I guess it is time for your reporter to change location

Sir I am sorry but Benedict Mander completely misses the angle when in “Red tape congests Venezuela’s roaring car trade”, July 11, he describes the governments “new rules that 30 per cent of cars sold from next April must have dual natural gas and petrol tanks” as something extraordinary. I just need to ask what extraordinary measures he believes the Crown would have to take to reign in car sales if it sold petrol at 4 cents of a dollar per litre and if it subsidized the import of new cars by means of an exchange control system.

When a foreign reporter does not see the absolute grotesque in the state giving away petrol at prices below distribution costs, I guess that reporter has been to long in the country and has become blind to its realities. There is supposedly a study that shows that people after having lived long enough close to a railway station do not even hear the trains, because of natural anatomic process of adjustment.

Just another case of managers running their personal agenda.

Sir Daniel Gros writes that “it is no mystery that oil supply has not reacted to higher prices. Producers are just waiting for even higher prices tomorrow”, “The China bubble fuelling record oil prices” July 10 and this is far from the whole truth.

The problem lies in that in the many countries where the oil belongs to the State, the current oil revenues exceed their respective governments’ capabilities to use them rationally, and their respective leaders’ most immediate personal needs, and so there is not a lot of incentives for them to produce more.

If on the other hand in all these countries, where the population still suffers many unsatisfied needs, the oil revenue was to be shared out directly to the citizens, the true shareholders, you would see more supply. Again it is all another case where the management run their personal agenda.

Gros quotes King Abdullah of Saudi Arabia that if additional oil were to be found in his country he would advise leaving it in the ground because “with the grace of God our children might have a better use of it” and this he can say only because the current children of his land have no say on it.

Give more freedom to the commercial banks

Sir of course I agree with Frank Partnoy in that we need to “Do away with rating-based rules” July 9 (my over 100 letters on the subject to FT should attest to that) but I would not necessarily stop at picking a substitute like the risk assessments made continuously by the market and as Partnoy seems to suggest, but change the whole current system of minimum capital requirements that differentiates among risks and go for flat percentage capital requirements, that could be higher or lower depending on the conditions of the economy.

That way we put the responsibility for taking the financial decision squarely back on the shoulders of the market and the individual bankers by eliminating the almighty excuse impossible to avoid of “I just followed the advice of the credit rating agencies that my bank regulators appointed”.

The traffic signs set up around the world by the credit rating agencies indicating low risks and the minimum capital requirements for the banks hijacked the commercial banks. It is high time to free them since we do indeed need their cooperation in channelling our resources to more productive uses than the building of subprime-mortgages financial pyramids.

As disaster producers, do not underestimate the humans

Sir John Kay tells us to “Forget the meltdown worry about goo and asteroids” July 9 and his arguments goes along the line that the damage humans can cause is modest relative with the damages nature can cause. On the surface it would seem that he has a point but given that humans are no cats and have only one life it does not really matter whether a disaster is capable of killing you once or a million times over.

Also he should not forget the havoc humans create while trying to tame the nature. Just look at the financial sector. Our risk-busters appointed the credit rating agencies to eliminate the risks and what did these do? They concentrated their prime-rating rays too much on a part of the market so that it exploded, bubbled, only later to implode, hopefully in a bunge, but that will foreseeable cause many sufferings, and worldwide, you can’t hide this fact, many onetime deaths.

Whatever, do not make the poor countries trust they can count on the rich ones

Sir Martin Wolf in “Why the obstacles to a deal on climate are mountainous” July 9, repeats frequent arguments of why the costs associated with the reduction of carbon emissions should be borne by high-income countries. Nothing wrong with that except if doing so makes the poor countries actually believe this is going to be so.

Since I am certain that Martin Wolf like me suspects that the possibilities of the high-income countries picking up the tab on this are almost nil, may I suggest that a more productive and honest line of argument would be on the line of the following:

“You poor countries, you better take special notice since in most of the climate change impact studies you seem to be dangerously exposed and since you most probably will not be helped sufficiently by the rest of the world community, you better stop copying the rich countries unsustainable habits, and start cracking on preparing yourself for the worst, on your own. And who knows, there might even be some great hidden benefits in doing so.”

We need a new batch of bank regulators

Sir these days the credit rating agencies are getting pounded on, as they should be, for instance as described by Joanne Chung and Michael Mackenzie in “SEC sees conflicts of interest at rating agencies” July 8, but the really frightening issue is how on earth we landed ourselves some bank regulators that trusted so much the credit rating agencies.

No matter what you believe the credit rating agencies they do not even intend to look into the future, they just extend the past into the future, and so they do not even purport their ratings to be correct, and besides that they are manned by humans and therefore bound to err.

But all that did not stopped the regulators from assigning to the credit ratings agencies the role as supreme risk overseers and by doing so reinforcing the beliefs of all those who wanted to believe that the future is manageable. And, like lemmings, the market followed the officially endorsed credit rating agencies over a precipice, and will do so over and over again. Is it not high time to get us a new batch of bank regulators, some that are more knowledgeable of the very basic facts of life?

And the lesson number one is....

Sir, Martin Wolf in “The lessons to be learnt from today’s financial crisis” July 2, 2008 quotes the Bank of International Settlements annual report stating “loans of increasingly poor quality have been made and then sold to the gullible and greedy”. Although I find it hard to think of a market that does not use greed as one of its main motors it is really the “gullible” part of it all that really blows my mind.

Who on earth is BIS to talk about gullibility. Was it not the Basel Committee on Banking Supervision that BIS hosts that set up a system based on credit risk assessments and that appointed the credit rating agencies as the supreme risk measurers? If we normal citizens and investors are gullible of anything it has been of believing that the Basel bank regulations had taken care of the problem once and for all, and that the credit rating agencies knew what they were doing.

BIS also mentions “the inherent procyclicality of the financial system” to argue for tighter monetary conditions when credit soars…but not a word about how the risk rating and the consequent “massive re-rating of risk” can send cyclicality soaring to the moon.

No, if there is a first lesson to be learnt it is that central bankers and bank regulators are, no matter how knowledgeable and pompous they act, only humans prone to err, and so it behoves us not give them too much powers, which is what makes them truly scary and dangerous.

PS. A letter on this theme to FT back in 2004.

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is dangerous nonsense.

The bank directors have the mother of all the good excuses.

Sir Francesco Guerrera and Peter Thal Larsen wrote a full pager on June 26, 2008 titled “Gone by the Board?” on why the directors of big banks failed to spot the credit risk. Though it is not my intention or role to defend bank directors I must in all honesty say that they completely left out the most important argument the directors could use in their defence.

Just think about a knowledgeable and a responsible director’s chances to convince his fellow directors that the securities backed with subprime mortgages and rated prime by the credit rating agencies and appointed to such a task by the bank regulators themselves were not prime as he had heard rumours that the mortgages were not awarded with the same usual care. None? I would say so.

If you want a board to act you have to let it act and not let them believe that the credit rating agencies are doing the job for them.

But the citizens of the oil exporting countries would love to consume…if given a chance.

Sir Martin Wolf says in “How to manage the world economy through two crises” June 25 that the ongoing transfer of wealth from oil-importing countries to oil-exporting countries… from those who spend to those inclined to save… will curb the rise of global demand” and he is right, but it should not have to be that way. The reason for him being right is that the wealth transfers goes into sovereign funds or other government pockets and not to the citizens of the oil-exporting countries who would also gladly step up their consumption.

Today, in Venezuela, I am publishing a fictitious letter from Arnold Schwarzenegger in which he offers to buy on a rolling five years average price 2 million of oil barrels per day to satisfy the needs of his constituency and take the worst volatility out of the market. To stimulate Venezuela entering into such a country he is offering to pay an equal share of the proceeds, to each one of the 26 million citizens of Venezuela, in the currency and in the individual account each one of them would like.

http://opinion.eluniversal.com/2008/06/26/opi_769_art_de-arnold-para-venez_26A1723279.shtml

Indeed moderation needs to be sustained…but it better be the right kind.

Sir Stephen Cechetti wrote “We need to sustain the great moderation”, June 23, 2008 and I initially thought he meant a “from-now-on”. To my big surprise, reading it I then saw that he refers to the period 1985 to 2005 when the $500bn in home mortgages grew to $9,500bn, signifying debts of about 7 months of the current GDP, and of which $7,500bn was used for securities, as the “moderation” that with some minor tweaking, needs to be sustained.

On what planet does he live? As I see it the most important result of that boom was to make the USA even more energy dependent, in the midts of an environmental threath, and luring many babyboomers to anticipate their current consumption.

Can you imagine how much better the US would have been off if those $9,000bn had gone to infrastructure investments that prepared the US for the new realities?

But of course that could never have happened when the bank regulators all they care about is to stop the banks from defaulting… no matter where the rest of the country ends up.

Indeed moderation needs to be sustained…but it better be the right kind.

The real conundrum is… what is the purpose of the banks?

Reading “The conundrum of financial stability” June 20 we get the impression you have been boxed up with those bank regulators for whom everything in life circles around stability, on their watch. You discuss the problem of the central banks having the dual responsibility of macroeconomic and financial stability, but forget that out there, in the real world, stability itself is not enough, we want and we need more.

How the financial systems could help to create decent jobs and avert real threats such as those from arising from climate changes, are issues much more important to discuss than just how banks can avoid to default but, unfortunately, almost by definition, central bankers are not at all interested in those themes, and much less now when having convinced us that they need independence they have been granted their own full stability, given that we cannot fire them.

Angela Merkel, helps us understand, thanks! And now credit rating agency Del Sur!

Sir the world at large needs to show Angela Merkel much gratitude for when she says “I think that in the medium term Europe will need a working ratings agency because the robust currency system of the euro has not yet secured sufficient influence over the rules governing the financial markets” June 11, she is in fact daring to lay bare the fault in the whole fundamentals for the use of the credit rating agencies, namely that these agencies could, objectively, without bias, and presumably without mistakes, measure risk.

Not so, whether through bias or through mistakes they are as humans to err and with their signalling lead us in the wrong directions or even over precipices.

I can already hear a hugo chávez call for a credit rating agency Del Sur!

But foremost we need a new direction for our growth

Sir Martin Wolf writes that “Sustaining growth is the 21st century’s big challenge” June 11 but as the article is set in the perspective of the environmental and energy limitations that the world now faces and that Jeffrey Sachs has written a book on a better title would have been “Re-direction growth so as to make it sustainable is the 21st century’s big challenge”.

Now how do you do that? First of all by measuring growth in terms that makes more sense. That a dollar used to buy the family’s third car in a developed country should count as much as the dollar used to pay for the vaccine for a child in Africa does somehow not seem to give us the right compass bearing we need.

Why can’t you have sensible long term contracts in oil?

Just the sheer possibility of losing a tenure based on no particular fault of their own, could do wonders for the educational system, infusing it with a minimum required dose of uncertainty, and thereby allowing tenured professors to at least to understand the concept of anxiety.

Sir in “Double, or quit?” June 10, you say that “Volatile prices get in the way of sensible medium-term contracts to produce or deliver oil-intensive goods and services” June 10 and you are right but why on earth you cannot extrapolate that into the need for sensible medium-term or even long term contracts for oil itself, to bring down that uncertainty that hinders more investment is indeed very hard to understand.

We need to avoid monopolies or oligopolies in the market of risk-appraisals.

Sir it is indeed comforting to read the president and chief executive of the Federal Reserve Bank of New York Timothy Geithner admit that “Regulation can distort incentives in ways that make the system less safe”; but also disappointing that in his Op-Ed “We can reduce risk in the financial system”, June 9, there is not a word about how the appointment by the regulators of the credit rating agencies as their delegated risk surveyors, reduced the incentives for the rest of the markets to do their own risk appraisals.

We need to avoid monopolies or oligopolies in the market of risk-appraisals.

Sir it is indeed comforting to read the president and chief executive of the Federal Reserve Bank of New York admit that "Regulation can distort incentives in ways that make the system less safe" but also disappointing that in his Op-Ed "We can reduce risk in the financial system" June 9 there is not a word about how the appointment by the regulators of the credit rating agencies as their delegated risk surveyors, reduced the incentives for the rest of the markets to do their own risk appraisals.

We need to establish a worthier purpose for our banks than just avoiding a default

Sir Ken Lewis the Chairman of Bank of America in “Markets alone will not lead to a green future” June 6 says that “the private sector needs a stable and predictable regulatory environment with a bias towards clean energy and the green economy”. By doing so, perhaps unwittingly, he points out the major failure of our current bank regulations, which is that they are biased exclusively towards eliminating the risk of bank defaults, as if that is the only risk with the banks for the society. In fact the risk of the banks not doing their part in the development of the society is much more serious than the risk of having to go through a bank crisis.

In this respect instead of applying minimum bank capital regulations base solely on risks of default, most often as measured by the credit rating agencies, we need to give more purpose to banking, perhaps by starting to think in terms of units of risk of defaults per environmental hazard avoided or per decent job created.

More confidence requires more distrust

Sir Robert Jenkins writes that “Confidence is what we need, not more alchemy” June 6, but let us not forget that it was an excess of confidence, by the regulators in the capacity of the credit rating agencies, that caused much of this turmoil. In this sense we could reach the somewhat peculiar conclusion that confidence building must also include distrust building.

Free the banks from the chaperones and get the party going!

Sir Charles Goodhart´s and Avinash Persaud´s “A party popper’s guide to financial stability” June 5 reads like the desperation of a garage fixer to fix something with whatever epoxy he can lay his hand on.

I have myself often proposed a progressive tax on banks, based on the-bigger-you-are-the-more-it-will-hurt-if-you-fall-on-me principle but, what on earth do they mean by taxing the growth rate of bank assets, which is what raising capital requirements mean? That slow growing banks can just sit back and trade growth allotments, like if bank assets were carbon type contaminants?

No instead of worrying so much about the possible hangovers why do they not worry more about making the party better. The current risk adverseness implied in the minimum capital requirements based on risk and as measured by the credit rating agencies, have the markets playing boring and unproductive minuets, like consumer finance dressed up as “risk free” securitizations.

The world is clamouring for decent jobs, and if the banks are to help us create them, they need to be given more freedom and responsibility. In that sense, set the capital requirements for banks at a fixed percentage of assets and get the chaperones out of their hair, so that we can get more of that risky salsa that when if times comes for a hangover, makes it at least more bearable... since the party was great!

Should not all banking be sustainable?

Sir Lawrence Summers, June 2, gives his “Six principles for a new regulatory order” for the financial system and the next day you publish a full section on “Sustainable Banking” and there is absolutely no connect between them. Should not the ordinary financial sector and its commercial banks also be sustainable?

Ever since the Basel Accord the only thing in the agenda of bank regulators has been to avoid bank defaults and that cannot simply be all the purpose there is to banking. What a big irony that FT and IFC the private sector arm of the World Bank Group can find the need to mention sustainability and even award prizes to banks based on something that does not even appear in Basel I or Basel II or even in the thoughts of bank regulators.

In just the same vein we now read that “World Bank calls for microfinance rules” June 3 saying that “lenders making small loans to poor people in developing countries should be subject to regulation to prevent abusive practices” and we need to ask, does that not apply to lenders making big loans to rich people in developed countries?

The new regulatory order should correct the faults of the old one

Sir Lawrence Summers lists us “Six principles for a new regulatory order” June 2 and I wish to make the following comments. Though I do agree on that the risk of allowing institutions to determine capital levels based on their own risk models neither do I think it is up for the regulators to intrude artificially with their own subjective rulings. As is the differentiated minimum capital requirements based on credit ratings is imposing an arbitrary layer of risk adverseness on top of the market’s own with quite possibly long term dangerous results as society needs risk-taking in order to develop.

With respect to the need of avoiding that the failure of “an individual institution is not itself a source of systemic risk” there would seem to be no other route than placing limits on the size of the institution, perhaps based on a progressive the-bigger-you-are-the-more-it-will-hurt-if-you-default-on-us tax.

Finally there is a fundamental principle that Summers misses, that of avoiding the risk of the market relying too much upon other, such as the credit rating agencies. The least acknowledged lesson learned from the current sub-prime turmoil is that it would not have happened were it not for the credit rating agencies having been too much empowered by the regulators and a new regulatory order that is build without naming the faults of the previous one has little chance to become better.

What kind of reporting is this?

Sir Benedict Mander reports that “Drivers put cars blame on chávez for Caracas congestion” May 30, and nowhere does he mention that the purchases of cars is subsidized by means of the foreign exchange system and that petrol is sold for about 2 cents of a Euro per litre, and which has made a small country like Venezuela import 750.000 new cars to place on already jammed roads, in just two years. What kind of reporting is this?

Is Benedict Mander trying to hide the fact that this supposedly socialist government is taking way over 10% of Venezuela’s GDP from the poor people who have nothing and giving it to those citizens who have a car?

If you have to handle uncomfortable truths, go for the right ones.

Sir Philip Stephens in "Uncomfortable truths for a new world of them and us" May 30 blames the subprime mortgages turmoil on "the explosion in financial innovation made possible by ever more sophisticated information technology. This has… engendered among investment bankers and traders an insouciant indifference to risk". The real truth is much more uncomfortable than that.

The subprime mess has nothing to do with sophistication but with the fact that those who had been empowered by the regulators as supreme risk surveyors, the credit rating agencies, just did not do their job right finding out some very basic faults with the mortgages and that should have been easy to spot.

Stephens, referring to Washington consensus type of preaching to the developing world now tells us that in response to the turmoil the developed world must show the "willingness to see that this is a transformational moment that demands we look at the world entirely afresh".

He is right; and one of the issues on that urgent agenda must be to annul the dangerous paradigms that have taken over financial regulations. The first being that the only purpose of bank regulations is to avoid a bank crisis, when there is so much more to banking than that, and the second, the one that relates to the uncomfortable truth above, that it tremendously unwise to delegate so much regulatory risk surveillance power in some few agents that, as humans, are bound to err and take us over ever more dangerous precipices.

When in Rome, do not try to see every attraction but do not miss what has to be seen either

Sir Robert Zoellick making reference to a meeting among world leaders in Rome prescribes “A 10-point plan for the food crisis” May 30. That plan is somehow confusing in that it mixes immediately needed actions, the first three, that of fully funding the World Food Programme’s emergency needs; the support of vital safety nets and facilitating the access to seeds and fertilizers in poor countries, with other seven points, on some of which there is even an ongoing debate about whether they are right or wrong, like for instance whether to step up ethanol production from sugarcane, which consumes a disproportionate amount of water.

Since this food crisis relates more to economic growth and energy related than to unforeseen weather disasters, and there are many official watchdogs like the International Energy Agency, the Consultative Group on International Agricultural Research, even the World Bank, supposed to keep their eyes open, my suggestion of an 11th point, I believe far more important those point 4-10 suggested by Zoellick, is to figure out why world has been so taken by surprise with this food crisis and what can be done to improve the foresight.

Rating the rating agencies would be just digging us deeper in the hole.

The last thing we need is to create even more illusion that nothing can go wrong piling on top of current realities the concept of an AAA rated credit rating agency.

Sir, “Who rates the ratings agencies?” May 30, starts from the premise that the credit rating agencies need to keep the immense powers that regulators have awarded them and that they therefore need to get better. You are wrong on that! The way to go is to reduce the powers of the credit rating agencies and so that the rest of the market have better incentives to analyze credits, for instance banks could instead of rating readers and rating predictors employ credit analyst again.

If the banks were just needed to report as an information the minimum capital requirements as judged on the basis of the assessments of the credit rating agencies but were actually not forced to apply these capital requirements, and for example go for a fixed percentage of capital to credit instead, then that would make of credit rating agencies what they are supposed to be, information providers, and not what they are, regulation enforcers.

Let us also free the development experts!

Sir William Easterly, himself a development expert, after reading the report of the World Bank Growth Commission, tells us to trust the people, instead of development experts, “Trust the development experts – all 7bn of them” May 29.

Easterly bases his conclusions on Friedrich Hayek’s teachings on the need of freedom for “multitudinous individuals to figure out their own answers” arguing that experts cannot impose this freedom from the top down. He is right but having, as a former Executive Director of the World Bank 2002-2004, witnessed myself how the risk aversion of those who manage the business of development; the vested interest of those who hire the development experts, the governments; and the experts own often non functional peer reviews all conspire against creativity and promotes useless development jargon, we should not forget that the experts are also in need of much more freedom.

Humans and animals are still challengers to oil.

Sir although Daniel Yergin is absolutely right reminding about the disastrous effects of the price collapses [of oil] in 1986 and 1989 in "Oil has reached a turning point", May 28, it is much harder to agree that oil “seems to be losing its almost total domination in ground transport”, because of ethanol... since hybrids still run on oil.

In a world where cyclists and animal pulled carts are going over to cars and trucks, in many places, high oil prices, just makes humans and animals real alternatives again. Of course we could get some petrol out of coal, but, when push comes to shove, that is just another sort of oil, though perhaps slightly dirtier, no matter what the clean coal slogan says.

When it comes to oil FT does not write without fear and favour.

Sir once again, when it comes to oil, I feel that what is most valid about FT’s “Without fear and without favour” are the quotation signs. In your “Pumped up”, May 28, you refer to a study that finds that “UK duty was 20% higher in real terms in 2000” and you therefore happily conclude that “it is not the cause or rising fuel prices” Why did you not compare it to a year when petrol duties really started to increased, like for instance 1980?

You talk about that driving is getting costly, but you do not dare to specify the components of that cost, could that be because the taxman still gets more than the oil man?

Hey, you missed the story!

Sir, "Moody's error gave top ratings to debt products" May 21, is presented as a "human bites a dog" story even though it really is a "dog bytes a human" event. We all know that Moody and all the others are bound to commit errors, it is only human and must be forgivable, just as then try to cover up those errors is also human though not as forgivable.

The real story is how these agencies could have been regarded as infallible by the regulators who empowered them, and thereby forcefully or suggestively induced the market to blindly follow their ratings.

The article states "Credit ratings are hugely important within the financial system because many investors – such as pension funds, insurance companies and banks – use them as a yardstick to restrict the kinds of products they buy, or to decide how much capital they need to hold against them" and this gives the impression that the use or not of the credit ratings is a voluntary issue, which is clearly wrong. The investors mentioned, use the credit ratings because they have been strictly ordered to do so by their respective regulators.

Now if they managed to get you to spin a story about a once in a lifetime crazy mistake event that is never ever to happen again, then let me assure you that someone is shamelessly using you.

Yes, it is awfully hard to have the cake and eat it too!

Let's face it, globalization is awfully hard to discuss when "like most of us do we try to have our cake and eat it too and Martin Wolf's "How to preserve the open economy at a time of stress", May 21, is but another example of it. I agree with it all, full-heartedly, yet I have not the faintest idea of what I really have agreed with. It might be that we need to simplify the whole globalization equation in more manageable pieces.

Martin Wolf mentions for instance "redistributing the spoils of globalization, not sacrificing them" and which sounds a quite sensible thing to do. But that would have to start by identifying the spoils and perhaps wake up to the fact that the spoils are not to be found in a faraway country but in your own neighbourhood, in your own friendly neighbours courtyard.

Trying to speculate about where the non-obvious spoils are to be found, as those arising from higher prices of commodities are easier to identify, I frequently end up making two questions that might indicate possible new direction, exactly the purpose of questioning.

The first is. Is it logical that profits made by competing nakedly cost to cost in an efficient market should be taxed at the same rates that profits derived from an activity to which society has provided special shelter, like intellectual property rights?

The second, much more mundane, is why should a sportsman that earns a fabulous amount because he plays in a franchise with global reach pay income taxes based on where he slugs or kicks it out? Should he not pay it to his homeland or proportionately to where his audiences are?

Many of the consumers have had oil at $130 for decades!

Sir may I congratulate on placing the current price of oil in its true perspective saying "When oil was $10 a barrel, the idea that the stuff was running out seemed demented", "Solving the $130 oil conundrum, May 21.

It is exactly in that "dementia" during the last oil bust-boom (where you place yourself depends on whether you are an extractor or a consumer) that we find the origin of the current boom-bust, and so let us hope that a similar dementia is not present this time. This requires being sincere with the facts.

Among the little acknowledged oil facts is that for instance that the European consumer and many others have already for decades been living with oil in the $130, only that instead of the extractor getting that value it was the taxman. While oil prices were nudging down to the $10 you mention, taxmen were stealthily increasing their take...will they now reduce it?

Oil was at almost 10$... and heading south!

Sir, why are you distorting the truth? In a "Time to convene a summit on oil" May 16 you refer to the inexorable rise in the oil price from below 20$ to 126$ in less than a decade. If that had happened we would probably not seeing the current conditions but the fact is that late 1998 the price of oil got close to 10$ creating havoc for producers and investors alike (and for Venezuela bringing us chávez) and you know that as late as April 1999 even The Economist published an article arguing it was going for 5$ and FT must have echoed the same beliefs.

If an oil summit between the consumers and the oil extractors is to succeed then it has to build on the truth. And the truth should be spelled out without fear and without favour. Don't you think so?

Could we please have our active commercial bankers back?

Sir Evan Salway is right when he urges to "Rethink the 'active versus passive' investment debate" May 15, but much more important is the issue of whether we want active versus passive bankers. I sure do!

Since it is the commercial banker's true societal role to be actively out there in the real world developing his skills in listening and analyzing the many different lending opportunities I feel saddened by seeing the bankers turning into passive credit-rating-agency-criteria followers and automated executioners of trading opportunities identified by computers running models that none of them fully understand.

Banking regulator in Basle...could we please have our active commercial bankers back?

Should central bankers be allowed to own assets?

Sir in reference to your leader "The great asset price controversy" May 15 one could wonder if the first step should not be that of prohibiting central bankers from owning assets as one must wonder how many, if not all of them, were plainly delighted seeing the value of their houses go up and up... like a beautiful balloon full of hot air.

Americans, how sure are you it is not Mr. Jones that you should blame?

The fundamental driver of the unease with globalization is the reduction of the share of decent salaries paid in the gross global production (GGP) and since “decent salaries”, whatever that means, has almost exclusively to do with the developed world, there is a growing grumbling in the western world that this globalization thing might not have been such a bright idea after all.

Clearly, if an American holds that the world has to stop growing, immediately, so that he can go back to his 2 dollar per gallon of gas, he has a point, though he would also have to explain what to do with a paralyzed world.

Devesh Kapur, Pratap Mehta and Arvind Subramanian, “Is Larry Summers the canary in the mine?, May 14, worry that American liberal intellectuals might now team up with Lou Dobbs and produce a pure local US knee jerk reaction, which would be both dangerous and unproductive for the whole world, instead of teaming up with them in finding some valid solutions for all. They are very right about that.

Americans should know that when you build an isolation wall the worst part is how difficult it is to be 100% sure that you got stuck on the right side of it and so, before shutting themselves out, they would de well trying to get at the root of who are really capturing a larger share of the GGP, since besides from those obviously benefiting from the commodity boom, one of the culprit might even be their next door neighbour, Mr. Jones.

But we did what the market told us to do not long ago!

Sir Martin Wolf tells us that “The market sets high oil prices to tell us what to do” May 14, but we should not forget that the same market, less than a decade ago, priced the barrel of oil under 10$, and according to some pundits it was heading for 5$, and that in fact many of our current problems are derived from doing exactly what those low prices told us to do.

Martin Wolf also quotes the International Energy Agency in order to establish a case for extremely tight oil markets but what was this agency saying just a few years ago? Why are they to be more credible now?

What Martin Wolf does not mention are the alternatives to the short term markets in oil and that some long term take up contracts between producing and consuming countries, based on some reasonable in between prices, could create stability and reduce volatility in the oil markets for the benefit of all...less the short term speculators of course.

There is indeed a case for a league of “real” democracies

Sir Robert Kagan writes about “The case for a league of democracies” May 14, and of course there is such a case, as long as we are talking about real democracies. Many citizens around the world pray for the existence of a club where only governments that show their own people their utmost respect could be members, and where not belonging to it, helps to send an unequivocal shaming message.

Now for this to be a true example-setting club, it should not be possible to become a member by sheer political wheeling and dealing, but only by meeting a set of very strict criteria that go much further than just having a popular vote.

For instance Venezuela though presumably having a popular elected government, should not be able to be a member of such club since though it is a very polarized country it yet has a Congress that includes 167 members who are in favour of him who wishes to be called ‘Commander’, and none, zero, zilch, of those many who are not the least in agreement with that. Additionally Venezuela, as an oil cursed country that by centralizing the revenues from the oil in the State has a government that is wealthy and powerful independently of its citizens, should obviously not be admitted to a club of real democratic leaders.

And then on top of it all there is the regulatory tax on risk.

Sir I could not be in more agreement with what Eric De Keuleneer has to say in his letter “Step up competition for banks and rating agencies”, May 12 in relation to taking away the powers the credit rating agencies have been given to distort the markets, as you must know having received at least 100 of my letters on the subject over the last years. That said Mr. De Keuleener does not mention the current tax that the minimum capital requirements for banks impose on risk.

Under the current Basel I Standardized Approach, a low risk corporate loan (rated AAA to AA-) requires a bank to hold only 20% of the basic 8% capital requirement, meaning 1.6 in units of capital, while a much riskier loan (rated below BB-) requires it to hold 150% of the basic 8%, meaning 12 units of capital. If the current cost of capital for the bank is 15%, then the bank's carrying cost for the low risk credit is 0.24% (8%*20%*15%) while the bank's carrying cost for the high risk credit is 1.80% (8%.150%*15%), thereby producing an additional cost of 1.56% that must be added on to the normal spread that the market already requires from the higher risk credit when compared to the lower risk one.

This mind-boggling 1.56 basis points regulatory tax on riskier but frequently more needed credits when compared to low risk but often not so productive loans, dwarves any Tobin tax proposals both in terms of costs and distorting signals, but it is blithely ignored.

What is the purpose of the financial institutions?

Sir Evelyn de Rothschild writes passionately that “Ethical standards must be restored in finance”, May 9 and we all agree. That should begin though by clarifying what is the purpose of the financial sector since without that ethical standards would indeed be hard to define.

In fact given that the current purpose of the financial institutions seems to be extracting as much profits and bonuses as possible from them, some could even argue that there has been quite a lot of ethical behaving lately.

What is the purpose of our banks?

Samuel Brittan in “The financial crises of capitalism” May 9 says that “The beginning of wisdom is to recognize that boom and busts have been a feature of capitalism from the start”. Let us hope our bank regulators read it since instead of regulating so as to maximize the benefit from the boom and minimize the cost of the bust, ever since the Basel Accord in 1988 they have been set exclusively on avoiding the bust and which is clearly unwise.

How long has it been since any bank regulator has asked himself the question of what is the purpose of the banks? It cannot be simply that of avoiding a bank crisis as that is just stupid.

But in all this slicing and dicing there is no cube with the fathers and mothers of the US

Sir Jurek Martin in “Do not let Limbaugh pick the president” May 8, says “We are slicing and dicing the great American Community as it has never been sliced and diced before. Every component part is in play – black, white, men, women, Hispanic, Asian, rich, poor, old, young, Protestant, Catholic, evangelical, Jew and non-believer”.

To this we would then also add the slicing and dicing that the US Census Bureau does when reporting on the characteristics of citizens who voted or not in the elections and which, to Jurek Martin’s components adds: Nativity Status (whether born in the US or naturalized), Marital Status, Educational Attainment, Employment Status, Tenure (whether they own or rent the house), Duration of Residence at the place where they now live, Veteran Status and the Region where they originally come from.But surprisingly, at least to me, no one seems to be interested in the cube represented by fathers and mothers! Since the backbone of a nation is its people and the backbone of its people is God and families one has to wonder whether someone is taking the US backbone for granted.

Please visit!

The bankruptcy of the finance sector regulations

Sir Martin Wolf lists a quite comprehensive “Seven habits that finance regulators must acquire” May 7, though I missed two things.

The first is a definition of what we should have the right to expect from the regulated financial sector since hopefully it must be something more than just for it to avoid defaults. And how can you regulate without an objective?

Second, when Wolf mentions that “Capital requirements must be the same across the entire financial system, against any given class of risk”, this is way too important to leave at that, since it signifies that the fundament basis for all current Basel regulations, namely minimum capital requirements allocated on the basis of risk of default alone, has proven to be a bankrupt concept; with in this case “bankruptcy” being an unusually appropriate term.

By tinkering with risk and forcing upon the markets the “opinions” of the credit rating agencies overall societal risk has only increased and this has to change. Basel, do not go forward to Basel II or III, go back to the drawing board altogether!

Don't forget to sack some regulators too!

Sir William Cohan writes "Regulators must seize the chance to reform Wall Street", May 2, and though I agree with most of what he says I can't help thinking that we must also seize our chance to reform the regulators before they take us to That-Place-That-Must-Not-Be-Named.

Our bank regulators have now for two decades forced upon us a system which sole objective has been to avoid financial turmoil, as if that is all that banking is about, and they have not even delivered on that!

Come on, that the bank regulators should get sacked when they do not perform must be the first pillar of any reform. This is turning out to be the mother of all the non-accountabilities.

We also need to review "normality"

Sir it is understandable to wish for a return to normality as could be read from your "No quick end to the credit squeeze" May 2, but one of the very few good parts with any crisis is the opportunity it brings to reappraise whether we agree with "normality". This is a moment to step back and have a long deep thought of what we really want to get out from our financial sector and from our banking regulations, since just keeping us out of turmoil is clearly neither enough nor deliverable.

Just because they are private doesn’t make the credit rating agents less bureaucrats

Sir John Authers in “The Short View” of May 2 asks the relevant long term question “should the S&P’s ratings be this important”, and answers with a no “As we have learnt from the credit crisis, it is dangerous for so many to put so much weight on one rating agency’s judgment”. He is right. The fact is though that as long as the regulators keep empowering these agencies to decide so much on how much capital the banks have to set aside for each credit based on the ratings, too many will indeed put too much weight on one rating agency’s rating, and there is no way around it.

I just ask what if those credit rating agents had worked for the regulators. All hell would have broken loose. Our confusion arises from not being able to see through the veil that the outsourcing to the private sector signifies, so as to comprehend that the credit rating agents are just simple credit-risk-measuring-bureaucrat-commissars.

Risk is always relative!

Sir, John Gapper titles a bit prematurely "The return of high-risk optimism" May 1, when in fact we are yet only going through "the coming home of low-risk pessimism" phase; and in fact he mostly discusses the losses on "safe securities".

What is finally true is that risk itself is a very relative concept and I have argued for years that while all those low risk instruments could be truly low risk instruments from a financial investment perspective, they could just the same be the most risky investment from a long term societal development point of view. For instance the "safe" financing of cars placed in the perspective of the climate change threats.

The restructured mortgages need to earn the prime status they should not before have been awarded.

Sir the chairman of the US Federal Deposit Insurance Corporation Sheila Bair opined on "How the state can stabilize the housing market", April 30.

She describes the pros of some current options but misses out on what is the most important rule of any restructuring namely that if you are going to pay for the costs of restructuring, this is normally only worthwhile to do, if you get it right once and for all; and that what is left in the pot is deemed as being of much better risk quality than what went in. In other words the resulting mortgages should have to earn the real prime status they should never before have been awarded.

In this respect when Bair states as a clear advantage that "it keeps the risk of re-default on mortgage investors", though it sounds about right, it should be irrelevant if the restructuring has been done correctly and the risk of re-default are negligible.

Force oil companies to adopt EITI principles in order to list and trade

Sir as a cursed citizen from an oil cursed nation (I guess you have never really seen a cursed government from an oil cursed nation) I do applaud your editorial "Fighting graft" since you there clearly state that if persuasion and coercion do not exist, nothing will happen any century soon. 

I for one am begging the developed countries to have their financial and commodities exchanges to ask for evidence of compliance with a set of minimum practices along the lines of the Extractive Industries Transparency Initiative, before any oil company is allowed to list or trade on them. 

That of course would do infinitely more than having to spend our next hundred years trying to convince individual companies and countries of the merits of such initiative.

That of course does not mean that I am in agreement with EITI’s obnoxious 2nd principle that states “We affirm that management of natural resource wealth for the benefit of a country’s citizens is in the domain of sovereign governments to be exercised in the interests of their national development.”

As a citizen I know that the worst part of any oil curse is the excessive concentration in the governments of our oil revenues.

America, and the world, needs equally to make a new case for its financial system.

Sir Lawrence Summers observes in “America needs to make a new case for trade”, April 28, that “while the financial crisis dominates current discussions on the US economy questions regarding America’s future approach to globalization are looming increasingly large” and as if those were in fact two separate issues. They are not! Summers asks for us to better define what the purpose of trade for the sustainable well-being of a country is and the same needs to be done with respect to the financial system.

The biggest failure with the financial sector is not its current turmoil but the fact that having left it completely into the hands of regulators who on their minds had only the limited goal of avoiding defaults and bank crisis, we now face a totally purposeless banking system. Even if we would get out of the current turbulence, it would still be totally rudderless system. I say this assuming that no one could really be satisfied having a financial system that makes bets in a virtual world, guided by traffic signs set up by the credit rating agencies, all just in order to survive. Ask your regulators… survive in order to do what?

In fact had you not had such a wasteful financial system pursuing so much the lending to the public sector, the housing finance or the anticipation of consumption just because this lending could be disguised as less risky lending, you might not even have the current trade imbalances.

Our first turning point has to be in the how we manage the world’s economy.

When I was an Executive Director at the World Bank 2002-2004 I am on the record complaining that there were no significant mention of energy plans in the country assistance strategies presented to us, when in light of the tremendous energy intensive growth occurring in places like China and India, we could very well be facing 100 dollar per barrel of oil in a short time. And I do not yet understand how the International Energy Agency was not capable of mustering sufficient strength to warn the world of the upcoming imbalances with the supply and demand of oil.

For more than a decade I have been also been voicing, sometimes quite noisily, that in fact we do not have a workable regulatory framework for our financial systems, since it should be clear to anyone that our real objectives for it must reach much further than the current limited and almost silly objective that Basel has in mind, that of just avoiding defaults.

Also, from the very first moment I heard about officially empowering the credit rating agencies to do the risk measurements that determined the capital requirements of banks, I have repeatedly stated that this would just lead some participants to let down their guard and end with many investors following, sooner or later, the credit rating agencies over a precipice.

I mention these three aspects, though there are many more, like the “scandalously wasteful biofuels programmes”, in response to Martin Wolf’s “A turning point in managing the world’s economy”, April 23, in order to emphasize that the first turning point we really need to make has to do with the how we manage the world’s economy. Obviously we must break lose from the habit of blindfolding and ossifying our institutions. Perhaps we need to impose term limits on the bureaucrats too, especially since their first rule for survival seems to be…do not ask questions and do not answer what you have not been questioned.

Frightening!

Sir what many of us feared, the Union of those who can not go bankrupt with those who are to big to fail is getting closer. Henry Kaufman’s proposal contained in “Finance’s upper tier needs closer scrutiny” April 21, on a supervisory authority that takes over the role of the credit rating agencies and that starts almost micromanaging the big financial entities makes our hair stand up.

Where are we citizens going to be left in this cosy arrangement among those who could share so many mutually beneficially interests? Why do we not just place a little tax on the size of banks based on the bigger you are the harder you could fall on us concept?

Clarity is needed for credibility

Sir you rightly say that the “Climate Policy must be credible” April 19 and one of the basic requisites for that is clarity in the use of terms.

When on a simple water bottle you might find information such as calories=0 (thank god the implications of something different would indeed be frightening) there is no way to find a clear-cut definition on what is meant by for instance “clean energy”. The closest we get is to some mumblings about energy that causes little or no harm to the environment and which will not get you that far down the lane of credibility either.

But why did the regulators, knowingly, tempt the bankers?

Sir Gillian Tett shows great expertise describing the physical evidences gathered in the ongoing “forensic research” like the regulatory arbitrage that resulted from that the super-senior debt that carried the triple A tag and that only required banks "to post a wafer thin sliver of capital against these assets”, “Super-senior losses just a misplaced bet on carry trade” April 18.

Where Tett falls short though is in the reconstructing of the scene of the crime, since nowhere does she ask herself why the regulators exposed the bankers to these types of temptations, especially when they must have known they would fall for them.

My personal answer is that the regulators were so obsessed with fighting their own demons, “the default risks”, so that they did not care for anything else; and neither did they want or listen to other opinions, since they wanted to show themselves to be independent.

If there is one single lesson that stands out from the current turmoil it is that the regulation of the financial sector cannot be left solely in the hands of the regulators, since single-mindedness is not a good enough reason to award anyone independence.

Sometimes formal limits signify fewer limits

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

If investments banks invested in those super senior debt that carried the triple A-tag and that are described by Gillian Tett in “Super-senior losses just a misplaced bet on carry trade” then according to the minimum capital requirements that apply to the commercial banks these could in fact have an even higher leverage…in some circumstances even more than 60 times.

Let us not forget the rental options

Sir though I might have picked a somewhat more gentle title I agree full heartedly with Martin Wolf’s “Let Britain’s housing bubble burst” April 18. Having said that perhaps it would also have been appropriate to include a remark about the bias that has been spread throughout the whole world and that favours the ownership of houses as compared to the alternatives provided by the rental markets.

In a global mobile work market where a house when owned often signifies a ball chain around the ankle it would seem that renting should be a very good option, if it is able to overcome the stupid hurdle of having almost been socially derided as a second class choice.

FT you’re obsessed!

Here is the world confronting truly frightening scenarios and one is trying to argue that one way forward is not to blindly pursue the avoidance of the risk of defaults, just for the sake of it, but to be able to better embrace the risks of default by placing them in the perspective of what could be achieved in terms of sustainable growth… and you keep on busy with your quite silly and almost sissy chit-chat on the testosterone levels among male traders, Calibrating cojones, April 16.

Let me just remind you so that you can get over this discussion and return to your senses, that for each trade induced by an overdose of testosterone, there should be a counterparty suffering from an under-dose of testosterone.

Sissy banks and sissy markets?

Martin Wolf in “Why financial regulation is both difficult and essential” April 16, says “It is impossible and probably even undesirable to create a crisis free system”.

Wolf falls way short since in fact even trying to create a crisis free financial system poses extreme dangers, being that risk is the oxygen of development.

No matter what, the world does not belong to the risk adverse and the real risk is not banks defaulting, the real risk is banks not helping the society to grow and develop. Not having a hangover (a bank-crisis) might just be the result of not have gone to the party!

What we then must do before rolling up our sleeves to do regulations, is to have a fresh look at what has been ignored for so long namely what are the financial institutions and specially the banks to do for us?

In that sense we need to stop focusing solely on the hangovers and begin measuring the results of the whole cycle, party and hangover, boom and bust! For instance the South Korean growth boom that went into a bank crisis in 1997-1998 seems to have been much more productive cycle for South Korea than what the current boom-bust seems to have been for the United States.

If we insist on using as the main ingredient for the regulation the risk of default, is it not time to start thinking of capital requirements for banks based on units of default risk per decent job created or climate change avoided? That would at least seem much more productive that units of badly gauged default risk per subprime mortgage financed. Honestly who could believe that the world would have come this far without a bank crisis now and again?

And, to top it up, FT ran two pieces yesterday suggesting banning testosterones from our trading floors! Sissy banks and sissy markets?

This is indeed an embarrassing low for FT!

Sir not only did you publish John Coates’ “Traders would do well to track their hormones” April 15, in which, based on the study of the saliva of 17 male traders over eight days, the author suggests we complement the efforts of our bank regulators to drive risk out from banking, with driving out any risk taking stimulators such as testosterones from our trading floors, but you also have Clive Cookson reporting fully on the same nonsense including a photo of testosterone in action.

Unless this is a complete mess up of an April fool joke I sincerely think you owe your readers an apology. Are we to extend this type of risk adverseness litmus tests to the professionals working for the credit rating agencies too? Why do we not start with FT editors? Seeing that you completely lost control!

Why we can not leave bank regulators to regulate on their own!

Sir Nout Wellink’s declaration that “Basel II is sophisticated and sorely needed” April 10, is a splendid example of why we cannot leave the traditional bank regulators regulating banks on their own. The just are digging ourselves deeper in the hole we are in!

Of course there is nothing wrong with sophistication as long as it does not take away from our understanding of what is going on, which it will be the end result, which makes further mockery of market transparency; and as long as it does not create new artificial market advantages, which it will by favouring the big banks and the continuation of our craze of putting ever more eggs into fewer basket; and as long as it does not create new systemic risks, which it will as long as “to err is human” applies, just like it applied in the case of the credit rating agencies.

But, what I most object to is that “there will be greater differentiation in the capital requirements for high risk and low risk exposure”. Who on earth told the bank regulators that the only role of banks was to avoid failing and that for that purpose you had to create an additional regulatory bias against risks, more than the natural bias against risk that already exists in the market? No, we do not need the banks to increasingly finance only securitized consumers and public sectors around the world just because that could be construed as having a lower risk of default. To do so could lead the world to default. If we are going to use default risk as a basis, then we better design the minimum capital requirements in terms of units of risk per decent job created.

Any reform should obviously have to start with the most direct causes of the crisis

Sir it is not the first time and it will most probably not be the last one I have to raise the issue but John Plender in “Radical reform will be flawed by compromise and fudging” April 9 does not even mention the credit rating agencies.

Fact one: The single most important detonator of the current difficulties in the financial sector was the securities that had been collateralized with truly lousy mortgages awarded to the subprime sector in the US.

Fact two: The single most important factor that allowed truly lousy mortgages to morph into prime paper was the high prime ratings awarded the collateralized securities by the credit rating agencies.

Fact three: If we survive this there is nothing to stop us following again as lemmings the credit rating agencies over an ever worse precipice.

And so if there is a need for a reform that would be taking away the power of the credit rating agencies to impose their will on the markets.

But then of course Plender could be arguing that this would have to be included in a sort of minimum reform, not at all radical; and in that he would have a point.

It is still the simplest things that are most likely to really bring you down.

Sir John Kay correctly says that “In times of complexity common sense must prevail” April 9 and among the danger present in going down the road of further sophistication he quotes “Goodhart’s law: as soon as reliance is placed on relationship, the significance of relationship changes”. As I see it old Murphy’s Law might be just as relevant because entering into a formal relationship with the credit rating agencies empowering them to advise the markets so much on where the risks were, was just a disaster in waiting.

In this times of complexity let us not forget that the prime detonator of our current crisis were just some simple mortgages to the subprime sector and that were so lousily awarded that anyone should have been able to see them for what they were, had they only used their own eyes and not some old data sets or fancy models.

But Greenspan does share the blame

Sir Martin Wolf in “Why Greenspan does not bear most of the blame” April 9, correctly says that blame distracts from understanding what happened why it happened and what we should do, but it looks that so does also defending someone from blame.

Alan Greenspan in “A response to my critics”, FT’s economist forum, April 6, says that “The core of the subprime problem lies with the misjudgements of the investment community”; and the core of that misjudgement lies of course with the credit rating agencies; as most of the other financial agents were just doing their normal business which is selling something risky valued at somewhat less risky terms.

In this case what Wolf fails to recognize, sufficiently at least, is that the immediate detonator of the current crisis was not a housing bubble but a bubble in financial securities, such as those collateralized by lousily awarded mortgages to the subprime sector.

The credit rating agencies did not do the job they were supposed to do, to err is human; but the responsible for empowering the credit rating agencies to do the risk measurement for the markets and ignoring the “to err is human” part of it all, were the bank regulators, like Greenspan. And for this Greenspan should at least stand up and take his share of the blame.

It is stunning how Greenspan can keep a straight face

Sir Alan Greenspan declares that “The Fed is blameless on the property bubble” April 7 and puts the blame instead with the investment community, like bank loan officers; and says “Regulators confronting real-time uncertainties have rarely, if ever, been able to achieve the level of future clarity required to act pre-emptively”. He also ends up by saying that “free competitive markets are the unrivalled way to organise economies.

I am stunned. How can he keep a straight face saying such things when he, as a regulator, did in fact outsource the real-time risk vigilance to the credit rating agencies and thereby helped to lead the market into the temptation of believing that the risk measurement by some few qualified eyes sufficed?

Please FT will you try to help me find out who on earth came up with the idea that the only risks that mattered for the financial sector were the risks of default and thereafter empowered the credit rating agencies to do the measuring?

Stop dodging the issue about the credit rating agencies

Sir the real line of division does not go that much between those who want more or less financial regulation per se but between those who argue that you can give so much power to the credit rating agencies to influence the financial flows and those who like me have always held this to be absolute madness; that sooner of later the market could follow these pipers over a precipice… as indeed it did in the case of the securities collateralized with subprime mortgages. Clive Crook in “Regulation needs more than tuning” April 7, is at least clearly admitting that sooner or later he needs to make his mind up on this thorny issue and for this he should be commended, since most have just been dodging it.

By the way just to help sort out a deep misunderstanding; the fact that the credit rating are private do not make them less official.

Regulatory outsourcing creates confusion

Sir George Soros in “The false belief at the heart of the financial turmoil”, April 3 though he sees some trees that the regulator’s do not, he completely misses the forest just the same.

Soros accuses the regulators of beeing misguided by a market fundamentalism arguing that they believe markets are self-correcting without being able to grasp that the markets are indeed self correcting, though in a quite violent way grant you, to what should be considered the mother of all regulatory fundamentalisms, the excessive empowerment of the credit rating agencies.

If the credit rating agents had been working for a government institution all hell would have broken out, long ago, but since they work for private companies, they get confused with being a part of the market. Indeed regulatory outsourcing creates confusion.

Do not throw imprudence out with the bath water…throw out the power of the credit rating agencies!

Sir “Now the prudent will have to bear the cost of profligacy” says Martin Wolf, April 2, and before anyone misinterprets what I am sure Mr Wolf does not mean, let me remind fellow readers that from a different perspective imprudence can also be seen as one of the basic and most valuable driving forces there is in our societies.

Now if we are going to talk about imprudence, big scale, then let us discuss the appointment by the regulators of the credit rating agencies as risk measuring bureaucrats, as if anyone in a society can really know from what hole risks could jump at you.

That bank defaults are risky and bank crisis bad? Yes, but even more so banks not defaulting and thereby setting us up for the mother of all crisis; and so therefore, please, disconnect the markets from having to give special credence to the credit rating agencies, ASAP.

Whose side are you really on FT?

Sir in “Paulson’s gamble”, April 1, you refer to “investor stupidity” without mentioning that the only fault or sin that probably most of these investors committed was to deposit too much trust in the credit risk surveyors appointed by the regulators. Is not the original stupidity the regulators? And the investor’s and yours only let yourselves be fooled by them?

Mr. Clive Crook. Now you please repeat after me too

Sir Clive Crook is absolutely right when titling “Markets need more than a patch-up” March 31, and ending it with “We need an entirely new model” as in between he really wavers around among a world of possibilities.

Now given that Crook gives so much weight to the issue of moral hazard that he orders us to “Repeat after me: you encourage recklessness if you protect people from its consequences” and which I duly did, I would love Crook to return the favour and also repeat after me that “you encourage carelessness if you make it to be seen that risks could indeed be measured and nominate credit rating agencies as duly qualified to do just that.”

Regulators really have tremendous workload cut out for them especially when they have not yet really decided the objective of their regulation correctly, since avoiding defaults and crisis cannot be the only societal role of a financial system.

Eerily peculiar recommendations

Sir Lawrence Summers writes about “Steps that can safeguard America’s economy” March 31, and suggests “that a top priority for financial policy has to be increases in the level of capital held by financial institutions” and “have Congress insist that [the government sponsored enterprises] stop paying dividends and raise capital substantially as they expand their lending”.

Given that we heard so many times during the last years about how well the financial institutions were capitalized; and that the lack of capital had nothing to do with how this crisis came about, since even the over leveraging of financial institutions had more to do with the lack of common sense, these recommendations sound eerily peculiar indeed.

Why not suggest they stop digging in the hole they’re in first?

Give the banks time instead of bailouts!

Sir in your editorial of March 29 “Not yet time for a bail-out of time” you mention that “Governments can also help by facilitating renegotiation of mortgages. The principal aim is to avoid unnecessary and costly foreclosures.” That is nonsense! The principal and perhaps only aim of any renegotiation is to make the credit viable, ideally taking it out from the shadows of the subprime world and bringing it in to the prime world, where all debtor and creditors can enjoy lower interest rate return requirements.

Now also and though I fully agree that it is not time for a bail-out of banks, it is definitely time to give them some more time to react. This whole affair of putting the banks against the walls just because of the change of mind of credit rating agencies is too harmful. At least give them a year to find and make the new capital increases by allowing them to use a 12 months moving average to account for market changes in the value of their investments. And this way tax-payer does not have to step up to the plate as fast either, or even at all.

Too much ‘Group think’ C’est la vie!

Sir Gillian Tett in “Banking oversight and the danger of ‘group think’” March 28 mentions the “difficulty the staff of the Financial Services Authority’s (FSA) face in terms of challenging the dominant financial creed” mostly because they lack the glamour needed to be allowed to question the glamorous.

Something similar happens when a modest MBA like me, with only 30 years street experience, in only a developing country, tries to get through to journalists to alert them of what has and is really happening out there, only to be ignored because it is so much more glamorous when appearing surrounded by PhDs. I guess c’est la vie! Regulatory authorities will not get to see the full truth, and neither will the journalists, not even some columnists.

Now if Gillian Tett sees danger in the above when occurring in FSA she should have a look at what happens in that mutual admiration club composed by The Basel Committee on Banking Supervision, the International Monetary Fund and all their members the Central Bankers…talk about the mother of all ‘group think’ they even have their own checks and balances, like The Financial Stability Forum. The World Bank and that should presumably do some of the questioning, was just told to shut up and harmonize.

A subprime dollar? Not the end of the world; but a change of collateral may be asked for

Sir Martin Feldstein’s “The dollar may be falling at just the right time” March 28, is a timely reminder that it is not necessarily that bad for the dollar doing upon other currencies what other currencies have done to the dollar; and that there is no need to look at it all as the end of the world… even though it might be the end of that money that was backed only by the trust in the government and that has had a run for almost 40 years now, some say amazingly.

To insulate us from realities? Thanks but no thanks!

Sir John Kay writes “Why more regulation will not save us from the next crisis” March 26, and though he is absolutely right I do not make the same inferences that he does. Just for a starter, I believe that if we do not have a next crisis, that could just the same be the symptom of that we are not doing enough… getting out of bed has its risks, but staying in bed leads you nowhere.

Also, when Kay argues that we should “insulate the real economy from the consequences of financial stability” and meaning with it that the governments should “protect small depositors” (how are they identified?) and mentions “to restrict the use of retail deposits as collaterals for speculative activities” he is in fact proposing something like forcing us to invest exclusively in government papers… and as if that carried no risk to us.

We do know about many different efforts going on in trying to create absolutely risk free environments for retail deposits and that is not only arrogant and preposterously silly but also quite dangerous… much like the belief that the credit rating agencies could be imposed as official risk surveyors without themselves tuning into a huge systemic risk.

Wake up Mr. Wolf!

Sir Martin Wolf holds that “The rescue of Bear Stearns marks liberalisation’s limit” March 26; as if we have had some true liberalisation. 

He is wrong. Much the contrary, never before have the financial markets been so regulated as they are now with the credit rating agencies, empowered by the regulators, deciding over how much each bank needs to pack their rucksack with reserves; and most of what has happened since imposing the minimum capital requirements imposed on the banks through Basel I, has been the result of regulatory arbitrage. 

Wolf quotes Ben Bernanke in a speech that “makes one’s hair stand on end” saying that much of the subprime mortgage lending of recent years was “neither responsible nor prudent”. 

Mr Wolf. You know what makes my hair stand on end? That all the market did was to follow the criteria of the credit rating agencies that felt that such mortgages were good enough to make up prime collateral. Wake up Mr. Wolf, before we can start to think about the limits of liberalisation we still have much to think about the limits of regulations.

PS. Credit ratings as a systemic risk

The truth as always lies somewhere in the middle!

Sir Michael Skapinker in "The market no longer has all the answers" April 25 writes that though the hands-off regulatory policies have clearly been discredited even in the eyes of hardnosed free-market fans no one knows what to do now and that "Trawling leftwing and far-left wing websites is instructive, because they clearly have not got a clue either".

May I invite Mr Skapinker to trawl the radical middle too? From the middle we protest the sheer thought of the financial sector having had a hands-off regulatory policy since in our view never before has the financial sector been so much nannied as with the empowerment of the credit agencies as the officially outsourced regulatory risk surveyors. Had these agencies not worked undercover as private agencies I am sure all hell would have broken out long ago.

But from the middle we also protest any deepening of the regulations that starts without taking a huge step back and realizing that to regulate the banks, with the sole objective of avoiding a bank crisis, as it has been done for almost two decades now, is totally meaningless.

We need banks to do much more for society than simply avoid risks and survive and therefore we need to clearly define what their whole purpose is. How on earth could you regulate without doing that?

We do not need FT to be a Besserwisser

Sir in your “Muzzle the market manipulators” March 22, you just come through as a Besserwisser saying “All long term-investors can do is ignore rumours, ignore share price volatility and concentrate on the facts. Easier said than done, in a world where there are more finance courses on how those real not that good Besserwisser and rumourmongers we know as the credit rating agencies could change their opinions than there are course on how to analyze the rated companies themselves.

We better not leave bank regulation in sophisticatedly skilled unscrupulous hands.

Sir Martin Wolf in his marvellous “Why today’s hedge fund industry may not survive” March 19, describes how the hedge fund industry by acting as bookies arranging the betting on low probability events manage to profit handsomely while these events do not become the certainty that they indeed must become, at some point; and that this clearly attracts the unscrupulous and the unskilled. Wolf also frets that the hedge fund managers by copying each other could produce a real disastrous stampede of non-events and says “the more one believes this is how an unregulated financial system operates, the more worried one has to become”

What Wolf fails though is in connecting the dots with between the way the hedge funds operate and how our banks are currently regulated. The regulators, exactly like hedge fund managers, have been able to collect their praises upfront for a system that by favouring size tends to unload failures into an even greater accumulation of risks; that by using minimum capital requirements exclusively based on short term default risk leaves us not considering sufficiently all the other risks; and that by imposing upon the market the credit rating agencies as their official risk measuring bureaucrats, will just guarantee that we all will, sooner or later, follow them and fall off the deepest of the cliffs.

We should not fret the unscrupulous unskilled as much as the unscrupulous skilled and sophisticated… the last conform the really dangerous wild bunch. And please, do not tell me that some of our current bank regulators do not have it in them to know this is all true. I sincerely believe that Greenspan knew it all along but he did nothing about it!

What we need is trusting doubters

Sir Gillian Tett in “A lack of trust spells crisis in every financial language” March 18 should also remember that usually an excess of trust equally spells the origin of a crisis in any language. Tett spells out in no ambiguous terms that “the key to resolving this crisis will not lie with just the injection of billion more of central bank dollars; instead what is needed is restoration of credit” which is exactly trust.

That said and as true as it is, this time around let us please make certain that what we build is some reasonably doubting trust and not that type of blind trust that could only come out of such a preposterous idea that you could leave the issue of managing risks with some minimum capital regulations for the banks based solely on one risk type, namely default, and measured over a fairly short time horizon by some humanly fallible credit rating agencies.

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

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

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

Does winning but not getting the expected odds paid out really make it a loss?

Sir Prof Louis T. Wells commenting on March 14 on Alan Beattie’s article “Concern grows over global trade regulation” March 12 hints at what I have always found as one of the most intriguing questions in matters of foreign investments. If you require a high rate of return to invest in one country and thereafter you obtain a lower return but that is perfectly in accordance with your expectation of returns in lower risk countries should you be satisfied or should you feel let down because the risk did not materialize?

Having said that and returning to Mr Wells´ real issue, the validity of international arbitrary courts and proceedings, let us also never forget that those that in the long run are mostly hurt by closing down courts and proceedings are those that being weak most need them…and they should therefore be the ones most careful with not shooting the messengers.

And no one called Mr Sharma’s bluff!

Sir, in View from The Top March 14 you have Devin Sharma, the president of Standard & Poor’s saying “Ratings play an important role in the capital markets by providing opinions on creditworthiness” and nobody called his bluff. Had it been true then we would most likely not be in our current mess, though perhaps in another one.

The truth is that the credit rating agencies give much more than opinions since empowered by the financial regulators they do in fact give orders to many of the actors in the financial market of where these can or not go, and to the banks with respect of how much capital they have to set aside for each credit.

Striping the credit rating agencies of these really crazy powers is one of the most important things to do if we are to avoid future financial disasters that could prove if possible even more lethal than the current one; and so that they then can go back to just providing opinions.

Mr. Wolf, this is no a black plague that will just soon be over

Sir Martin Wolf in his “Going, going, gone: a rising auction of scary scenarios” March 12 seems reduced to being a chronicler of the black plague. In truth, what should the world care about a couple of trillion more or less in losses when in fact it is our whole financial system that is under siege and there is nothing right now that promises us a brighter and better day.

Much more important then that to tally the losses it is to make certain that our scarce rescue forces are send to save the real economy and not the virtual parts of it; which unfortunately seems to be what our regulators have come up with pouring monetary resources on the fire while praying this will not turn out to be gasoline for the inflation.

Also start mending what got us into this mess. Fixing those minimum capital requirements for banks solely based on risk assessments for short term defaults; give the banks time to adjust their capital ratios when this need is sprung upon them by surprising down-ratings; take away the frankenstenian powers given to the credit rating agencies; make certain that those mortgages that have been turned into viable mortgages by means of a reduction in the principal or rate adjustment are not longer valued as subprime; make sure that mark to markets means what it says without self-enforcing the panic of a mark to the markets-fear-anticipation; force the managers and directors of financial institutions to sign an affidavit stating that they have an inkling of what they are doing and freeze the bonuses paid to financial executives pending final results seems like a decent place to start.

Spend your limited ammo on the real world!

Sir one would expect you to be right saying that the “Fate of finance lies with real economy” March 11, but one of the conclusions one should also draw from that is that all the assistance provided by governments in a world with scarce resources, should be targeted at the real economy and not squandered away on some frontiers that seem more virtual than real.

Better confused than wrong!

Sir Saskia Scholtes writes that “Agencies’ differences add to confusion” March 11, describing how credit rating agencies differ in their appreciation of companies in this case of bond insurance companies, to which I would just have to add a Hallelujah!, since it is clearly better being confused than wrong.

It is precisely the fact that the whole concept of risk relates to so many different variables that can be analyzed with so many possible methodologies over so many different time horizons, and that makes it impossible to come up with a true risk assessment, that the world should never have allotted so much power and influence to some few credit rating agencies.

The mess these credit rating agencies got the world into by all three of them giving prime ratings to securities collateralized with junk mortgages, is bust just a small example of why we should welcome more of the confusion that reigns in real life and that real investments are all about.

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

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

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

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

The born again financiers

Sir Aline van Duyn in her report "Banks spend $500m on Ambac shares" March 8, quotes Michael Callen the chief executive of Ambac saying that "The market gods were totally against us"; which must be very humbling to say for a member of a profession that so recently believed themselves to be the gods of the market.

That said the operation also begs the answer for how the banks are going to account in their books for the registry of what basically amounts to an expense in order to avoid having to expense even larger losses if the credit risk insurance provided by Ambac is shown to be worth less than a prime rating.

We need the regulators to backtrack on their own ideas

Sir Francesco Guerrero wants "ideas to stop backlash from regulators" March 8 and there is nothing like reminding them of the blame they have in this mess.

A market with many participants measures many type and dimensions of risks, applying many different time horizons and using many different risk measuring techniques. The final result might not be perfect but at least it avoids the risk of leveraging excessively on any presumption and opinion that might turn out to be dangerously mistaken.

It was when the regulators forced the market to give special consideration to what some few credit rating agencies told it about risks of default over a short period of time, that the information capacity of the market was constrained and extremely dangerous regulatory biases and fresh systemic risks introduced.

Although there is such a thing as prime mortgages awarded to the subprime sector it was only because credit rating agencies gave good ratings on securities collateralized with badly awarded mortgages, that this pure junk could grow into incredible volumes and travel so far that a German bank became their first casualty.

And there are currently almost more courses given about how to analyze how the credit rating agencies might change their ratings that there are about analyzing the underlying credits and companies.

This has to stop, urgently; and it is not a question of the credit rating agencies becoming better at what they do since that will only force or induce us to follow them even more to a precipice.

A Nobel prize-winner should not make such a statement

Sir Joseph Stiglitz and Linda Bilmes while defending their book The Three Trillion Dollar War (that I have not yet read) March 5 from some comments made by Tunku Varadarajan on March 3 say with respect to the price of oil “we attribute only $5-$10 to the war” and this is just a plain wrong statement, from a pure economic point of view.

All the terrain between the marginal extraction cost of oil and its market price is complete no mans land and so no one, not even a Nobel prize-winner, could therefore attribute any of it to any specific condition. If there is just one barrel of deficit in the supply, speculation and desperation could lead to any price; just like one barrel of surplus could start a movement towards equating the price of oil to its marginal cost.

That is why less than 9 years ago pundits predicted $5 per barrel of oil with the same ease other predicts $100 or more. That is why there is the extreme volatility in oil that wets the appetite of so many speculators. That is why it is impossible for me to understand why producers and consumers have yet not entered into long term production and take up contracts that could benefit them both.

A flat tax is what a flat world needs!

Sir much as I wholeheartedly agree with the intentions that John Christensen and David Spencer express in their "Stop this timidity in ending tax haven abuse" March 4, and that establishing a network of bilateral tax agreements will not be sufficient to solve the problem of world wide tax evasion, I do not believe that what they propose in terms of shifting the focus "towards the infrastructure of cross-border economic crime, including accountants, lawyers and financial institutions" will cut it either. On the contrary we could just be opening up new growth opportunities for those many illegal and illicit organizations that thrive so much on all our prohibitions.

What I would suggest is to go instead for a real worldwide tax transparency by making all countries sign up on an easy to understand world wide flat tax. This would help to remove the incentives to geographically arbitrate taxes and that keeps so many accountants, lawyers and financial institutions in the business "legal and intelligent tax avoidance"; and that keeps so many governments from not knowing whether they are giving true and needed tax incentives to attract investments or just being taken for a ride.

In all, a flat tax is precisely what a flat world needs; and by the way, just in case, a flat tax can be construed as a progressive tax too.

A crash capital replenishment is bad for the banks

Sir let us suppose you have gone to your doctor for regular checkups and because his balance had broken down you never discovered something was very wrong and as a result you had become seriously obese. What would you say if the doctor when discovering his mistake sends you on a crash diet, even though that could be life threatening?

This is exactly what is happening in the financial sector when the banks, after it was discovered that the credit rating agencies that were imposed on the banks by the regulators got it all wrong, and they are now ordered to replenish their capital… immediately… while the conditions are as adverse they can be. Who on earth could benefit from this? Only those who shorted the banks.

A rational doctor would work out a medium or long term plan for a diet and a rational bank regulator would give the banks ample time to come up with new capital.

And by the way, for the record, I do not own a single bank share.

PS. We normally know if a weight is lying to us…but how we love it for that!

Nothing but BIG!

Sir February 29 David Wright0n reports that AIG announced “almost $15bn of writedowns and losses related to subprime mortgage exposures” but that according to Martin Sullivan, the chief executive, “AIG had the ability to absorb the current volatility while committing the resources to grow and take advantage of the opportunities”.

Sir I must admit to feeling frightened by these expressions of nothing but sheer bigness.

Don’t just blame Basel II, Basel I where it started is also to blame

Sir Harold Benink and George Kaufman wrote that “Turmoil reveals the inadequacy of Basel II” February 28 and I disagree. Basel II has not even been fully implemented yet and what the turmoil really reveals is that Basel I is also inadequate.

Among other Benink and Kaufman recommends more discipline in the oversight by the markets but mention as a problem the lack of incentives for professional investors to use information in an optimal way. Of course they are right. What is the sustainable incentive in a system that no matter what the bank could think of a credit it is still the credit rating agency that calls the shots? The way out of this conundrum that I have been proposing for quite a while now is to include the minimum capital requirements calculated as current with the help of the credit rating agencies as a footnote and impose on the banks a minimum percentage of capital to assets requirement, for instance 8 percent.

Doing so would free us not only from the regulatory arbitrage that has stimulated banks to hide risks in other places but also from that systemic risk produced by the credit rating agencies and that has entities like the monolines sweating out ways of how to respond to crazy ultimatums type “you got five days to find capital or I downgrade you and you’re history”, something especially painful considering that if the credit rating agencies had done their job correctly in the first place the monolines would never have been in their current predicament.

PS. Update December 2012. When I wrote this comment I was not aware of how much of Basel II had been implemented in Europe and I had also since 1997 been expressing concerns about Basel I. 

Sovereign funds are not really that sovereign

Sir John Kay when arguing “Sovereign wealth investment is a force for stability” February 27 says “the lesson of history is that the problems are for the investor not the investee” and that “Investments across borders binds us together by creating actors with much to lose from political tension”. Both arguments clearly point to the fact that when push comes to shove, once committed to an investment, sovereign wealth funds are not really that sovereign.

These days the International Monetary Fund is drafting good conduct rules for the Sovereign Wealth Funds. I wonder if they should take the opportunity to include some good conduct rules about how the countries receiving the investments should behave… or would that infringe too much on someone’s sovereignty? There are arbitrage procedures to settle investor against country dispute but, do these apply in country against country cases?

The bank regulatory system risks turning itself into a Polish cavalry

Sir it is when Martin Wolf expresses concern over how the financial system works that he really makes it clear “Why Washington’s rescue cannot end the crisis story” February 27.

This is no ordinary crisis that requires an ordinary cavalry led by a John Wayne to rescue some poor pioneers from being scalped by the Indians. No, this is a much more serious affair that starts with having to question some of Wayne’s adjutants, the credit rating agencies, about their role in seducing capital inflows from foreigners to a non-existent El Dorado, by telling stories about great ratings around the world’s market-fires.

And so, to really end this crisis we need to revise the overall fundaments of the current regulatory system because if not, next time, our valiant John Wayne could end up commandeering something like the last charge of the polish cavalry against enemies much more dangerous than some yelling Sioux.

They have not even imagined how right they are

Sir having for more than thirty years argued about the dangers for the bathtubs of a small economies to lie completely open next to the global financial oceans exposed to their tsunamis I could not but fully agree with the general direction of Dani Rodrik’s and Arvind Subramanian’s “Why we need to curb global flows of capital” February 26.

Having said that I would much rather use the term “slow” than “curb” because it is the speed of how the financial resources move that causes the most damages.

But let me put forward a much more important comment. When the authors say that one should not be “too optimistic about the potential of prudential regulation to stem excessive risk-taking” they are more right than they have imagined in their wildest dreams or wildest hypothesis. In fact, it was precisely the running away from the risks, forced upon the financial market by the regulators through their minimum capital requirements for the banks and that was based exclusively on risk-assessments carried out by the regulator’s own outsourced risk overseers, the credit rating agencies that set us up to all what is currently happening.