The one and only focus of Basel is risk-adverseness

Sir John Plender in “Let’s not forget to mention liquidity risk at the Basel round” October 10, though having good intentions gets it wrong, when he says that “the focus of banking supervision has become biased towards capital at the expense of liquidity” as he confuses goals with instruments. The one and only focus of the Basel banking regulations has been to drive out the risks from the banks and for which purpose they decided to use the minimum capital requirements instead of what Plender now seems to suggest some Basel ordered minimum liquidity requirements. The sooner we accept the truth that what Basel has managed to do is to have the risks hide out in the undergrounds, such as Special Purpose Vehicles, or in other dimensions, such as sophisticated instruments impossible to value, the better chance we have of coming to grips with reality. We need also to remember that any nation that decides making risk-adverseness the primary goal of their banking system will place itself voluntarily on the way down. The saddest part is that even developing countries fell in the trap of calling it quits.

Are the bank regulations from the Basel Committee an unqualified success?

Sir Christine Lagarde, France’s minister of economy, finance and employment in her “Securitisation must lose the excesses of youth” October 9 says that “In Europe, regulations initiated by the Basel Committee have served us well” and the question that begs the answer is “who are us?

By their minimum capital requirements methodology what Basel has primarily managed is to introduce a layer of regulatory arbitrated bias against risks and, long term, I do not know of any nation or continent that has been well served per se by more risk adverseness.

Yes it might be true that Basle has been able to reduce in the financial system what Alan Greenspan recently has referred to as the “benign turbulence”, but this could just have the effect of providing more stimulus to the camouflage or the hiding of the risks in other places than the commercial banks’ balance sheets, resulting in less transparency and the possibility of a dangerous accumulation of risks that could end in some real malignant turbulence.

If you need a hole, dig it now!

Sir James Altucher in his high spirited writing about someone else’s “The end of life – but not as we know it”, October 9, in reference to the future of the baby-boomers mentions “the golden years where they begin to cash in the chips they’ve accumulated and figure out how to enjoy the rest of their lives” it seems that is his gently skipping over the question of whether they will in fact be able to cash in the chips. Will there be a market for their big mansions far away from the nearest city or health facility and who will buy their immensely valuable complete collection of the Beatles vinyl records? Will Altucher be a buyer at decent prices?

He point out though some creative hedging strategies for the baby-boomers such as investing in funeral related activities but, given that market conditions at that moment might lead to an severe increase in counterparty risks, perhaps a more solid strategy is to buy the casket and dig a hole at current prices, and then have a Blackwater guard it so that no other less fortunate boomers jump in.

I myself know that I am a baby-boomer but I can’t seem to be able to relate to anyone of them, although I have been told this is a general condition of the current lot of elderly.

It really is about subprime subprime

Sir in order to better understand the current “subprime mortgages” difficulties it is important to remember that there is something such as a very prime mortgage that can be awarded to subprime creditors and that in fact the problem is that the mortgages to the subprime creditors were in fact very subprimely awarded; and many even fraudulent. And this is what the credit ratings agencies should have been able to catch; independently of the statistics of the subprime creditors; independently from the strength or weakness of the housing sector.

Of course once the crisis gets going all subprime creditors are going to pay for it, most especially if they keep on being targeted as the sinners.

Let us beware of upgrading the storm to a hurricane

Sir Gillian Tett reflects well our uncertainties when asking “Is the storm over?” October 4. Now, even if its over, in order to take stock of the damages we will have to wait for quite some time since the costs of any financial crisis are: the actual direct losses existing at the outbreak of the crisis; the losses and costs derived from mismanaging the crisis, for instance injecting too much liquidity and running up inflation; and 3 the long-term losses to the economy resulting from the financial regulatory puritanism that tends to follow in the wake of a crisis and that stops thousands of growth opportunities from being financed. I have hypothesized that each of these individual costs represents approximately a third of the total cost but actually, having experienced a bank crisis at very close range, I am convinced that the first of the three above costs is the smallest.

I mention the above since as we have not yet heard a word from Basle about some flexibility on the minimum capital requirements they imposed on the banks, by perhaps temporarily bringing down the base line from 8% to 7.5%, we should fret about the consequences of the surge in demand for bank capital from having to put assets back on their books and that if not accommodated could upgrade this storm to hurricane.

There is more to be gained from a debate, even while speaking different tongues

Sir Jennifer Hughes does a very good and spirited defence for accountancy global unification in her “More to be gained from talking in the same tongue”, September 27 but although she is absolutely right in all what she says she is still wrong.

One of the reasons, or perhaps the only reasons why some of us feel happy about having US GAAP and IFRS living side by side is because that helps to sustain a debate among their respective Standard Boards on matters fraught with such intrinsic difficulties as accountancy. No, let us please hope that we will never have to face one solid cohesive block of standards since who knows what they could contain and there would be no one with sufficient strength to oppose it. For a living example of how much we lose out in benefits from diversity let us just consider all the risks that are beginning to surface as a consequence of having relegated so much of the world’s regulatory power over banks to a single single-minded group in Basel.

It behoves us all to stand up to the bank regulators

Sir Martin Wolf in “The Fed must weigh inflation against the risk of recession” September 26 mentions “It would be wonderful if those responsible for this most absurd financial crisis could be punished” but for that to happen we need to dare to go to the real bottom of the crisis.

In this respect what most stand out in the Global Financial Stability Report, September 2007, published by the International Monetary Reform is the absolute reluctance by the bank regulators to accept that they, through their regulations, might indeed have been the largest de-facto suppliers of financial systemic risks. The minimum capital requirements imposed by them on banks around the world and their empowerment of the credit rating agencies as the marines in charge of driving out all risks from banking, no matter what, is the true genesis of the problems we now face.

Am I upset? You bet! When reading IMF admonishing the investors with that they “have an obligation and responsibility to understand the dynamics and liquidity risks associated with the products they buy… and they should not assume that the simple letter provided by the rating agencies show equivalent risks as those for hither asset classes” and blithely ignoring that they themselves use those same simple letters interpreted in very simple ways when imposing rules on the banks is frankly shameful.

In November 2004 the Financial Times published a letter of mine titled “Basel is just a mutual admiration club of fire-fighters trying to avoid a bank crisis at any cost”, where I complained that the regulators were so one-track-minded fighting the risks of banking that they blithely ignored all other issues related to the responsibility of banks, such that perhaps some type of financing could be more beneficial to society and therefore merit taking on more risks. Now, they are not only not delivering on the risk elimination front but worse they are even showing a certain willingness of, though in a hole, to dig deeper.

Alan Beattie in “Master of the Universe (Retired)” September 22, when writing about the memoirs of Alan Greenspan “The age of turbulence” references the central bankers with “They would regard themselves as something like the Jedi Council – an ascetic elite who through innate wisdom and arduous training are entrusted with maintaining order”. Be they the wise and the trained the recent experiences still tells us other humble earthlings that if there is any ounce of wisdom within ourselves we now need to stand up to these bank regulators and ask them, or better yet order them to take a better look at their own role in the mess.

Sir, all of us have of course fully supported the independency of the central banks but if they do not have it in them the character to generate sufficient internal criticism and make the debates public then, unfortunately, because of the many dangers from incest, we perhaps need to revisit this whole independency issue.

PS. Paul Volcker’s courageous and honorable 2018 confession: “The assets assigned the lowest risk, for which capital requirements were therefore nonexistent or low, were those that had the most political support: sovereign credits and home mortgages.”

I need to fluoridate

Sir, Michael Skapinker in his “Bottled water and the madness of crowds”, September 25, seems to be searching for the perfect reason why ask the waiter for tap water instead of expensive bottled water. May I suggest “I need to fluoridate”. Unbewits to most of us the use of bottled water has disconnected us from the fluor added to the water in the water taps and so therefore we can already see a whole generation of sophisticated water drinkers ending up with bad teeth. In the US they now almost call it an epidemic.

Regulators, please make the financial flows free to flow again

Sir, when Saskia Scholtes reports that “Moody’s alters its subprime rating model” September 25, we get a glimpse on what is the inherent weakness of any rating system that does its rating from the desk. It is not that the borrowers were subprime that caused the current difficulties since there clearly are many prime mortgages to subprime borrowers, it was that some of those shady operators that always exist in any market exploited the Achilles heel opportunity provided by the credit agencies themselves when they assigned prime ratings to very sub-primely awarded mortgage loans. Anyone should have been able to tell those mortgages were lose-lose propositions if only they have left their desk for just a second to go and have a look.

The above describes perfectly the systemic risks or even the moral hazard that can and will arise from empowering any agent in the market too much and there is no way on earth you can really correct that, and much less so if you insist on doing the ratings by monitoring real life from afar.

I do appreciate the credit ratings efforts and that we should be able to benefit much from their services, but this can only occur if the market is also totally free from not having to use them. Regulators please make the financial flows free again.

Caught between moral hazards and moral duties

Sir, Lawrence Summers rightly ask us to “Beware the moral hazard fundamentalist”, September 24, but ends up sounding a bit fundamentalist himself listing the three conditions that if all met makes “a strong case for public action”, namely that there are contagion risks; that it is a liquidity and not a solvency problem; and that it will not cost the taxpayer any money. Very helpful indeed! Under those conditions the moral hazard of not intervening would seem to loom large.

But what if for example the problems were derived from the fact that the regulator through the use of minimum capital requirement rules had ordered or, somewhat softer, induced the financial institutions to dismantle or, somewhat softer, to scale down their own credit risk departments and follow more the criteria of the credit rating agencies, would the authorities in that case not also have a moral duty to help out?

It is who dwells in the houses that really count

Sir, Wolfgang Münchau tells us that “The big economies are only as safe as houses” September 24 where he more than hints in the direction that a substantial part of the economic growth has come from blowing hot air into houses. Be that so and even though I agree much with his article, as someone coming from a country like Venezuela where we are being setback by more than our fair share of political hot air, I feel a duty to clarify the title by reminding that, at the end of the day, the big economies are only as safe as those who dwell in their houses and the institutions that regulate them.

Then get rid of those paranoid-schizoid bank regulators too

Sir Richard Taffler and David Tuckett say in their “How a state of mind abets market instability” September 21, that when a “paranoid –schizoid state of mind dominates . . . anxiety that might spell caution is denied . . . doubters are dismissed… responsibility disowned. They then say that “the solution to the financial crises will not easily be found in increased regulation, more transparent information or cuts in interest rates. Rather, it lies in understanding how a market in which a paranoid-schizoid state of mind is encouraged is inherently unstable”.

Absolutely, this is where the analysis has to start and so that we can realize as fast as possible that even though it is hard to accept it the sad truth is that our bank regulators are not only themselves in a paranoid schizoid state of mind but they have with all their actions or silences been the worse encouragers of it. Otherwise you tell me, how can you explain that grown up men have harboured such a belief in that they have found a foolproof way to dominate risk and that they could even go to such length as to appoint some agents, the credit rating agencies, to monitor risks for them, as if such thing a thing would be really possible without creating through the feedback enormous systemic risks.

And this is why we now find ourselves in an extremely sensitive situation because more than getting rid of the worst financial agents, which is what you normally do in a bank crisis, here we might first have to get rid of some bank regulators in order not to mess things up even more. I mean I imagine there cannot be anything worse to stimulate a normal paranoid –schizoid state of mind than the presence of a superior paranoid –schizoid state of mind.

On some dangerous impreciseness

Sir Martin Wolf in “The Bank loses a game of chicken” September 21 mentions that “the banks both created the radioactive securitised obligations and set up special investment vehicles (off-balance sheets banks) that they must now rescue at the expense of lending to everybody else” but this contains some impreciseness that is dangerous when we have to act very clearheaded.

First, yes the banks played a role in designing the securitised obligations but what really gave these the radioactive qualities were the prime ratings given to them by the regulator sponsored credit rating agencies. Second, the setting up of special investment vehicles was much a response to the bank regulations coming out from Basel, a response that as the bank regulators let it pass seemed to have been blessed, officially or by ignorance. Third the rescue at the expense of lending would only be true if bank regulators, as they should, since at this moment they serve no real purpose, do not waive some of their minimum capital requirements and thereby do not force the banks to allocate too much capital to harbour the homecoming lost sons.

As a minimum make sure that no one forces you to trust the existence of gold in California

Sir, Philip Stevens ends his “Modern-day parable of the run on Northern Rock” on September 21 questioning “Why should we trust anyone?” though a far more precise question would be why should we should be forced to trust anyone? Describing how “the squall became a hurricane because the risks of subprime lending had been carefully concealed in the mortgage securitisation market and then scattered to the winds” he should have remembered that what allowed that to happen were the prime ratings awarded to these instruments by the credit rating agencies.

Stevens, the doubter, even mentions almost with sadness that “it is too late, even if we wanted to, to roll back the frontiers of financial innovation” but of course that is not needed when all that is called for is some more scepticism with regard to the gold in California.

Start dismantling any forced use of the credit rating agencies, now! If the markets want their services let them say so but do not have the regulators do their marketing for them.

And who pays me?

Sir I deeply appreciated John Gapper’s “Microsoft problem is close to home” September 20 and where he so valiantly gives voice to the for us layman unthinkable possibility that what has been slowing our computers down is not necessarily bad hardware or virus but Señor Windows himself.

Although I confess still being a bit dizzy, if this was to be right, does Gapper think that I could address the European Commission and ask them to share with me some of the money they collected from Microsoft as a partial reimbursement for all my down time?

Alternatively, since Neelie Kroes, the competition commissioner is caught confessing that he “would like Window’s market share to fall from more than 90 percent to nearer 50 percent” and we can safely assume that he assumes this lack of competition lies at the heart of the problem… would it be better for me to sue the Commission instead for not doing their trust-busting job right?

Do we need a product responsibility and liability legislation that is proportional to the market share? At least in those cases were the society itself by awarding intellectual property rights and investing money in their defences creates some of the possible reasons for a high market share?

Some of God's greatest gifts are unanswered prayers

Sir we fully understand the plea of Eric Schmidt in “Global privacy standards are needed” September 19, since for a company like Google it must be nightmarish to manage the 50 different approaches to privacy of each state in the US.

Having said that it is not without some fear that we citizens would entrust a global agency with the development of any global privacy standards, and that is not simply because we could be scared that these regulations could turn out to be too relaxed but also because, just as well, they could turn too rigid for our own good. We are yet in the infancy of a global information revolution where access breeds its own needs and so perhaps, before letting bureaucrats lose, it would be nice see the industry come up and agree with some proposals of their own, just to see how they look.

Eric Schmidt himself clearly points to the benefits of self regulation The problems with regulations is that they normally entail choosing a path from where it is later hard to backtrack and as an example let us just look at how the banking regulators empowered the credit rating agencies and now do not really know what to do with them.

Clearly Eric Schmidt has his own commercial needs for regulations and we citizens have ours, and they might not be the same, but perhaps both of us could benefit from thinking about that phrase from a Garth Brooks song that goes ”Some of God's greatest gifts are unanswered prayers”

PS. We might need a Global Web Constitution

Unfortunately Northern Rock is not the war, it is just a war incident and on top of it only a minor one.

Sir Martin Wolf in “From a bank run to the nationalization of deposits” September 19 takes a Polaroid photo (if anyone in this digital world remembers what they were) and that tells little of the story. Not only because the events that lead up to this Northern Rock moment have been in the pipeline for a very long time but also because, unfortunately, we are still very far away from where we could be able to discern the end of the story and in fact we should all count our blessings if this all stays as the “Northern Rock” moment. Wolf is of course aware of this when he answers his own question on whether this is the end of the story with “a far from it”

The fact then that Wolf raises so early the questions of whether the disaster could have been prevented, whether the crisis could have been better handled and finally on what to do about it in the future can only be explained in terms of a very human desire of wanting to believe its over, looking to numb those fears that Wolf and so many of us share and that make us “tremble at what may happen”.

Wolf sees the events as an “unwinding of past excesses” sort of like shedding some kilos, while I having been much more sceptical of what has been in the doings see the need to unwind much more than that, among other a bank regulatory system that has placed us on the clear course of fewer and fewer bigger banks, until we hit the very biggest final bank bang. For a brief look ahead, read Saskia Scholtes “Credit turmoil set to benefit big banks”, September 19, where you can read on how central banks are already in despair outsourcing their responsibilities to the banks... while naturally crossing themselves.

Bore where are you?

Well here we are the day after the Fed announced the “what do the fed know that we do not know” 50bp rate cut to which the market responded with their own “what does the market know that the Fed does not know” too large jump in the value of stock and it all just reminds us about the truth of the Chinese curse “may you live in interesting times”. Now let us all please hurry back to the big bore.

Does Observer know the difference?

Sir referring a bit unnecessarily sourly to a man who is supposed to have made his peace with society Observer, Spetember 19, comments on some observations made by Michael Milken on real estate loans but that demonstrates that Observer might not really be so clear about what this subprime mortgage business is all about. Perhaps I could help clarify.

We have some borrowers who qualify as less than top of the heap and have been known as “subprime”. Now to these subprime borrowers you can actually extend very prime quality mortgages but and what has really happened is that you can also be extremely sloppy doing that, and of course it is important to be able to tell the difference. My suggestion is although it becomes a bit lengthy we should really have to refer to our current problem sector as those “subprimely” awarded mortgages to subprime borrowers.

Stop them from digging!

Sir, Paul Davies and Gillian Tett in “Moody’s talks of rating reform”, September 18 quote Brian Clarkson, the President and chief operating officer of Moody’s saying “One of the issues we are talking to regulators about is the possibility of creating tools to address liquidity and market issues”. 

And we can just pray for that the regulators understand the real meaning of “when in a hole, stop digging”.

Once again, I do not have anything against the credit rating agencies refining and improving their mostly already very good products. What I oppose though is that the regulators press the market to use these products, since such a bias will only guarantee the introduction of even more severe systemic risks than those that we have been discovering lately with the sub-primely awarded mortgages to subprime borrowers.

If there’s ever been a confession there you have it.

Sir Brian Clarkson, the President and chief operating officer of Moody’s Investors Service in “Transparency and trust must keep on driving rating agencies” September 18, makes a confession that illustrates exactly the risks of securitization, meaning the packaging the selling and the forgetting of an investment by putting it on someone else’s book, and of the real danger of an excessive systemic reliance in the credit rating agencies criteria. He says” There have been allegations of lax underwriting and misrepresentations in subprime mortgage originations. There is no sure way for a rating analyst who is not involved in the loan origination process to detect such shortcomings.” With such a confession do we need more? Of course if a credit rating agency is to award an AAA rating based on the accumulation of a thousand individual mortgage loans, the least one could expect is a closer examination of some of them through a sampling process.

Nonetheless the real value of the confession lies in showing us how fail prone a system is when we are forced to trust someone, as is much the case with the credit rating agencies

There should be limits on how much you can make your opinions heard.

Sir in “Fitch eager to make headlines” September 17, Adam Jones quotes Mr de Lacharriére the owner of Fitch Ratings saying with respect to the possibility of buying Les Echos “that a ratings agency and a financial news provider are complementary since both strive to deliver impeccable information: ‘There is no conflict of interest, we have truly the same objective” May I ask has he ever heard about the reason for separation of powers in any government even though their different branches have the same objectives. On the contrary if I was a bank regulator of those who have empowered the credit rating agency to dictate so much within the financial markets one rule I would make sure of is that these credit rating agencies should have no access to other additional means of imposing what they consider to be their First Amendment protected opinions.

Is the coverage in Business Week influenced by the fact that its parent company, McGraw-Hill, also owns Standard & Poors?

Most probably not but given the real power that has been given to the credit rating agencies that should not even have to be a question we consumers would have to ask ourselves since the regulators should know that it is in their best interest to keep incest as far away as it can?

Is there anything else with sufficient power to stand up to the credit rating agencies going crazy than a free media with the voice to criticize it? Will the criticism be the same if they have the same father? I do not think so and so I would gladly suggest that McGraw-Hill makes up its mind about which part of the business it wants to keep.

Do we then need two world banks?

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

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

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

Forest destruction is it a threat or is it a reality?

Sir John Aglionby and Fiona Harvey when reporting on September 13 that “Forest nations press for carbon credits to help cut greenhouse gas” mention “that many governments fear rainforest nations could use the threat of destruction of their forest as a bargaining chip in climate change negotiations”. What threat of destruction? They are destroying them now.

I recently told a prominent-save-the-Amazon person that they should, at 7 am each and every morning, put a matchstick to one hectare of pristine Amazon jungle and transmit this on the web and then perhaps the world could easier understand that it needs urgently to create some huge world forest reserves. These reserves could be managed and cared for by hundreds of thousand forest-guard families and who could all be helped to partially improve their lives receiving a small monthly salary from the whole world, financed perhaps through the levy of a special forestry tax of one cent per litre of petrol.

In 2004 while an Executive Director at the World Bank we were asked at the Board to approve a loan to Brazil for “Environmental Sustainability” and I told my colleagues that what we really should be approving was how much each one of all the world countries would have to chip in to help repay that loan, since obviously keeping our most important lung clean could not only be Brazil’s responsibility.

Does burning 365 hectares per year sound awful? Well the same report indicates that only in Indonesia 1.87m of hectares have been lost every year since 2000. Now having said that… please be careful with the matches though.

It’s a Baron Münchhausen moment for the US

Sir Martin Wolf in “The policy challenge of rescuing the world economy”, September 12 writes that “Prof Martin Feldstein of Harvard University pointed to a 3.4 per cent year-on-decline in US house prices” and “Prof Robert Shiller of Yale argued that the US house prices might ultimately fall by as much as 50 per cent”. Although oversimplified a division would yield that the recession carries a 15 years potential and since this is clearly unacceptable by all standards, one of the main real challenges is how to get out of the current conditions as fast as possible. Wolf mentions the need for the Chinese authorities to expand their domestic demand so that the burden of external adjustment does not fall unfairly on Europe and though he is right on his European concerns I am not that sure that Chinese domestic demand expansion would really be so helpful at this particular time for the US since China’s demand elasticity towards commodities and mid-range industrial products could be higher than the elasticity to the products offered by the US.

This looks in fact much more like what I would call a Münchhausen moment for the US, and by which I refer to that Baron’s legendary escaping from a swamp by pulling himself up by his own hair. If there was ever a moment to hurriedly correct other weaknesses in the US economy; like for instance by tort reform, health sector reforms, more strict supervisions on how much intellectual property right’s originated monopolies are exploited and the introduction of a tax on petrol consumption and that would help to take away pressures from fiscal and trade deficits while at the same time sending a better long term signal to the US economy, this is it.

Do credit ratings stop capitals from going where they should?

Sir Arturo Cifuentes in “Credit of the big rating agencies under fire”, September 12, explains very well some of the problems that arise from that many market participants do not know what the credit ratings really mean. Also and although Cifuentes does not fully enter into that very delicate terrain of explicitly wondering whether the bank regulators who enforce the use of these ratings know what these mean, he at least dares to ask the question of “Under the current regime, is it safe to determine capital requirements? , and for this he should be commended.

Now, having been very critical of how we have substituted the no matter how technically correct still limited vision of a few credit rating agencies for the real biodiversity of criteria of a free market, the most important question we need to ask about the credit ratings is not so much in reference to the calculation of the capital requirements of the banks, but on how these credit ratings can influence the directions of the capital flows in the world. It is of course bad if banks do not have enough capital but let us remember that it is far worse if capitals do not go where they can best deliver results.

It is time to de-regulate the markets

Sir, Wolfgang Münchau in “Stability for the markets is just the start”, September 10 mentions that he is not so convinced of the need to regulate the credit rating agencies since “the smart investors have always known to treat AAA ratings with a pinch of salt”.

Whether the smart investor knows it or not, which also begs the question whether we have a way to divide the financial market into smart and dumb, has nothing to do with the problem. Münchau would do well to read the role of the credit rating agencies in for example the Minimum Capital Requirements by the Basel Committee on Banking Supervision to get a fuller understanding of how much power these First Amendment protected opinion makers really have. Also, although the midst of a crisis might not be the best moment to speak about it, let us not also forget all those who are in real terms hurt by not being more favourably rated. Therefore although I agree completely with Münchau in that we do not need to regulate the credit rating agencies, we absolutely need to de-regulate the financial markets from having to use them.

In Spain there is a saying that goes “We were many and then granny gave birth” and in this respect I feel there are far sufficient forces in the world to drive the financial flows up the mountains towards the same cliffs, so as for they to be further herded on by the credit-rating-boys.

On moral hazards

Sir, one prime problem with subprime mortgages is that it is given subprime terms and so, if a lender would agree to write off a 20% of the value of all subprime mortgages and give the current debtor prime terms, it would not be something outrageous to have the government chip in offering some partial payment guarantee on the balance owed, callable only if the loan is delinquent after a cool-it-of period of perhaps two years, and thereby allow the prime terms to be warranted.

That this could imply the moral hazard of allowing some guilty and bad intentioned borrowers to benefit? Absolutely, exactly in the same way that moral hazard exists when bailing out investors. The final question, as always, is just what side of the equation you most need (or want) to benefit, the debtor or the investor.

To do nothing then?... and have the housing market crash, which could of course help some youngster to at last afford buying a house, but make it harder for other youngster to find a job. You see? It is not easy, even for politicians, as life is only about a continuous choice among so many different moral hazards.

A Frankenstein blaming the monster!

Sir, FT´s Tobias Buck reports, September6, that Charlie McCreevy, the EU internal market commissioner attacked the credit rating agencies for their role in the subprime mortgage crisis. Yes clearly they did not do their homework but the last ones who have the right to voice criticism against them must be the regulators who empowered these agencies to decide so much.

McCreevy mentions that “credit rating agencies provide ratings that are widely relied upon by investors” but he should do well reading The First Pillar – Minimum Capital Requirements by the Basel Committee on Banking Supervision in order to understand that the investor´s reliance is far from voluntary.

Do not forget the mother of all paternalism!

Sir Martin Wolf in “Questions and answers on a sadly predictable debt crisis”, September 5, though he would seem to be qualifying as “paternalistic . . . the abolition . . . of devices that encourage ordinary people to borrow more than they could afford” he does not even get around to mention that mother of all regulatory paternalisms present when investors are forced, stimulated or induced to follow what the credit rating agencies say. A predictable crisis? Yes, just follow the lead of the credit agencies’ exaggerated ratings. A traditional crisis? No way, this is the first ever regulator induced crisis I have seen. Wolf acknowledges “contagion” as a cause; the question that remains though is why he does not want to name the virus bearer, namely the credit rating agencies that with their prime ratings catapulted worse than subprime local mortgages into a global crisis.

But a share is still (mostly) a share… it’s attractive

Sir, John Plender in “There can be no return to ´normality´ of a freakish bubble” August 30, mentions that “in the midst of all this, many investors are baffled that equity markets have not been seriously damaged”. The explanation for this should be quite clear though, in this freakish market, at least for the time being, a share is still mostly a share, and you can see its value quoted daily, so when you compare it to all those fancy investments where your advisors is currently asking for more time to figure out what it could be worth, give and take 20%, no wonder a share looks attractive.

But we still need to be rescued from the central bank's regulating follies

Sir though I agree completely with Martin Wolf in that "Central banks should not rescue fools from their folly", August 29, we should not forget that at least we need someone to rescue us from central bank's regulating follies. It was because the regulators appointed, certified and in some ways even forced the market to heed the opinions of some special inspectors, the credit rating agencies, which allowed for instance some worse-than-subprime very local mortgages to be classified as non-lemons, enabling them to go global and spread their rot.

Barack Obama is looking in the wrong direction

Sir, Barack Obama in “Fine unscrupulous mortgage lenders” August 29, believes that “the implosion of the subprime lending industry . . . all started with a good idea – helping people buy homes who previously could not affor to”. He is seriously mistaken.

What catapulted some lousy awarded mortgages (forget about calling them subprime, they are much worse than that) into a global financial problem was that some credit rating agencies have been too much empowered by the banking regulators to do their oversight.

If we do not fix that, then next time around our problem might not be with mortgages but with something even much worse.

But the regulators should have known!

Sir, Charles Calomiris and Joseph Mason are exactly right when in “We need a better way to judge risks” August 24, they say that there is no “use blaming the rating agencies, which are simply responding to incentives inherent in the regulatory use of ratings” and recommend that we just have to avoid “settings standards for permissible investments by regulated institutions”.

Now it is most important that we understand that the real reason for abandoning the regulatory enforcement of the use of the credit rating agencies is not because the credit rating agencies have been bad at what they have been doing, the subprime mortgages is a big exception of course, but the simple fact that the better they get; and therefore the more we would tend to automatically follow their opinions and the harder it would be to express contrarian views, the higher the risks that the world will encounter some systemic risks of truly catastrophic proportions. And that the regulators should have known.

And why does not the US use the World Bank for their infrastructure needs.

Sir, Felix Rohatyn and Warren Rudman in their “Federal action is needed to rebuild America” August 23, come out in support of a proposal for a new bank to address “the critical needs of infrastructure”. This. at least in Rohatyn’s case, being from the private sector sounds a bit surprising. But, if they are right, why would the US need a new bank for that? … when there is International Bank for Reconstruction and Development, IBRD, better known as the World Bank.

Not only would the US by using the World Bank set a great example and help to scale that institution for some really big globalized action that might be needed but also, at least for a start, the World Bank would probably be quite covenant lite… sorry I mean conditionality lenient with the US.

Misleading advertisement

Sir, on FT’s front cover you announce Clive Crook’s “The next financial crisis starts here” August 23 with the phrase “Punishing the real culprits”, It turns out to be misleading because even though Crook mentions “stamped AAA by the credit-rating agencies” which of course was what catapulted some local bad lending policies into a global financial problem, nowhere does he mention those who empowered the credit-rating agencies to has such an influence, namely the bank regulators.

But what are the non-professionals to do?

Sir Krishna Guha in “IMF warns of risks to global growth” August 22 reports that John Lipsky, the number two official at the International Monetary Fund, seemingly quite unseemly washing his hands in relation to the issue whether the credit rating agencies have done their job well said “The basic issue is that in the end, professional investors bear ultimate responsibility for risk assessment and management in a securitised market. It is not realistic to expect third parties to take that responsibility.”

There is of course nothing to object to that statement, c´est la vie, but it clearly leaves a question or two about what to do with all those who are not professional investors or that just thought they were and who followed the advice of the credit rating agencies just as the bank regulatory authorities, and the IMF, told them to do. Is the IMF now arguing for two lender of last resort now? One booth for the professionals and one for the credit rating agency followers?

It is not about to little or too much but about the right or the wrong regulation

Sir, Barney Frank, the chairman of the House Financial Services Committee says in “A (sub)prime argument for more regulation” August 20, that “the subprime crisis demonstrates the serious negative economic and social consequences that result from too little regulation”. He is wrong. The question should not be about too little or too much regulation but about the right or the wrong regulation. At this moment there should be no doubt that what leveraged the very local subprime mortgages problem into what seems to be a global crisis, was having empowered the credit rating agencies to explicitly or implicitly impose so much of their criteria on the markets, and that was ordered by the regulators.

I am not against credit rating agencies. Of course I will use them. But please unshackle the markets from having to use them.

On calling the credit rating agencies poker hands.

Sir, Roger Blitz in a “Harvard professor flushes out answers to life’s hard calls: poker” August 18 reports that Charles Neeson, a Harvard law school professor will set up some “global poker strategic thinking societies” around the universities arguing that “poker teaches people to think for themselves.” What an extraordinary sense of good timing, I mean now when the credit rating agencies have been called out on some of their strongest AAA bluffs and investors have to start to think for themselves again.

Unshackle us from the credit rating agencies…please.

Sir, Gillian Tett in “Fears of crash unfounded – for now” August 18 describes very well the origins to the current market turmoil tracing it back to the American housing markets. Unfortunately she leaves out what is the most important fact we need to be aware of and consider, that is if we want to keep that “for now” where it is.

It was primarily an excessive confidence in the risk assessment done by the rating agencies that managed to catapult what should have remained a small local problem of badly awarded mortgages, into a global mass-confusion. And that excessive confidence sprang foremost out of the fact that our regulators, going against what all human wisdom should have taught them empowered the credit rating agencies to implicitly and explicitly to decide so much about where market should go.

The real truth we need to realize to face is that the better the credit rating agencies could get at what they are supposed to do truth is that the larger could be the build up of really dangerous systemic risks and therefore the bigger the ensuing explosion.

I am not against credit rating agencies. I will always use them. But please unshackle the markets from having to use them. Otherwise I guarantee you all that what will happen is that sooner or later 100% all our pension funds might end up in AAA illiquid junk.

Chávez is in fact out of control.

Sir, in your editorial “Chávez in control“ you seem to believe that the president who loves to be called “Commander” has with this recent proposals of some changes in the Venezuelan constitution and that among other would allow him to reign forever, has suddenly reached a point of inflexion where now his plans “would be to weaken democracy”. You also mention “a landslide victory” for Chávez in the elections in December last year.

Sir, you have been mightily misinformed. Last December the opposition managed to get 4.3 million votes, 37% of the electorate and this was counted by the electoral authorities who had all been appointed by Chávez and who did not include among them anyone who represented the opposition. And that 37% of the electorate, ever since December 2005, because of their more than reasonable distrust in the electoral system, have had to live with a Congress with 167 members in favour and very obedient to Hugo Chávez and none, zero, zilch of who differ with him.

Please, whatever, do not tell us it is only now this authoritarian is getting in control since truth is, if anything, what is happening is that he is now really getting out of control.

The regulator’s human folly

Sir, Sir Samuel Brittan clearly knows his way around the humans when in “The crooked path of capitalism”, August 17, he says “experts are never as likely to be wrong as when they speak with near unanimity”. I suppose he would agree then that it is has been a human folly of monumental proportions that regulators have forced the financial markets in so many ways or forms to have to heed the criteria of the credit rating agencies.

Credit rating agencies should be free to rate, but the markets should also be free of not having to follow them

Sir, you can give “Subprime ratings for rating agencies” August 17, and blame them for all but the original sin lies in having empowered them by ordering much of the markets to act in accordance to their ratings. The better the credit rating agencies gets at what they are doing and the more trustworthy they become, the worse the next explosion of a systemic risk… that is what risk is truly all about.. Tell that to the regulators.

Do not blame the messenger!

Sir, Avinash Persaud in “Hold tight: a bumpy credit ride is only just beginning” August 16, speaks nostalgically about those days “before securitization” and indeed he is right in so many ways especially on that part of the banks not any longer carrying and nurturing the credits on their own books. But he should not blame it on securitization as such, that is just a very valuable tool, if used correctly. He should blame instead those bank regulators that arrogantly thought they could drive banking risks out of banking without any consequences and that empowered a couple of credit rating agencies to do the impossible task of correctly rating credits without introducing systemic risks.

Credit rating agencies should be free to rate but the markets should also be free from not having to follow them.

Sir, every comment in Richard Beales and Saskia Scholtes´ extensive and detailed “Critical focus turns on rating agencies”, August 16, seems to underline the idea that credit rating agencies can do a better job, while the most important fact we need to realize is that to correctly rate credits is such an impossible thing to do that we should never adjudicate special powers to any agency to influence the market. The first thing we need to do is to start dismantling the system of using credit rating agencies. Of course they are free to rate, but the markets should also be free not to follow them.

Just do no harm

Sir, Jaques Diouf “Biofuels should benefit the poor, not the rich” August 15, prescribes such a complexity that our first and only reaction is… forget it! Much more reasonable seems to try to live up instead to that single three word rule that says “do no harm”,

We need to repair what fear brought us last time

Sir, Martin Wolf writes that “In a world of overconfidence fear makes a welcome return” August 15, as a response to the current unknown-knowns of the market as Rumsfeld would have phrased it. Although I cannot say that I disagree with his article it brought back to my memory the first piece I ever published, titled “Puritanism in Banking” Caracas, El Universal, back in 1997, where I warned against the costs of overreacting to a bank crisis. At that time I felt that the premature adoption of some of the banking regulations pushed by the authorities in Basel had made a recent bank crisis so much worse.

The role of the credit rating agencies and that came as response to previous crisis has caused much of the market to relax its due diligence processes and is therefore something directly responsible for the runaway financing of not just subprime but absolutely wrongly awarded mortgages. Now it is obvious that we need to dismantle a system that places so much decision power in the hands of some few credit rating agencies and which undoubtedly is setting us up to systemic risk Tsunamis.

Also, instead of injecting so much liquidity why do not the Central Banks try to loosen up those capital requirements that Basel created in reaction to previous banking frights. This would of course not fuel a renewal of a subprime mortgage boom or anything like it, but allow for the recognition of the disaster to be more digestible. Summing up, ironically, what we now need is also to repair what fear brought us last time.

Please unshackle the markets

Sir, in a “Shake-out could help the markets” August 14 you make it clear that Central Banks should offer liquidity but not rate cuts and I fully agree, as you, based on the evidence we have seen. Central Banks are there to be there when needed but always with ever more demanding conditions and rates.

What they could also do is to suspend, until further notice, hopefully forever, that so much of the market in its investment allocations, has to heed the criteria of the credit rating agencies. Now is the time to unshackle the market and allow it to better find its own way out of the mess.

I wonder if also the Central Banks should not give a second look at those minimum capital requirements that the Basel banking regulating community has imposed on the commercial banks. I mean from yesterday to today it is not like the banks have become more risky, it is more that they are discovering how risky they really were, and so the Central Banks should perhaps help to ease that tragic moment of realization.

Where the buck really needs to reach

Sir, David Hale in “The Credit crunch and the quandary of the Fed” August 14, is just another one in the long line of commenter on the current financial turmoil that refuse to apportion responsibilities where they should go. For instance when he says that “the rating agencies facilitated the boom by giving high credit scores to securities with loans of dubious quality” the facilitated is by all means an understatement since they in fact have a great responsibility for that boom. Mind you, not that the “buck” should stop with the credit rating agencies. In the first line of responsibility, without any doubt, are those regulators that instructed and even in some cases ordered the market participants to stop thinking for themselves and heed the expert opinion of the credit rating agencies.

If we don’t realize all this and furiously back-peddle from our current setup, if we survive this turmoil, we will not do so the next time around. There is just too much systemic risk fabrication going around.

This time though ignorance was mostly fabricated

Sir John Kay in “The same old folly starts a new spiral of risk” August 14 recounts a story from the files of Lloyd’s to make a case for how “people who knows a little of what they are doing pass risks to people who knows less” and so therefore risks tend not to spread but to concentrate setting us up for an explosion. I agree that we might or should have already learned our lessons from that but in the current turmoil there are in fact two new elements that give a fresh perspective on financial history. The first, the most ironic, seems to be that it was in fact those most knowledgeable participants that with their excessive arrogance fabricated with their sophisticated financial models their own ignorance and second, more tragic, that the market was not allowed to apply its own and perhaps even more wise ignorance, but was instructed, by the regulators, to follow the advice of the experts, the credit rating agencies. The concentration of risks under such circumstances could prove to be even much more explosive.

On eating green

Sir Fiona Harvey informs on August 13 that now there is “A chance for shoppers to start counting carbons” beside the carbs, and that a packet of Walkers potato crisps contains 75g of carbon dioxide a mango and passion fruit smoothie 294g.

Great, this is more information for an information starving world. But how do we best digest it? For a start and even when I run a blog on the environment, http://www.ourpiedaterre.blogspot.com/, I have not a faintest clue of what 75g of carbon dioxide means. ¿Could you give it to me in equivalent to litres of petrol? Eating those chips means driving how many miles? I could perhaps connect more easily to that sort of information; I mean having been told that to get rid of those potato chips I have to walk so many miles.

Don’t get me wrong, I am all for maximum disclosure, but if it is to be helpful and not produce more g of carbon dioxide in the gathering and printing of this information than what it saves in the consumption of those same g then we need to increase its transparency. Next time what I would like to see is how many g of carbon dioxide Walkers potato crisp contains by g of carb, calories and fat, saturated and non saturated of course. With this information I might then be able to be so much more effectively green in my dietary and culinary endeavours. By the way, could this be a way for children to make up for not eating their greens?

In the stupid/intelligent, coward/valiant chart where will history plot today’s investors?

Sir it is clear what Saskia Scholtes is driving at in “Fear rather that fundamentals is driving trading” August 11, but as she readily admits that it can become self-fulfilling, we should never forget that fear can easily morph into a fundamental. You can fear finding a bear in the woods but if it appears you’d better treat it as a real fundamental or you pay for it. Now how you handle that fundamental and avoid panicking well that is a totally different matter which brings us to a graph where on the axis we plot from stupid to intelligent and on the y axis from coward to valiant, and then sit back and wait for history to plot us…on a minute by minute basis.

Even in a nightmare you might find good things to do…while awakening

Sir I just read David Gardner’s hair-raising “Lost in Iraq: the illusion of an American strategy” August 10, and, if he is right, then what he is telling us is that Iraq does not any longer exist and that even if there was never a reason for the USA to enter Iraq now there seems to be plenty of reason for why the world cannot leave Iraq. In a globalized world where does it say that the remains of a failed nation should go to the neighbours?

Also reading about the nightmare I once again felt that the best thing the USA could do, while trying to get out, is to impose, by brute force if needed, a transparent revenue sharing system that spreads out the oil income directly to each of the Iraqi citizens. Around the concept of a monthly check, of probably more that 100 dollars per citizen, you could find the real incentive needed for some good nation building. The current oil revenue sharing being discussed has nothing to do with the people but seem more like agreements between all the power grabbers about how to share the oil loot.

Markets also abhors experts not behaving like experts

Sir, Frank Partnoy in “Markets abhor the vacuum left by derivatives” August 10 describes very well why the volatility has increased as a result of the investors finding out that their investments are in many cases not accurately or timely valued and that they might be up for some nasty surprises. Add to this the fact of having to see how good grades were awarded to mortgage collateralized debt obligations by the credit rating agencies without them even leaving their desk and do a little check-up on how those mortgages were issued and you might see the perfect volatility storm coming into sight.

We need to attach a warning message to the credit ratings.

Sir Andrew Ward reports August 10 that President George W. Bush has said there was a “proper role for government” in enhancing financial literacy as “we had a lot of really hardworking Americans sign up for loans and the truth of the matter is they probably didn’t fully understand what they were signing up for”.

Mr Bush might have a point but from what we currently see those most in need of a financial literacy course seem to be all the investors struggling to make head and tails out of credit rating grades or financial models that really do not mean what they say.

Of course it also cannot only be a question about the reading but also about the writing. For a starter, as a minimum role for the government, I would suggest they start by making obligatory, whenever credit ratings are disclosed the inclusion of a “Warning, following these ratings blindly is dangerous to the financial well being of your portfolio.”

Does procreation include the possibility of adoption?

Sir Clive Crook with “Let the rich go forth and multiply” has really fired up my interest in reading Gregory Clark’s upcoming “A farewell to Alms: A brief Economic History of the World”, August 10. Besides of course forcing me to look up the meaning of “alms” it also left me with the question of whether this generous procreation of the rich so that it spills over into the less fortunate development method does also extend to Angelina Jolie’s adoptions of poor children.

Liberty and security also requires consensus

Sir, although Willem Buiter might be fundamentally correct when he says “For the sake of liberty and security: legalise all drugs” August 8, he should also remember that for the sake of that same liberty and security he needs to frame his idea in such a way that it is acceptable for the majority. 

In this respect and making reference to Moisés Naim’s interesting book “Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy”, (2005) and that reminded us of how much of the illegal world was interconnected, perhaps a more consensus reaching approach could be to identify the whole world market of illicit and legalize it at a rate of 5 per cent a year starting with the more digestible. 

Otherwise they way the world is going its illicit part is soon going to be wealthier and stronger than the licit… and that is more dangerous than hundred al-Qaeda put together. Also while discussing these issues let us never forget that strict social sanctioning is normally a far more efficient route to go than the strictest of the law enforcements.

That is not the route!

Sir, Jeffrey Garten’s “We need rules for sovereign funds” August 8, includes a mind-boggling list of proposals “that many will see . . . as having a protectionist thrust.” No kidding? The only real conclusion I reached was to tell my daughter to watch up if she was thinking of studying international trade or finance at Yale.

Not only does Garten analyze the issue of sovereign funds as if trying to carve out for himself the role as The High Priest of financial nativism but also, even if he was absolutely right about his deepest misgivings, the type of solutions he proposes, like requiring from the government owned investment companies that they “publish internationally audited reports on their entire portfolios at least twice a year” could not serve any rational purpose and could in fact even serve as a dangerous valium.

What on earth is Garten up to? Trying to extend Sarbanes Oxley to the rest of the world governments? Asking the credit rating agencies to rate the sovereign funds? Allowing these funds only to buy government paper? Good luck! This type of approach would only have much of the current world imbalances try to go underground, making them so much harder to manage. Do I then mean that sovereign funds do not pose any threat? Of course not…some do, the same way that some non-sovereign funds could also be dangerous for any sovereignty.

Wrong answer!

Sir Malcolm Rifkind gives the wrong answer when saying that “Mugabe must not be allowed to go to Portugal” August 6, as the real question should obviously whether Mugabe, when in Portugal, should be allowed to return to Zimbabwe. Does not Portugal have a judge like Spain’s Baltasar Garzón? Mugabe with his dead wrong economic politics is knowingly decreeing the premature death of many Zimbabweans and if that is not a crime against humanity, what is?

Stop following Basel and the Fund into the land of the guaranteed systemic risks

Sir, Mohamed El-Erian and Michael Spence in “The Fund needs to refocus its agenda to be relevant” August 7 seems to suggest that the International Monetary Fund turns itself into a merchant bank type institution “facilitating the ongoing breakout phase in the economic development of emerging countries”. Before branching out into private sector terrain the Fund would do well not by refocusing but by focusing more on what is its current agenda.

For instance the IMF needs to be much more certain about what long terms effects there could be for the world of having promoted so much the idea of their buddies in the Bank of International Settlement in Basel with respect of ordering so much of the financial markets to follow the criteria of a few credit rating agencies. The developed world, with their current subprime mortgaged backed securities mess, is already getting some quite horrifying glimpses of what might lie ahead if it persists in following Basel and the Fund into the land of the guaranteed systemic risks.

And be careful with the regulator risk

Sir in your editorial “The dangers of bailing out banks” August 6, you timely remind that “if bailouts are the norm, an entire banking system may take on inefficiently high levels of risk” and illustrating clearly the case for this warning by stating that in the case of IKB Deutsche Industriebank “there was always an implicit promise of support from KfW – credit rating agencies such as Fitch counted on it”

At this moment of time after so many years without any major bank crisis around the world and when the Bank Regulators have spend a couple of years in a self congratulatory mode may I also warn against the possibility, no matter how remote, that some very expensive bailouts could be undertaken also in order to save the regulator’s reputation. I mean if you appointed a couple of Credit Rating Agencies and then went to sleep on the job, you could foreseeable have a vested interest in hiding some facts.

Matchmaking on the web is still a quite chancy affair

Sir, your editorial “the wrong crowd” August 4, about risks with advertising on places such as Facebook reminded me of when, mind you for research purposes only, I recently visited one of those fanatic leftist pure anti-Yankee web sites that also tries to make a living earning some capitalistic advertising dollars, and up popped a recruitment add for the US Army. This comes to show our savvy matchmakers on the web still have a long way to go as having probably used “sovereignty” as their key word they failed to realize that this word depends so much on what side of the border you find yourself on.

Now let us connect urgently the lessons learned with the what to do.

Sir, Desmond Lachman, in “America’s subprime blues have historical echoes” August 3, is absolutely right when he says “At the heart of today’s subprime crisis is the unfortunate interaction of financial innovation gone awry, inept market regulation [by which we might presume he also refers to inept regulators] and a failure of the rating agencies to exercise their fiduciary responsibility to protect the average investor.” By the way the credit rating agencies would probably argue that part about “fiduciary responsibility” since they way they describe it, they only give opinions in accordance with their freedom of expression rights.

Now what Desmond Lachman does not yet do, is to connect the lessons learned with the what to do. As I see it and following that old advice of when in a hole stop digging, the first thing we have to do is clearly to recall all the empowerment awarded to the financial fortune tellers, the credit rating agencies, to dictate so much about where the financial flows can or should not go. Let us pray that the current problems are just a minor tremor that serves us as a warning and that we still have time to runaway from construing a financial system on top of a systemic fault that if we do not amend will produce mind-boggling catastrophes.

PS. "minor tremor"? The 2008 Global financial crisis GFC

We need to eliminate the financial fortune-telling franchise.

Sir I have nothing against the credit rating agencies, in fact I would like to have hundreds of them instead of the current only three. What I do not like though is when investors are forced to act in accordance with what they opine since when someone is told that someone else does the thinking for them, they lose the motivation to think for themselves and they have been empowered with the perfect excuse to hide their own shortcomings.

When you tell a pension fund it is not allowed to invest in anything below a specified level of ratings you are sending two messages. The first, that pension funds should only invest in safe ventures sounds about right but goes against current financial theories that say that a perfect blend of uncorrelated potions could just as well be the safest bet in town. The second message, the truly dangerous one, is that you are implying that there are objectively safe investments in the world and that the credit rating agencies have the tools to spot them.

We have already gone much too far down the road to a systemic risk explosion and we can already smell the subprime gases that have been accumulated. Anyone who lives in an earthquake prone region knows to be grateful for the small tremors that release the build-up of tensions and keeps the big one away. In these days we pray that the current financial uncertainties are only a minor tremor but if we really want to avoid building up the tensions that will lead to a true catastrophe, one of the first things we must do is to dismantle the fortune-telling franchise awarded by regulators to the credit rating agencies.

Do not ignore that bank regulators have played the leading role in finance over the last fifteen years.

Sir John Gapper in “Now banks must relearn their craft” July 30, describe how the banks that fifteen years ago were financial institution that lent people money moved into the business of investment banks, but are now thrust back to their old business as they find their balance sheet stuffed with loans that could be there for a long time.

There is nothing wrong in Gapper’s recounting of the story but strangely and like most or perhaps even all of his colleagues in the Financial Times, he does not mention the crucial role played by the banking regulators from Basel, who started it all by quite arrogantly thinking they could drive banking risks out of banking.

Well, the bank risks did not disappear; they went into hiding, just like any overly regulated business normally goes underground; and let us now pray that in this hide and seek game the world has not accumulated too many bank losses that it has lost track off.

I mention all this because if we are going to be able to handle some potentially very dangerous circumstances that might loom around the corner, we cannot afford to leave out the analysis of were the regulators went wrong, even though they are among the most respected citizens of our society, because it might be precisely in that area that we need to do a lot of fast and swift backtracking. As an example one of the first things that need to be done is to strip the credit rating agencies from much of the immense powers allocated to them by the regulators… as that can foreseeable only lead the world into worse and worse scenarios.

Without fear and without favour we need to punish the regulators!

Sir, John Authers in “Home to roost” July 27 quotes William Poole, governor of the St Louis Fed in reference to the current subprime woes saying “The punishment has been meted out to those who have done misdeeds and made bad judgments”. Forget it, soon it is going to be time to punish the real brains behind this mess, namely the bank regulators that displaying an amazing lack of wisdom, empowered a couple of credit rating agencies with so much say over the markets. Had it no been for some haphazardly awarded credit ratings the not subprime but criminally irresponsible behaviour of some mortgage brokers would have been contained in a couple of banks and not leveraged into the problem it now represents.

On your front page the same day there is also a report by Francesco Guerrera and David Wighton on “US executives find favours to analyst can secure better ratings” and honestly anyone who could be surprised by this have not walked the streets enough to be a regulator. Sir look around you and you could find more courses on how to obtain a good rating than on how to manage your real business. This all is lunacy and we are being set up for even bigger disasters and it must end, before it ends us. We need urgently to punish the regulators, at least on the count of being very naive.

Have 100% guaranteed incomprehensive financial model…will travel!

This is a great and handy tool for hedge funds when valuating portfolios and that will produce maximum commissions; and for the large US banks that have recently been authorized by their regulators to apply Basel II rules and now need to catch up with European competitors in lowering their capital requirements.

Low maintenance costs with access to an exclusive well churned and pliable data set licensed by the proprietor and that reaches back to 1840 and is equally impossible to scrutinize.

About Banana Republics and the moments of reckoning

Sir in March 1999 I published and article where I held that the effects of the global warming might be more severe than we thought as it seemed to even have shifted the parallel of the tropical Banana Republics northward, since how could we otherwise explain the current enormous fiscal and commercial deficits in the United States.

Now, eight years later, when Kenneth Rogoff in “Americans will eventually learn that deficits do matter”, July 18, mentions that “continuing inflows are probably holding down interest rates by at least 1.5 per cent and possibly more” I cannot help but to think of those investors that quite recently thought they were doing splendidly, when valued by a model, but that now have to face some crude realities when marked to a market that sometimes does not even seem to exist.

You should not give debt relief to “odious” debt.

Sir Alan Beattie in “Vultures unlikely allies in anti-graft cause” July 18 quotes Stephen Rand of the Jubilee Debt Campaign saying “Debt relief should never be used as a weapon of economic coercion by creditors” as implying that debt relief should be awarded even when governments are still corrupt.

What is this? As a citizen of a country with a government that I consider quite corrupt, I do not like anyone giving it loans, debt relief or anything whatsoever. Frankly, before corruption is ended most of any debt relief given would just end up allowing these countries and governments addicted to debt, to hit the bars again.

If the concept of odious debt is applicable in the sense that some debts should not have to be repaid if contracted in an illegitimate way, castigating the creditor, then the same concept should clearly also apply to the granting of any debt relief, punishing the debtor.

Yes we need a Peeping Tom free, free trade core

Sir, I could not be more in agreement with Mr Grant Aldonas’ suggestion for the first part of “A fresh free trade agenda for Doha”, July 13, namely that of a “plurilateral agreement among all WTO members willing to move directly to free trade on a global basis”. Just like in a nudist camp we need to separate the real nudists from the Peeping Toms, as only this would allow us to conform a true and honest free trade core

It is clear that many of those who profess a belief in free trade fake it, since how could you otherwise explain the sort of perverse satisfaction many show from entering into negotiating processes that hinders the free trade from really advancing. The true spirit of free trade does not stand a chance against these saboteurs and who are simply too scared of taking off their protections, but want to enjoy the view anyhow.

Some subprime heads need to roll.

Sir, The Lex Column of July 11, with respect to the subprime-mortgage-backed-securities and the rating agencies affaire duly says “Could the rating agencies have acted sooner? Possibly. True, it is not their job to simply react to market moves”. Nonetheless the column opens by citing John Maynard Keynes with “When the facts change, I change my mind. What do you do, Sir?” and this is highly inappropriate and exculpatory since the basic truth coming out is that there has been not one single factual change but only the discovery of some amazing sloppy job, not only by those issuing the subprime mortgages but also by those rating the resulting securities.

I have until now not heard a single word about one single credit rating employee fired because of such an obviously shoddy work and if there is no one made responsible at this stage the future will only set us up to even much worse result. I am not suggesting anything like the recent execution of a regulator in China for what there was a clear case of corruption but, figuratively speaking, some subprime heads got to roll too… and of course some wallets be emptied.

Go where the beef is

Sir, I really do not understand how, in “Latin Lessons”, July 10, you can even think about achieving a better US engagement in Latin America by entering the field of establishing comparison between the simple propagandas of “the $20m being spent on a four-month-long humanitarian health care mission, involving a visit by the Comfort hospital ship to 12 countries, to the scale of the health care plans launched by Mr chávez and his Cuban ally, President Fidel Castro”. That is like assessing the cultural efforts of Brittan in terms of how long the British Museum lends out their Tutankhamen collection to the world.

Of course the real dealings with Latin America have to occur in the real areas you mention such as energy, trade and of course migration, and there, if the US was to find a more constructive approach to Latin America, it needs primarily to start looking for a more constructive and consistent approach among themselves, in Washington at least.

The Inter-American Development Bank recently reported that the working migrants of Latin America remitted to their home countries $62.3bn in 2004 and if these represented 15% of what the workers earned, we are then talking about a yearly figure of around $415bn, of which the US contributes almost all, and clearly this beats anything that what Castro and chávez can come up using the money obtained by selling Venezuelan oil.

All we need is “outsourcing”

Sir, after reading John Gapper’s “A cleverer way to build a Boeing” extolling the virtues of almost full outsourcing with as opposed to chaining itself down an as close to 100% local component production as possible, I cannot but sadly reflect that in my country Venezuela, if offered to help produce a 2% of the A380 it would currently have rejected it on the grounds that I must be an effort by the Empire to penetrate it.

Outsourcing seems as a constructive road to world peace there is and in this sense we should perhaps promote a rule that states that no country shall be allowed to contribute more than 5% of the components of any weapon. I can almost hear John Lennon rewriting a song.

The world has no representation either

Sir, Wolfgang Münchau in “This gentlemen’s agreement fails Europe too”, July 9, makes a very clear case for why Europe by splitting up the European representation in international institutions such as the International Monetary Fund (he argues that it is to preserve many plum jobs) ends up in fact with having no real representation at all. I understand and agree with his point of view especially since it goes hand in hand with my opinion that since all the votes, and all the Executive Directors, and the Presidents, and so many of its staff are assigned on pure local considerations, it is the “international world”, the global order, or mother-earth itself, whatever you want to call it, that ends up being the most under represented party in these global institutions.

If we are going to be able to manage the global challenges it is urgent we look for means to break away from our parochial local chains. What about splitting at least 50% of the shares among varied constituencies such as migrant workers, multinationals, media, educators, environmentalists, NGO’s, accountants, farmers, manufacturers, service providers, and so on?

The only constituency that has currently a representation in IMF, a 100% one, is the constituency of central bankers and this need to be changed. Europe, if you must insist on naming the next managing director in the IMF then at least do the world the favour of appointing some finance knowledgeable person that has never worked for any central bank. That would provide us with much more needed diversity than just appointing another central banker based on the local consideration that he is from Asia, Africa or Latin America.

And this is no joke. Incest is about the most dangerous limiting factor when it comes to impede clear thinking and effective actions.

We need to slam Moody too!

Sir, “Moody’s slams private equity” is how Francesco Guerrera and James Politi title their report on July 9 about the strong criticism that this credit rating agency is making about the private equity industry; and I believe it is high time for us to slam Moody as clearly the powers they yield over the markets is getting to their heads. Who do they think they are? Is a neutral credit rating agency supposed to get involved into what business their clients do? If they do not like how the business is structured, and believe it will affect negatively the credit ratings, then they should say so, in their ratings. To come up with unsolicited a priori advices that could only bias their future outlooks is not what they are supposed to do. Next time they might just opine on the cars that GM should produce to get a rating.

Let’s face it, if we do not stand up to the credit rating agencies we will help to create and strengthen some real financial Frankenstein monsters, authorized to dictate their feelings about anything. And, do not get me wrong, there is not a world in Moody’s comment about the private equity industry that I would object to, I just object, totally, that they should be the messenger. The credit rating agencies have already far too much power for their and our own good.

Christopher Caldwell risks being sent to Speaker’s Corner.

Sir, Christopher Caldwell’s “Healthcare as horror movie”, July 7, where he discusses Michael Moore’s latest film Sicko dares to touch upon something that is clearly more sickening than what a truly horrific healthcare system could be, namely the big business present in feeding the insatiable and bias craving radical extreme misconceptions with even more bias so as to allow them to be even more extreme and hungry.

This reinforcement of beliefs business which has created and promoted stories such as the 9-11 incidents having being carried out by the US government itself; or the migrants workers plotting to assassin, rape and take over countries; and so many other lunacies, are slowly leading us into neo dark ages characterized not by the lack of information but by a massive overload of it, and that has us all screening in terms of what best tickles our preconceptions. Now, why do I qualify Caldwell’s comments as daring?

In 1872, the British Parliament decreed Speaker’s Corner in Hyde Park of London as a place reserved for free expression, and initially it attracted all those extremists who, although qualifying as nuts, still had the right to vent their opinions. Lately though, we have all witnessed how the original Speaker’s Corner speakers moved into Speaker’s Studios and now radicalism, anarchy, or fundamentalism is voiced on prime-time television. All of us others, modest low-key analyzers or rational in-betweens, have to settle gratefully for slots in after-midnight cable television, dubiously sponsored by the most traditional professional services.

As rationality could soon be viewed as symptomatic of a modern nut, we might all have to line up at Speaker’s Corner… and so we’ll see you there Christopher Caldwell.

A not so transparent someone else’s life

Sir in “A transparent life” July 7 you mention that “privacy is so last century” and comment about how the new internet technologies risk us losing our privacy. That may well be so but simultaneously you just need to go to any of the millions of web based discussion forums to notice that very few speak in their own name but hide out behind strange pseudonyms and avatars. I myself have opted for always using my own name, as the best way to assure I will never forget who I am and start talking in someone else’s name. And so, while we definitely must help to assure the right to privacy for the right private person we also need to simultaneously deal with the multi-personality disorders created on the web.

Gazprom in a public-private partnership?

Sir, in your “Putin’s piste”, July 7, you sort of allude that there might be a public-private partnership between Russia and Gazprom. Nonsense. That is just a public-public partnership that uses private sector flexibility to avoid the constraints that reason imposes on public spending. If Gazprom is anywhere like the Venezuelan PDVSA that I know, then whatever it does beyond their basic oil and gas exploration, production and refining business, is just a way to non-transparently lose or distribute some of their oil and gas profits previuosly made.

Private or informal?

Sir when looking to analyze “Private equity’s risks and rewards” July 7, it might be useful to always differentiate between what could happen when someone goes into private practice from what could be the results from hiding out, going informal. The freedom to be private must always be defended, just as the forces that drive the growth of the informal sector must always be opposed.

My timely warning about Jo!

Sir, as the final book of the Harry Potter is about o be released, just in case anything dark happens, let me remind you all that at least I did my civic duty by including the following warning in my book Voice and Noise in 2006.

“As the books about Harry Potter have meant so much for the upcoming generation and sometimes they even represent the only books it has read, there can be no doubt that the last Potter instalment can actually seal this world’s fate for a long time to come. J. K. Rowlings, or Jo as we are instructed to call her in her Web page, is someone to watch, very closely. Not that I distrust her, but we should perhaps think about censoring her (discreetly). What will be the lessons she will imprint on her young and not so young and even quite old (like me) readers’ minds with her final book? What if she goes haywire? I guess I’ll manage it, I hope, but will the young ones?”

Are the Scots entrepreneurial or gullible?

Sir Stefan Stern’s “Billions made so far from home” July 7, where he comments on so many “of the UK’s richest . . . are Scottish born – though most have found it necessary to leave the land of their birth to make their fortunes”, led me to think about Richard Llewellyn's “How green was my valley” and John Ford’s Oscar winning movie adaptation of it, even though that particular green valley was welsh.

I once used the “green valley” allegory in a speech to extol the development virtues of blissful ignorance, which allowed Venezuelans go to the USA, Americans to Europe and Italians to Venezuela; and everyone daring to do business just because they lacked information about how difficult the local circumstances were; and since nationals knowing about the hardships too well would never dream of doing anything.

And so the question that now goes around in my head after reading Stern is whether the Scottish born have an especial entrepreneurial sense… or are just an especially gullible lot.

Do we really know how currencies behave when nude?

Sir, the concerted and concerned called for “We must act when currencies become misaligned” July 6, by four US senators, seems timely and reasonable even though it is hard to detect much real urgency as the unemployment levels in the US are low. In the dark ages, less than forty years ago, these currency imbalances would take care of themselves once the gold had moved over from the strong currency country to the weaker vault, and which made a reshuffle of the exchange rates required in order for the game to go on. Not any longer, now the currencies have no specific backing, they are all naked, which makes the issue much more confusing.

One of the attractions of asking someone else to revalue their currency is that somehow, because of some magic that would make the Hogwarts curricula proud, you seem to avoid having to communicate that you are devaluing yours, or that in essence you are declaring a big domestic salary decrease when measured in international purchase power terms.

The senators rightly say that there is no one single answer to America’s international economic and of course they are right, even though I fail to fully understand how “responsible healthcare” is an instrument of this particular toolbox. Sir, the world has never really been in this territory of major currency misalignments while in a nudist camp, so let us pray that everyone tinkers very carefully with them, while we learn, and at least while it all seems to be working not too bad.

Global leadership should be global

Sir, when in “A chance to exert global leadership” July 5, you argue against the fact that Belgium has more votes in the International Monetary Fund than India “despite the fact that it does not even have its own currency” you really get it wrong. Belgium does indeed have their own currency, the Euro, and the fact that they are willing to share it with others could perhaps even argue in favour of them having more votes.

But what really bugs me is the déjà vu feelings I get reading the article, as I am sure that exactly the same things were said when Rodrigo Rato was appointed and, worse yet, that the day when voting rights finally get reshuffled using a new geo-economical realities, we will discover it really did not mean that much. In order to take the IMF and the World Bank to the next level of multilateralism in a globalized world what is needed is a formula more helpful to break those geographical ties that keeps them so chained to sometimes very parochial issues. Besides, if whom you are going to appoint to the IMF’s Executive Board are just central bankers you will never get any real diversity, no matter what country they come from and which just implies of course the slowly build up of another systemic risk.

What we first need is an insurance that covers the risks of the discoveries.

Sir, Stephen Cechetti argues in “A future of public healthcare for all” July 3 that the advances in genetics and that will be able to provide for better individualized projections of expected health costs will translate into a market failure that will force the private health insurance system into the arms of the public sector. Actually it is not a market failure that will do so since in fact the market could only benefit from knowing more about the risks, it is the market results that will be unacceptable, or at least let us hope so, since if those prognosed as much healthier sneak out from sharing the risks, society could turn much much nastier. For instance, there is nothing to stop a good health prognosis to also influence such variables as the admittance to universities.

Before we put any new safeguard system in place, which will certainly only happen when it is much too late for many, what we most need is an insurance that covers the risks of whatever extra costs we could suffer because of what they discover in our genes, and have everyone subscribe such an insurance, before they are allowed to take any genetic samples

On the fashion of titles

Sir, John Dizard’s “Where money is lost there are winnings to be made” July 2, is a valuable reflection on the yen carry trade, though I must say the title sounds quite démodé. From what we have been reading lately about mark to markets through models of markets, the titles in vogue are more in the nature of “Where winnings have been made, losses wait to be recorded”.

A myth or a plain vanilla fraud?

Sir Tony Jackson in “Myth that could undermine credit derivatives”, July 2, describes the possibility that the traders on both ends of a deal could, by using their own models, show themselves to be making a profit for years and collect bonuses on these. Jackson describes these mark to market mechanisms in terms of myths, though I would read them slightly more like frauds. Anyhow it all makes me think that the hedge-fund-derivative traders could in a near future be facing the same type of difficulties a tourist has when he needs to talk himself out of a serious problem in a language no one understands... well until now they have all at least gained a lot in the translation.