaucrats hammering out dull and complex regulatory solutions in closed smokeless rooms. That is exactly why they can concoct such utterly silly ideas like allowing banks to hold only 1.6 percent in equity just because a credit rating agency opines someone is worthy an AAA rating, and by this effectively authorize 62.5 to 1 bank leverage.

If it is this kind of international coordination that might be endangered by the politicians, then this can only be a welcomed evolution. Just let us make sure the pitchforks go after the Basel Committee, the producers of the financial “Terminators”.

The eurozone is heading towards a marriage of convenience... at gunpoint

Sir Martin Wolf’s “The Greek tragedy deserves a global audience”, January 19, makes it perfectly clear that, with respect to the eurozone, its members now face having to make a more profound commitment... or get off the pot.

It will be interesting to observe how it will all play out and though I prefer not to lay any bets on any outcome, if I absolutely had to do so, it would be on first Greece defaulting and thereafter the rest will scramble to enter a marriage of convenience... at gunpoint. You see the fact that “stuff happens” is not worth that much until the stuff has really happened.

The real riggers were the regulators and perhaps now the taxman

Sir Philip Stephens in “How the big banks rigged the market” January 18 considers that the reason for the huge profits of some banks is that “they have been operating as natural oligopolies”. Given that much of the strength of the most profitable banks did derive from favourable regulations, the term unnatural oligopolies might describe better what really happened, in which case the real riggers were the regulators.

And let us also remember that one of the largest sources of profitability over the last years has been that of packaging high risk loans and, with a little help of their friends the credit rating agencies, selling them off as low risk loans, and this has really nothing to do with how the market is structured.

To now try to correct for the above by imposing taxes on the banks, sounds like rigging it also in favour of the taxman. The real question we have is... when will the banks be rigged in favour of the economy growth they are supposed to assist us with? Never?

We need a new morning, before darkness sets in!

Sir Gillian Tett holds that “Deleveraging out of the debt mire will be an unsavoury task” January 15 mostly because “it remains a very open bet whether western voters will accept austerity without a backlash”.

Good for her, that kind of opinions are exactly those needed in order to start to prepare a debt resolution plan that makes sense for future generations... since what least makes sense is to hang on to something unsustainable just because that is the right thing to do. Anyone proposing the "hang on and let’s work it out" route should first establish how much of a tax on his wealth he is willing to contribute for such a dignified purpose.

The value of a clear morning no matter the storm during the night should not be underestimated. I would prefer my children to work for their tomorrows than to pay for our yesterdays. And if the young find some resources to take care of us baby-boomers then that would be a much welcomed and appreciated bonus.

Who puts obscenity limits on the taxman’s bonuses?

Sir in “Obama attacks ‘obscene bonuses’” January 15 it says that the President pledges “to recover every single dime the American people are owed” from the government support given to the banks.

Sounds fair, but unfortunately he will not be recovering those amounts from those who made the money on the crisis, that’s long gone now, but from the future depositors and borrowers who will have to pay for it all by means of receiving lower returns and paying higher interest rates.

Our banks should be efficient financial intermediaries, not fiscal cash-cows, and the government should collect its taxes only from the final economic growth that banks have helped to foster. It is indeed worrisome to see how, instead of correcting the regulatory actions which has helped the banks to generate monstrous margins the taxman seems more set upon participating in the feast.

Iceland’s puts no end to this type of sagas

Sir I agree with Martin Wolf that having to pay for the Icesave cost the way it has been presented by the British and the Dutch governments is extraordinarily onerous and should not be imposed on future generations of Icelanders, “How the Icelandic saga should end” January 15.

Unfortunately I do not believe that the easier way out that Wolf hint at mentioning paying 90 percent of that money with the assets of Landsbanki is feasible as I am sure there has to be many other creditors lining up for the same purpose.

If I was Iceland, I would not try to solve something insolvable and would mostly at this moment just buy time, in the certainty that Iceland’s recent financial saga will soon be just another saga among many other similar tragic sagas.

No one likes being told they are laggards

Sir Joshua Chaffin reported on January 15 that Günther Oettinger, Germany’s nominee for the European Commission concluded from what happened in Copenhagen during the discussion on climate change that the European Union isn’t big enough for ‘world authority’. Nonsense, even a butterfly has influence if it knows how where and when to flap its wings.

In order for Europe to gain more influence in environmental matters it needs to get rid of that we are greener than thou and besserwisser attitude because the rest of the world, when trying to open up a space for the environment in the midst of so many other urgent main-street problems, surely must find it quite fastidious always being told by the Europeans that they are irresponsible laggards in being green.

When Oettinger is then quoted saying “We need a paradigm shift and to explore solar, wind, ‘smart grids’ and other alternative sources of energy” in my mind he is just proving my point. Climate change needs to be fought with more sturdy global tools and not only with European toys.

How do we make sure there is no hanky panky?

Sir in reference to your “Apocalypse later” January 8 may I draw your attention to a recently released Consultative Document by the Basel Committee titled “Strengthening the resilience of the banking sector”. This document in my opinion evidences that the regulators refuse to assume their responsibilities or to accept that their regulatory paradigm of different capital requirements for different “perceived risk” is utterly faulted, and keep on digging us ever deeper and deeper in the hole of us mortals understanding less and less about how our banks are regulated.

Among other the document states that “The Committee is introducing a global minimum liquidity standard for internationally active banks”. This would mean that this category of banks will now have a different set of updated regulations that will imply they are especially safe and so these banks will most certainly need to pay less for deposits and equity, and so these banks will now enter almost formally belong to the “too super big global banks too impossible to fail”.

Sir, how on earth is the world at large supposed to make sure that no hanky panky is going on between the now too super-big banks and the too global and too little accountable to anyone Basel Committee?

The monsters that thrive on hardship haunt my dreams

Published in FT

As a son of a Polish soldier who had to endure more than five years in a German concentration camp, I also connect to Martin Wolf's feeling that the civilisation we pray survives for our descendants is indeed at stake ("The challenges of managing our post-crisis world", December 30).

In this respect my worst nightmare is that unmanageable Versailles-type public debts will become fertile ground for those monsters that thrive on hardships, and that is why I often wake up wishing that the US, instead of taxing and inflating itself out of an almost impossible problem, would simply do an Argentine form of restructuring such as offering 10 cents of the new dollar for each 100 cents of old dollar debt, hand out some Dollar II to its citizens and then take it from there. I believe not only that the world would still accept Dollar II as it has little other choice but also that China would then wake up and adjust . . . you see, governments can't stop dancing either while the music plays.

Once the air is cleared then we might have a better chance of tackling other challenges to civilisation like the climate change threat. As to the banking system, there is nothing that could not be solved by asking ourselves the simple question about what our banks are supposed to do for us, because, unfortunately, that is the question our current very poor set of regulators have never asked themselves.

Happy new decade!

Do not help the regulators to get off the hook.

I have always thought that bank regulations should primarily focus on stimulating the banks to take the kind of risks that are more useful to society, and so that, when something goes wrong, as it will do sooner or later, that it has all at least been worthwhile.

Instead the Basel Committee focused on trying to exorcize risk-taking from the banks so as to guarantee bank stability, something that per se does not serve society much; by allowing for some minuscule capital requirements for banks as long as they lent to or invested in operations that the credit rating agencies perceived as risk free… in other words:

Sheer lunacy! There is nothing to be obtained by giving those already blessed with being perceived as having low risks the additional advantage of generating low capital requirements for banks.

Sheer lunacy! Since capital by nature is already too coward, assigning special preferences to the “safe-havens” guaranteed these were to become overcrowded and create a new set of risks.

Sheer lunacy! Only some extremely gullible and naïve regulators would be unable to see that beside the fact that the credit rating agencies, composed by humans trying to measure hard to define risks were bound to go wrong, sooner or later, that with these regulations they were being set up for capture by many interested parties.

And this is why though I absolutely agree with much of Martin Dickson’s “The bankers who wouldn’t say sorry: a cautionary tale”, December 29, I completely disagree with it as a whole, since by pointing excessively at the bankers it might help the regulators to get off the hook.

Do we really need regulators who cannot define a purpose for their regulations?

Sir Simon Gleeson writes that the “hardest” is for the regulatory system is “deciding exactly what you are trying to achieve, “Regulatory systems do need regular pruning” December 28.

Gleeson is absolutely correct and if in need of evidence the current bank regulations produced by the Basel Committee, suffices. In these there is not one word on the purpose of the banks… because stability or better phrased the avoidance of excessive instability cannot of course per se be an objective but only a desired feature.

When having to embark on financial regulatory reform there is no better place to start than defining the purpose of the financial sector, but somehow it seems no one wants to do that… I wonder why?

Banker’s fears should pale in comparison to ours.

Sir Gillian Tett writes “when banks have made loans to western sovereign nations – or simply bought their debt, in the form of bonds – they typically do not post big reserves, since such debt is deemed ‘zero risk weighted’ in bank regulatory rules, and most western countries carried a triple A credit rating”, “Sovereign risk comes high on banker’s fears for 2010” December 22.

As I have written to FT so many times over the years now, though it has been blithely ignored, the banker’s fears should pale in comparison to ours as citizens, seeing that banks are allowed to lend to the State (which is what “sovereign nations” really means) without any capital requirements while, when lending to an ordinary citizen it must find at least 8 percent in equity.

Is not the State powerful enough without this regulatory favouring? Can’t you see it? Our banks are being nationalized through their balance sheet... or what would you call it when the bank holds many times their equity in government obligations?

I never held FT to be a procommunist paper but contemplating it’s unbelievable silence on this issue I am quite sincerely starting to have my doubts.

http://www.theaaa-bomb.blogspot.com/

There should be a growth market in tea-parties.

Sir Gillian Tett is too forgiving when she describes as a “perverse situation” that “the Europeans banks are now net sellers of insurance against the chance of their own governments going into default – even though those same banks are implicitly backed by those governments”, “CDS market needs reform if more drama is to be avoided” December 18.

It is worse than so, it goes to the heart of what could be deemed to be an immense collusion of interests between big governments and big finance, which starts with the fact that banks in many countries, courtesy of the regulators, are required to hold zero percent in capital when lending to the government and therefore leveraging even more its power.

That an ordinary citizen’s borrowing gives cause for an 8 percent or more capital requirement for banks while the same lending to the governments cause a zero requirement must be a dream come true for any government. There seems to be a growth market in tea-parties all around the globe.

Sheer regulatory lunacy!

Sir Anousha Sakoui in “S&P in rating threat to covered bonds” December 16, writes that these bank issued will be rated among other based on “the likelihood of government support”. Given that governments appoint financial regulators who now use the credit risk ratings issued by the credit rating agencies to decide how much equity banks need to have, presumably so that the banks won´t fail and the governments will not have to bail them out, it is absolutely crazy that the credit rating agencies when rating the risk also measure the government´s willingness to bail out the bank. Is this dangerous and incestuous circle of opinions not sheer lunacy?

Let all citizens of all countries in on the climate change human race challenge!

Sir Jeffrey Sachs “Hold the rich nations to their world” December 16 clearly views fighting against climate change as a government issue. But, if the threat of climate change is as serious as told and which from what I at least have been able to see with my own unscientific eyes I have few reasons to doubt, then clearly the only way to have a chance to succeed in that battle is by making it a citizens issue.

In this respect when Jeffrey Sachs now rightly complains in respect to climate change that “rich-country leaders want to sneak by on minimalist commitments… not consistent with global needs or international commitments” similar to what has happened to “rich-country pledges on development aid”, he would do well reflecting on whether the citizen of rich countries were sufficiently involved when making those commitments… or does the need of participation and ownership that is so much preached on by the development community only apply to poor countries.

Also these days we heard comments from the US with respect to the difficulty of monitoring Chinese commitments on containing carbon emissions, but if in this case we can’t understand that the only real effective climate change monitoring that can be done in China or in any country is that which is performed by their own citizens, then I believe we have already lost the battle.

Let’s hurry back to the drawing board and start talking with the people of the world and not the Jeffrey Sach’s or the governments of the world… pas la même chose.

Who is guilty of having seeded expectations of climate change reparations?

Sir Christopher Caldwell is right in denouncing that “many of the developing world’s representatives have come to Copenhagen seeking reparations” Climate change, the great leveler”, December 12. What we must realize though is that these representatives did not develop these expectations on their own but that these were certainly seeded there by some reparation intermediaries or vultures. There is no doubt that we should try to eliminate poverty in the world but we must have clarity in what are the prime objectives with respect to our earth-environment.

It would be an interesting challenge for any journalist to investigate the origin of the idea to open up the flank of wealth redistribution in the environmental battle. It should be possible to do so and it would also be very valuable for all to do so, especially for those now bearing groundless expectations and who now are bound to be disappointed.

Never forget who really paid for the bonuses.

Sir, on your front page Patrick Jenkins, Brooke Masters and Francesco Guerrera reports on the “Banker’s fury at UK bonuses supertax”, December 10. Because there could be some shady collusion of interests that could want us all to ignore it, it might be convenient to remember that the real payers of those bonuses, or taxes, are the clients of the financial intermediaries. If we are going to have true fiscal transparency then perhaps the supertaxed part of the bonuses should be returned to the clients of the banks, and if so needed, taxed there.

Do the poor not have the human right to share the obligations of the human race?

Sir Jeffrey Sachs in his letter “Poor pay for the sins of the rich” December 8, writes about “Pushing the developing countries into a climate accord based on tiny sums today and vague financial promises for the future”. It makes one wonder about what is wrong with the developing countries doing what they feel they should and can do in fighting climate change without being paid anything. Do they not have the human right to help out when the human race and the world is faced with a challenge?

It is all part of the same preaching that has it that the poor should not have to pay for the water when having a water meter installed is perhaps the best chance the poor can start feeling that he is becoming a citizen.

Instead of offering the poorest of the poor in a developing country a payoff I rather see them shaming the rich and poor in developed countries into taking on their full share of responsibilities.

Also much more honest is to tell the poor in the developing countries that they are “on their own” instead of giving them some illusions about that some champions will convince the world to help them out. Or is Jeffrey Sachs willing to give the poor his word that he will be successful?

And frankly I cannot think about something less constructive to get us working together as the indigenous to the earth all we humans are, than phrasing the funding of the efforts needed to combat the climate change threat in terms of it being “a compensation for damages caused mainly by the rich world”.

Does this mean that I object to Mr Sachs motives and that I disagree with all he does? Of course not!

To solve climate change, concentrate on that and shy away from green pork and fighting injustice, those are other battles.

Sir, you end your editorial “Copenhagen: we can´t risk failure” December 7 saying “The forces of negativity and scepticism, whether self interested or naïve, must not prevail if we are to reduce the threat to the planet´s future without sacrificing future economic growth”. Do you mean that if reducing the threat to the planet´s future implies that we have to sacrifice future economic growth that then we should bother? Can´t you see that trying to achieve multiple objectives is one of the ways of risking failure?

One of the problems of finding a solution to the threat of climate change is that like many legislative process, many are interested in adding their own (green) pork to the bill; some by creating business opportunities, others by trying to foster global justice. When will we have a climate change congress that just concentrates on what it takes to insure solely against climate change?

There is still a lot learning to do about the real meaning of “getting out of the way of markets”

Sir Martin Wolf writes “Gone, too, must be the assumption that governments should merely get out of the way of markets”, “A weakened Britain enters the post post-Thatcher era”, December 4.

Absolutely not! When we see governments ordering the banks to hold significant amounts of “high quality” government bonds and allowing them a zero percent capital requirements when lending to the government, as compared to the 8 percent required when lending to an ordinary citizen, we cannot but wish that the governments and some financial commentators someday learn “what getting out of the way of markets” really means.

And also, when Wolf suggests that we should not suppress markets but instead support them and guide them, I can´t keep but wonder on what Margaret Thatcher would have had to say about the guiding part.

Is communism being infiltrated through financial regulations?

Sir José Maria Brãndao de Brito, in “New rules on liquidity could do more harm than good”, December 3, refers to how “the Committee of European Banking Supervisors, aim to raise the quantity and quality of liquidity buffers by forcing banks to hold significant amounts of ‘high quality’ government bonds”.

If we add to that the fact that the current Basel regulations permits banks to lend to the government with a zero percent capital requirement, compared to 8 percent when lending to an ordinary citizen, there are reason to suspect that some are trying to smuggle in communism through financial regulations. Are they building a new wall? With governments and their special triple-A rated comrades on one side of it, and all the rest of us the rabble or Pöbel on the other?

http://www.theaaa-bomb.blogspot.com/

In Copenhagen, let us hope they finally make up their minds, and, if it is serious, scrap the cap and trade and fully enlist the poor

Sir though I agree with much of Martin Wolf’s “Why Copenhagen must be the end of the beginning”, December 2, what I most would like to see happening there is for the world to finally make up its mind whether it is going to treat climate change as a real threat or not. A wishy-washy middle ground that creates the false impression that something is done is the worst place to be. For instance, if we decide that we are going to act as we were in any real danger, then probably the first thing to do would be to scrap the whole cap and trade divertissement, roll up our sleeves and go whole heartedly for the carbon taxes which Wolf so correctly prefers.

But, where I really disagree with Wolf is when he mentions that “the cost should fall on the wealthy. This is as much because they can afford it as because they produced the bulk of past emissions.” Of course the wealthy have larger shoulders but, if this is really serious, then every human has the duty, and the right as a human showing solidarity, to push as hard as he can, with whatever he has, without any consideration to other issues. The climate change threat shall not be taken as a threat against humanity similar to the one depicted in the movie “Independence Day” and in which an American president takes an active part saving the world… as a fighter-pilot. This is no matinee show. The poor are probably among those to be most affected by climate change and so please, whatever, do not tell them that the wealthy will take care of it, especially when you know this isn’t so.

Is Greece becoming Germany´s fart-payer?

Sir Wolfgang Münchau writes “Greece can expect no gifts from Brussels” November 30, and which makes us reflect on what it would have looked like if for instance Greece still had the Drachma and Germany the Deutsche Mark. 

In such a case Germany would have had to be doing the Chinese styled currency weakening on its own instead of having Greece and others euro-black-sheep average the Euro down for them. And clearly Greece would be able to devalue and use that politically more friendly approach of being able to inflate yourself out of the problems, instead of having to impose Germanic discipline on their citizens. Come on, does not Greece deserve a little gift?

Rumours have it that in old Venezuela the fine ladies of society were always accompanied by a small coloured boy whom they could hit on his head whenever a lady farted. These boys were known as fart-payers (paga-peo). Could it be that Greece is becoming Germany´s fart payer?

In a world with reduced lebensraum it might be time for the Dollar II

Sir Jeffrey Gartner tells us “We must get ready for a weak-dollar world” November 30. It sounds like wishful thinking since what we need to get ready for is for a weak world, since it looks like the business model of most countries is out of synch with so many realities, among others the diminishing lebensraum that energy scarcity and environmental threats are signalling.

Also, when Gartner writes about a multi-currency framework as an alternative to the dollar, but says that”this regime will take time to devise” this is just another way of ignoring that, if we do not want to use gold, the only alternative to the dollar, for the time being, is the dollar II, to which the old baby-boomer dollars can be converted at a rate of ??? The dollar II would be a more transparent and perhaps even less socially traumatic than that of “camouflage a slow-motion default” by means of inflation.

What a world! A citizen admonishing monetary authorities “to meet secretly”, “perhaps between Christmas and New Year, to start discussions... (to avoid spooking the markets)” Has Gartner not heard about gate-crashers, twitter and facebook?

If all the bright students went to Wall Street… who became the regulators?

Sir Avinash Persaud declares “risk is a chameleon” and then describes many absolutely perfect reasons why no one should build a bank regulatory system centered around capital requirements based on perceived risks; all this reasons perfectly ignored by the regulators, “Boomtime politicians will never rein in the bankers” November 27.

Having often in serious jest forwarded the idea that perhaps bank capital requirements need to be higher for what is perceived as risky since that perception could introduce pro-cyclicality and carelessness into the system I fully agree with Persaud’s comments on risk.

Persaud also asks “why the universities and press, falling over themselves to kick bankers today, did not play a more effective counterveiling force” hindering the bankers from capturing the regulators. To phrase that question one has to assume the expert PhDs and expert reporters really knew what was going on, but seeing that so many of them are still not capable to free themselves from the paradigms they bought and wake up to the real facts, that might not really be the case; which is of course even more unfortunate for us all. They say that all the bright students went to Wall Street… if that’s true, then who stayed at the universities, who went to the press and who became the regulators?