December 31, 2007

Not even new jobs are needed, just a little income support would do

Sir Prof Jacob Borne makes a well argued case for to "Give the tree choppers more profitable jobs than logging" December 31 but I would add that since chopping logs is really not that profitable we should just give some income support to all those who live in the tropical rainforests and engage in traditional and environmentally sustainable non-logging activities.
We actually do not need to produce new high tech manufacturing jobs in the Amazon; a couple of hundred dollars per family a month, for them to improve their living conditions, while they keep an eye on their forest for all of us would do wonders.
The problem is that though we quite easily find ways to support our local parks and national forest reserves this seems so much harder when it comes to maintaining the health of our global common goods like our lungs in the Amazon.

December 29, 2007

Where has financial liberalization taking FT?

Sir your editorial on "Where the financial liberalisation got us" December 29 contains a doubtful statement, some declarations of faith and a big dose of understandable financial sector partisanship.
First can we really speak about liberalisation while a fundamental part of the financial system, namely risk evaluation, is chained by the regulators to the limited criteria of a few credit rating agencies? Before, in banking, there was more of a "you banks you do as you like but only indoors" while now it is more of a "you banks can go out but remember always to do as your nannies the credit rating agencies say" and we could spend years discussing which is the most liberal of those two systems.
Second, among the credos you recite is that of "but before the first Basel agreement on capital adequacy reserves often bore little relation to a bank's risk", and this is something that we all hope is true, but not necessarily so when we see so many banks scrambling around for more capital. Also when you say that "capital [has] been allocated more efficiently" we have to wonder on what basis you are sure of that since most of us would only be able to come up with a "and let us so pray".
Finally, on partisanship, your "Whereas 40 years ago many millions of young people may have wanted to borrow against their future income, in order to go to university…" contains a whereas that might be a little too sweet for our taste when we now read about so many students struggling to repay their loans.

December 22, 2007

The government needs to help turn subprime dollars into prime

Sir Saskia Scholtes writes that the "Helping hand could prolong subprime pain", December 22, and though she argues it well it really does not have to be that way, if the helping hand knows how to help.
Let us suppose that a subprime borrower has a set amount of dollars that he could pay to service his mortgage. In the financial markets, because of discounting of risks, the worth of that dollar cash flow is much lower if it is classified as a subprime lending operation than whether it is viewed as coming from a prime operation. And here is where the government could help turning his subprime dollars into real prime dollars. Could it really be so hard? I mean they are still exactly the same dollars.
A thousand dollars paid monthly during 15 years discounted at 11 percent is worth 88.000 dollars today while the same payments discounted at 6 percent is worth 118.500…35 percent more!
If the government is willing to guarantee, up to a specified amount, the mortgage payments of those who currently own and live in a subprime mortgage financed house then this would empower the borrower to renegotiate with the lender some much better terms, for each of them. This is a win-win strategy for them. Freezing the rates but keeping them subprime is, at best, just a win-lose proposition.
Could this cost the taxpayer some dollars? You bet! But then again someone has to pay for the bank regulators having appointed the credit rating agencies as their financial overseers and with that allowed some small sub-primely awarded mortgage virus to spread globally.

Why do you not make the real problem part of the solution?

Sir in your editorial "Subprime shake-up" December 22, you comment on the Federal Reserve's new proposals for some new mortgage lending practices in exchange for those "that led to this year's subprime debacle" You also recommend that regulators enforce their rules better, for instance by inspecting loans at random… but were not the credit rating agencies supposed to do that?

You must be fully aware that even with much worse lending standards there would have been no subprime debacle at all had the credit rating agencies not blessed the securities backed with these mortgages with their prime credit ratings, and so I must ask why you do not make the real problem part of the solution?

You also mention the risk of over-regulation, but Sir, is not in fact the appointment of the credit rating agencies as the supreme risk overseers in the financial markets the mother of all over-regulations? I believe mortgage bankers are quite capable at handling their job so why not let them get back at it again and get rid of those who fouled it all up?

December 21, 2007

A bailout in the dark?

Sir Mark Fish and Benn Steil in "Root out bad debt or more pain will follow" December 21 make clear the problem that the government has in helping out the subprime mortgage mess namely that the whole securitization process with its slicing and dicing has made it difficult to see where the final losses really lie, and therefore, while reaching out in the dark to help you might mess it up even more. Fish and Steil recommend the purchase of the underlying mortgages at deep discounts while I would prefer buying the houses where a real bona-fide debtor lives at a discount and arranging for a lease and sale back contract that makes sense for the taxpayer and the current owner. Anyhow whatever route is taken one needs at least to be sure that the underlying problem is cleared once and for all since experience says that there is nothing more expensive that keeping a problem pending in the sole expectation of losing less

December 19, 2007

A necessary though not so welcomed reminder

Sir Martin Wolf’s “The dangers of living in a zero-sum world economy” December 19 is a splendid, necessary but of course quite unwelcome aide-memoir for all of us that feel that we have been somewhat unworthily blessed with peace and prosperity during our life time and worry that we will not be able to guarantee the same for our children.

I fully agree that we will have to count on human ingenuity to save our descendants from the dark ages that already lurk close (hugo chávez), but to that end we also need to keep on believing that goodness and badness does not add to a zero-sum human condition

Beware of bank regulators acting like gods

Sir John Plender asks what is the right level of capital for today´s financial world, “Investors pray for acts of God but even they come at a cost” December 19. His question contains its own answer. Since it is in fact impossible to calculate the right capital then the best thing would be to be humble about it and require one single capital requirement for all assets, instead of arrogantly trying to outwit the market as the regulators did when they created their current minimum capital requirements that differentiates based on how risks are perceived, primarily by the credit rating agencies.

It is when the bank regulators themselves start acting like God that they really set us up for the big systemic disasters.

December 18, 2007

We need to stop this financial hocus-pocus!

Sir Arturo Cifuentes writes “Weak Basel II may not be enough to calm credit fears” December 18. Of course not! Basel II is just digging us deeper in the hole where the regulators placed us when they so unwisely thought that risks could be determined; and came up with their minimum capital requirements for banks based exclusively on risk, as determined in Basel I by the credit rating agencies and in Basel II by the models of the banks themselves. Those arbitrary regulations were the main cause for all the financial hocus-pocus we are now suffering.

If there is anything rational for the regulators to do now it would be to swallow their pride and require the same percentage of capital for all credits; give the banks some time to orderly adjust to this; and let the markets price the risk of the banks, for instance by forcing the banks to issue subordinated debt as was suggested by the Shadow Financial Regulatory Committee back in 2000.

To top it up, based “the bigger they are the harder they fall” I would also add some additional progressive capital requirements or insurance payment based on size.

A leap into the darkness defines 2007

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

Transparency is not completely without value

Sir I am not sure I get or even want to get the full drift of John Dizard’s “Time to admit that the models don’t work”, December 18. As I read it states that through the inter-central bank swap the lines Fed might provide liquidity to the non-US central banks so that these having less restrictions than the Fed can help out taking on their books some of the collateralized debt obligation initially owned by the US banks but swapped into the European banks.

If do this is of course a major operation that gives a totally new meaning to central-bank cooperation though I am not really sure I would like to be on the European side of the bargain. That said if risk adverse central bankers think that the conditions are serious enough to warrant this, why on earth do they not recommend their respective governments to proceed with much more targeted fiscal support measures that can perhaps be better explained to the taxpayer?

I for one would always prefer my government helping directly the mortgage holders who I can at least identify as the beneficiary, than having it give support through the purchase of some debt collateralized with mortgages, where I won’t have a clue whom they are truly benefiting, and the authorities will have to plead blissful ignorance.

No Santa comes Christmas?

Sir Kenneth Rogoff with his “The Fed must not play Santa to the markets” December 18 tells us to be careful since besides recession inflation might be lurking around in the woods. Okay that sounds like a reasonable warning from a reasonable man; problem is what are we to do with it? Given that our current problems might very well be derived from the fact that the Fed dressed as Santa during the rest of the year does Rogoff mean that comes Christmas they should now dress in academic robes?

December 14, 2007

Not Darwin but Frankenstein, not intelligent but unwise

Sir in “The great dying”, December 14, Niall Ferguson discusses the possibility that Darwinian evolution might explain the financial sector’s current difficulties although in the end he also clearly acknowledges that some “intelligent design” had to do with it.

When the bank regulators by means of the Basle Accord decided to drive risks (and creative destruction) out of banks, and imposed their exclusively risk based minimum capital requirements on the banks, they drove in fact banking business out of banks. When they simultaneously also appointed the credit rating agencies as their Blackwater type overseers of risks they also drove bankers out of banks.

The current turmoil is therefore much more a consequence of a Frankenstein’s not so intelligently meddling with the banks and Darwin has nothing to do with it that is unless of course you refer to the bank regulators themselves.

December 13, 2007

Don't they co-ordinate?

Sir, you and everyone praise the co-ordinated actions of the Central Banks but besides those who might argue that could increase the systemic risks, who could argue against the co-ordination of actions between central banks, in fact that in a globalized world they could even think of acting in an un-coordinated way makes us shiver.

Having said when you in “The charge of the central banks” December 13, mention that “the cavalry has arrived” let us pray they brought with them the right ammunition as the enemy has not yet been completely identified.

For instance, besides liquidity injections I would suggest the central banks now give the banks sufficient time to adjust their capital ratios for past sins. What is the need for having all the banks run simultaneously to find more capital just because they have now discovered a fire that has been burning for quite some time?… to add panic to panic does not seem the best of co-ordinations.

Finally, let me say a word about the conditions of the battlefields. The current plans to have the subprime mortgage sector freeze the interest rates amount only to an aspirin and no solution. The only thing that can really make solvent the markets is turning the subprime into prime; like by having the government buy those houses at adjusted prices, financed by the current lenders, and leased out to the current owners turned into tenants and giving these a repurchase option at a price that would hold the taxpayer harmless.

Emigrants/Immigrants of the Whole New World Unite!

Sir if John Gapper can ask “Workers of the New World Unite!”, December 13, when referring to scriptwriters and designers then clearly the same rights should be bestowed on those that voting with their feet and with their remittances are perhaps even more the real workers of the New World, though they still lack a unison voice…. Emigrant/Immigrants of the Whole New World Unite!

Since in gross earnings the emigrants/immigrants definitely represent one of the major economies in the world, they (and the global corporations) are really the ones who should next be empowered with Chairs at the Executive Boards of the World Bank and the International Monetary Fund.

December 12, 2007

The awakening of the financial world

Sir Martin Wolf is daring and right taking on the issue “Why the credit squeeze is a turning point for the world” December 12, but perhaps it is not really the credit squeeze that makes for the inflection point, but more so the general crumbling of some financial credos that were rightly inspired by the knowledge economy but that have turned out to be so lacking in wisdom. We and especially the regulators should have known that.

The appointment of the credit rating agencies to lead the way and yet believing in that the free market would operate freely would be laughable if not for the consequences.

I pray Wolf’s article opens up an urgent debate since our bank regulators are currently, among others with Basel II, just digging deeper and deeper in the hole where we find ourselves.

All is not bad news though. One good thing that could come out of this awakening is to allow banks to be banks again. In many developing countries where the banks because of the risk adverseness introduced by the bank regulators from Basel through their minimum capital requirement formulas, are more and more financing the “risk-free” public sector and the securitized-consumers, and less and less the more risky but yet vital entrepreneurs, and so the comeback of more traditional banking is urgently needed.

Energy is not allocated on a first come first served basis

Sir your editorial “Dark side of the hunt for energy” December 12 is really questionable on the grounds that the US energy consumption is seven times that of China on a per capita basis, and there is nothing to tell us that energy should be allocated on a first come first served basis.

We need to go from ninety days to ten years

Sir if not necessarily “the most” I would absolutely agree with Mr Karel Volckaert opinion that employee compensation is a very telling risk profile indicator when it comes to banks and the financial system in general, December 12. In this respect I also think it behoves us that all the institutions awarded the franchise of “last recourse protection” have employee incentives plans that are based on the medium and long term results, ten years, and not just the next quarter.

The differences between winning a presidency and a Nobel Price

Sir after reading Michael Bloomberg’s “America must resist protectionism” December 12 I am torn between being happy that he is not running as a candidate and is therefore free to spell out the truths and sad because he is not running. Seems you can’t have the cake and eat it too running for president… though you can win a Nobel Prize for being environmental conscientious without even daring to spell out that gasoline/petrol taxes are needed in the US.

December 11, 2007

You must solve the dollar problem with real and not virtual solutions

Sir we have a saying in Venezuela that goes something like “the baby’s crying and the mother is pinching him” and something like that came to my mind when reading Fred Bergsten’s “How to solve the problem of the dollar”. December 11.

If the dollar is really in problems and there are no other currencies willing or able to shoulder its weakness, offering to the trillions of dollars existing in the financial oceans the possibility of converting them into the Special Drawing Rights currency baskets and of which $34bn of value are currently swimming around in the bathtub of the International Monetary Fund, does not seem a solution that carries enough punch. This is something that Bergsten recognizes, but only after he has made his case for radical and insufficient solutions.

Also hearing that the funds would be recycled into the same securities currently offered and that the funds gold holdings of (only) $80bn could provide additional backing, just makes me want to cry more… and perhaps run for the gold myself.

The fact is that if you cannot diversify yourself out of a currency into other currencies then the fault might not lie with the initial weak currency but with all of them and, if so, then you diversify yourself into assets, and then you might realize that the US is not so weak after all, at least if they decide doing something about their weaknesses, like raising the taxes on their petrol/gas consumption to European levels.

You see sometimes the most important assets of a nation are not so apparent because they live in that hazy world of public policies that could be corrected. The US in their gasoline consumption and in their health sector has a world of this type of hidden assets just waiting to be taken to the market.

Allow the banks to be part of the solution

Sir in reference “Chance to restart the stalled securitised credit machine” December 11, and where John Dizzard touches upon a crucial theme I would like to comment the following.
Much of the currently unsatisfied financial needs of the market is directly related to the need of the banks to increase their capital in accordance with the minimum capital requirements set by the regulators in order to sustain on their balance sheet the homecoming of many assets and to make up for the many write-downs.

Since most of this movements are occurring not really because problems appeared but more so because problems were discovered, I cannot understand why the regulators cannot give the banks some time and leeway to rebuild their capital and thereby allow them to help out containing a crisis for which, if it is allowed to snowball, there is not enough capital to take care of the avalanche anyhow.

While writing your European rule book, please don’t forget us

Sir let me take the opportunity of Mr Tommasso Padoa-Schioppa, Italy’s economy and finance minister telling that “Europe needs a single financial rule book” December 11, to piggyback a request that in that rule book there should also be a clear and explicit wording about what to do with the subsidiaries of the European banks in developing countries in times of crisis.

December 08, 2007

The price of the rescue plan could be much lower

Sir you opine that the US subprime initiative is “A rescue plan that is worth the price”, December 8. That may be so but unfortunately the plan by keeping all the mortgages linked to the subprime sector of the market and therefore requiring higher rates keeps the price, in this case paid through the implicit interest rate subsidies that lenders have to absorb, unnecessarily high even if no default occurs. You see whether it is through the loss of interest or the loss of capital, a dollar lost is still a dollar lost.

Much better would be an alternative whereby the US government helped these subprime mortgages deserve prime rates. That this would cost the taxpayers additional money is ludicrous; just wait to see how not solving the problems right will cost the taxpayers money by other means, perhaps as an outright recession.

Personally I favour the idea that the US government, just as it sometimes can buy oil for a Strategic Petroleum Reserve, should offer to buy outright 2.000.000 of the houses currently involved with subprime loans; at a price well below the current outstanding mortgages, a one shot capital loss; financed by the current mortgage holder at government rates; and giving the current debtor a option to repurchase his house in a couple of years at a price that would keep the tax-payer from being harmed.

We are keeping away the minor tremors that keep the big earthquakes away.

Sir nothing, nothing, nothing of the current financial turmoil would have occurred if the credit rating agencies, empowered by the bank regulators to signal that it is possible to measure risks objectively, had not spread around the subprime virus. Of course using the credit rating agencies in the short tem can be something very good and expedient but in the longer run it can only lead to major disasters as the number of questioners are silenced. In my country, Venezuela, whenever there is a small tremor people applaud as these keep the major earthquakes away. Unfortunately, our current bank regulations seem more destined to keep the minor tremors away and it behoves all of us to do something about it.

December 07, 2007

The poor prospective of the Bank against the North

Sir when on your first page you announce the birth of Bank of South you state that the six signing parties aim “to challenge the influence of US-based organizations”. I would contend this is a great exaggeration. Perhaps such a thing might be in the mind of the extremist of the group but for instance a country like Brazil has no interest whatsoever in challenging the World Bank or the Inter American Development Bank, on the contrary it is quite logically doing their utmost to strengthen their voice in those institutions.

Initial funds will be placed in the Bank of South and rapidly withdrawn by each investor for their own favourite projects and thereafter,with its role reduced to paying the salaries of some bureaucrats, it will most probably linger unproductively forever and ever. Could not the south benefit from a Bank of South? Of course, but not from a Bank against the North.

Should we restrain from finding the truth and just go for the usual suspects?

Sir Gillian Tett in “US subprime blame game spreads overseas” December 7, says that “while some politicians think rating agencies are convenient whipping boys, policymakers know that if that line of attack goes too far, it risks undermining investor confidence in the entire credit world.”

That is indeed a totally valid argument but, if we are going to avoid even worse systemic financial crisis in the future, we must also dare to reach further yet and raise the issue that the policymaking-regulators are also to be blamed for having empowered the credit rating agencies too much.

Relaxed going down and relaxed going up

Sir Samuel Brittan afraid of overly tight monetary policies states in "That old Stagflation dilemma again" that when now cheap imports from China might be coming to its end that "the first job now is to convince people that monetary relaxations this winter in spite of rising inflation represent a tactical retreat and not the start of a headlong rout". He is right but we should not forget that the previously falling inflation, helped by China, was also used as support for monetary relaxation, and so the asset bubble resulted.

December 05, 2007

This time it was in fact the regulators who started the whole craziness

Sir David Pitt-Watson tells us that the “Lessons of the credit crisis are not just for regulators” December 5, and of course he is right, who argues the opposite? But when it comes to accountability it might be important to state that this should also be applicable to regulators.

Pitt-Watson mentions that “To be assured that these loans were credit worthy the market passed on this accountability and responsibility to credit rating agencies” but he forgets that, in the case of the banks for example, it was actually the regulators, by means of how they calculate the minimum capital requirements, that basically ordered the banks to make the credit rating agencies their pipers, and I have not yet heard the first regulator being fired, paying a fine, or even named and shamed for doing a crazy thing like that. On the contrary they seem all to be fine and dandy and ready to help out again…with our taxes.

Tons of knowledge for a gram of wisdom!

Sir we are experiencing how prime credit rating agencies pointed us toward clearly subprime directions; not knowing where the risks and the losses of the current financial turmoil are; and sometimes finding out that your highly sophisticated investment banker, whom you pay well, cannot tell you how much your investment is worth, not even on a give and take 20 percent basis.

Since we also so frequently hear references to the concept that our economy has become more knowledge-based, should we not, if only out of modesty, start to downplay that illusion?

Having been an Executive Director of the World Bank a couple of years ago I was of course bombarded with the concept of the Knowledge Bank, then and now my reaction was the same… “Forget your tons of knowledge and please give me a gram of wisdom!”

No use in crying wolf… there are better ways

Sir Martin Wolf searching to explain why the world seems not to be responding as it should to the growing threats of climate change, places the responsibility for it with the individuals saying “if they are to tolerate radical change in the energy use, people must first be frightened and then they must be offered a easy way out”, “Why the climate change wolf is so hard to kill off” December 5.

Although this basic premise sounds right, and should be right, unfortunately it is not right, and so if we sit for that fright and that easy way out to happen, we will all chop down our last tree, just the way we did on Easter Island.

I people knew it was very dangerous to smoke, I people was never offered an easy way out, it took two years of hell, but I people did it because the opportunity costs of not quitting, namely the nagging from wife and daughters, was just too big for any macho man to endure. In similar fashion many governments have managed to come up with ways of how to impose very high petrol taxes on their voters just because the incentives of fiscal earnings were very high.

And so, what is truly needed to get results on climate change is to align the incentives and empower the agents of change. For instance if you want to reduce the use of cars in the US, which is an environmental must, let local authorities auction off public transport monopolies and thereby enlist bus manufacturers and bus drivers in the army fighting climate change.

Wives and daughters (leaders of the world)… get us working on the climate change… you like heat even less than we do.

December 04, 2007

Financial Time’s Hillary Clinton interview

Sir the following is my reaction after reading the interview of Senator Hillary Clinton, conducted by Financial Times ’s Washington bureau chief Edward Luce.

Protectionism: Full fledged competition in a globalized world would have eroded the profitability of many companies had we not awarded them the protection of intellectual property rights, and invested some serious money in making that shield mean something. Can you imagine Microsoft in a world where efficient software copiers are free to roam?

Therefore since most of labor have not been furnished similar new protections, and some old ones have in fact been taken away, it should not come as a surprise that the share of labor income as a percentage of GDP is dropping, and that this is, certainly and rightly, creating a source of conflict.

So what’s to be done? There are only two choices? Either we award to labor similar protections which would set us all on a de-globalization route, a lose-lose proposition; or we must require that the beneficiaries of intellectual property rights give back some extra of their quasi-monopoly based extra earnings to the society. As an absolute minimum, this should represent the direct cost of enforcing and defending their rights. Is this protectionism? No at all!

Review of existing trade agreements: Absolutely. In some of the US bilateral agreement some prohibitions were imposed on developing countries because at the time they were considered as appropriate, but hindsight has led to other conclusions and so these clauses need to be revisited. For instance some US trade agreements prohibit any restrictions on capital movement even though now these restrictions are deemed quite good at taking away some of the excessive volatility that the waters of the global financial oceans can have on local bathtubs.

Energy and environment: “the most important thing is getting the US focused on energy efficiency, on clean renewable energy, combating global warming on raising gas mileage etc.” Just like the recent Nobel price recipient Hillary Clinton does not have the courage of spelling out what is primarily needed to really alter the energy and environment realities in the US, namely a substantial tax on gasoline consumption.

Housing crisis: Just like the US can sometimes use a Strategic Petroleum Reserve I would suggest the government buying a large amount of the houses currently involved with subprime loans; at a price below the current outstanding mortgage; financed by the current mortgage holder; and giving the current debtor a option to repurchase his house in a couple of years at a price that would keep the tax-payer form being harmed. That’s what I would do… but then again I am no PhD and so I could be wrong

December 03, 2007

I pray we will become one nation again!

Sir my country Venezuela is a world war one battlefield. Two deeply dug in trenches with about a quarter of the voters each, another quarter of the voters running exposed in no mans land, and the final quarter wandering around bomb shocked and oblivious to all in the neighbouring woods. I pray to God we will become a nation again.

December 01, 2007

Please do not sell US assets at bargain basement prices!

Sir reading John Gapper’s “America must live with being a bargain basement” December 1, and the sale of 4.9 percent of Citigroup to an investment arm of the Abu Dhabi government, it somehow led me to think about the “Memoirs of a Geisha” that describes the creation of a vicious competitive bidding process in order to maximize the value of a young girl's virginity.

I just wonder whether if someone had previously set a maximum limit to how much of a Citigroup could be sold to middle east countries before being blocked similar to how the takeover of some US ports were one would not have been able to generate that scarcity value that could have led the investor to gladly fork out at least twice what they paid for those shares.

Sincerely, in these days when we read of billions of run away losses in a world that has no idea where to invest, one could believe that the shares of the bank that never sleeps in the US and that is one of those that has seemingly become too large to fail should be worth a bit more.
There are other strengths in the US of course but the assets of America are the main line of defence when it comes to hold up the value of those dollars we are all holding and so if these assets start going at bargain basement prices, then we are all really in a jam.

We must help people to go where they feel they belong… alive

Sir Christopher Caldwell in “Rioters vs state in a test of will” December 1, quotes the Socialist leader Malek Boutih saying “they are whole populations here that don’t feel they belong to this country” and informs that the bodies of the dead boys “will be flown to Morocco and Senegal, respectively, for burial”, which leaves us all with the question of why could they not have been flown there alive?

The poor in developing countries frequently face no other choice than to emigrate to richer countries in order to survive physically but many alienated and frustrated citizens of developed countries do not really have the choice to emigrate somewhere else in order to survive emotionally, and perhaps they should have.

For instance if these dead boys had had the option of selling whatever French citizen’s rights they had to a foreigner truly interested in coming to France and with that money could have financed their resettlement to Morocco or Senegal perhaps we could have solved the problems on two fronts.

Clearly it is not as easy as that but the world needs to find new and different ways to fight violence originated from deep sentiments of alienation with other means than violence.

November 30, 2007

When will a foreign judge be retained in Heathrow?

Sir Martin Wolf questions the current extradition agreements between the UK and the US based on the extremely harsh sentences in terms of time and inhuman conditions that could be imposed on British citizens and for that he paints a horror picture about the US prisons, “Judicial torture and the NatWest 3”, November 30.
I do not know about the prison conditions in the US, thank you Lord, but in too many countries around the world when judges sentence people to prisons, they are in fact sentencing them to another Auschwitz in terms of the absolute disrespect those places show for the most basic human rights, and worse the judges cannot even start to claim they didn’t know. When will the International Criminal Court in The Hague start to investigate these crimes against humanity?
If we cannot correct the correctional institutions around the world the quality of all our future is much in doubt.

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

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

Snooties abound

Sir FT’s front page November 30 voices Peer Steinbrück’s, Germany’s finance minister, accusation that bankers are “snooty”. Of course he must be right, almost by definition but, before he throws the first stone, he does well looking closer at those nearer to him. If “snootiness”, a word that I never heard before but immediately felt intimate with, has to apply to anyone I would have to say it is to all the bank regulators who in self congratulatory ways thought they hade tamed the risk in banking for ever with all their Basel inventions.

November 28, 2007

We need to rewrite bank regulation from scratch before accidents are unmanageable

Sir Martin Wolf asks “how do banks get away with holding so little capital that they make the most debt-laden of private equity deals in other industries look well capitalized?”, “Why banking remains an accident waiting to happen”, November 28.

Mr Wolf could do well reading carefully the minimum bank capital requirements that have been imposed on the banks by their regulators. There he would see that if the banks lend to the public sector, or to creditors qualified as utterly safe by the credit rating agencies, such as securities backed by subprime mortgages, they need very little capital. If, on the contrary they would want to give credit to an unknown and not to well capital endowed entrepreneur, who might help to create those decent jobs the society needs, then the bank has to put up a lot of capital. With this incentive structure guess which route the banks are taking?

Wolf also mentions Henry Kaufmann’s suggestion to submit to special intense scrutiny banks that are deemed “to big to fail”. As the failure of any of this to big to fail banks would clearly have much worse consequences for the world than a little Northern Rock has, I have always suggested that the best way to insure us against the putting all the eggs into the same basket risk, is a small progressive tax on the size of banks. We might lose out on some of the economies of scale, but then again we have always been told that you can’t have the cake and eat it too.

November 25, 2007

We are in need of swift and far-reaching actions

Sir Lawrence Summers in "Wake up to the dangers of a deepening crisis" November 25 mentions that there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible…[and] to assure that there is a continuing flow of reasonably priced loans to credit worthy home purchasers." This sounds right though let us hope that with it he does not refer to a need for maintaining the prices of the houses. The more intense the market is allowed to work the shorter the adjustment period and that should really be the primary goal. This subprime bad tooth needs to be pulled out very fast if we are to avoid much worse complications.

The other thing we need to do fast is to start to comprehend the real significance of systemic errors in a globalized environment. What brought us here and what could have happened if this subprime mess had had two more years of build-up before exploiting? Let us shiver at the idea and start doing something about it. Please reign in our bank regulators and their commissars the credit rating agencies. Without them, this would not have occurred.

November 21, 2007

Let us also look at the quality of growth

Sir Martin Wolf in “Who will pick up the thread after the great unwinding” November 21, answers himself that question with a “the rest of the world” and we, praying, join the chorus.

Having said that and since Wolf juggles around with some percentages of growth, and views with some tremor the possibility of a “growth recession” in the US, I would also like to add that, sooner or later, we need also to start looking more in detail at the sustainability and the quality of growth.

I am spending this Thursday of Thanksgiving in New York and I have just been informed that in order for my wife and daughter to access the real bargains during Black Friday I need to go with them to the stores when they open…at 5AM in the morning. Since that cannot be a sign of good growth, if some growth recession could help me from having to go shopping at 4 am next year, well then bring it on.

November 19, 2007

We the rest also want Galileo

Sir we, the rest of the world, fully agree with Pierre Bartholomé and Kevin Madders´ “Why the Galileo project must go ahead” November 19, for reasons of our own. Just to be on the safe side we prefer two navigational systems so that we can either average out their results or concern ourselves with any differences. Can you imagine having to rely on just one source to tell you where you find yourself? What horrific systemic errors could ensue. In fact why should we not have at least three systems to tell us where to go, especially when seeing how the financial sector, even with their three credit rating agencies sextant, so utterly lost itself?

Who do they think they are?

Having much argued for that the bank regulators should give the banks more time to adapt their capital requirements when there is a systemic downgrading going on of course I would agree with that the monoline insurers should be given some time to improve their capital position so as to avoid a downgrading, as stated in Gillian Tett´s and Saskia Scholtes´ “Bond insurers act to keep their rating” November 19. My question though is about who on earth gave the credit rating agencies these type of power to stay the execution of a downgrading and who is responsible for what happens during the stay? It would really seem that the credit rating agencies are moving up from being mere opinion makers to policy makers.

November 16, 2007

And what about the composers?

Sir, John Gapper in “A bruising game of musical chairs”, November 15, beats up on some financial sector dancers like Citibank’s Chuck Prince but keeps totally mum about those composers in Basel who wrote the score of the “minimum capital requirements”, picked the conductors and the musicians, the credit rating agencies, who were to perform the music to which the bankers were ordered to dance. As much as I could object the generous severance checks to the dancers much more do I object that our bank regulators are not held accountable and are now almost expected to dig deeper in the hole we find ourselves and which can only lead to even wilder dancing.

We need to look further than the usual suspects

Sir, I absolutely agree with Martin Wolf when in "Big lessons from Northern Rock" November 16, he answers with an unqualified yes the question "Would it no be better to let mismanaged institutions go under, while protecting small depositors effectively?

Nevertheless, that forces us to define mismanagement and though I agree that management should be the first usual suspects we round up, in this case I would loath to let go, without further investigation, all those bank regulators who by inventing the current structure of the minimum capital requirements for the banks, and appointing the credit rating agencies as their commissars, could ultimately prove to be the real intellectual perpetuators of this mess.

November 15, 2007

And what about the composers?

Sir, John Gapper in “A bruising game of musical chairs”, November 15, beats up on some financial sector dancers like Citibank’s Chuck Prince but keeps totally mum about those composers in Basel who wrote the score of the “minimum capital requirements”, picked the conductors and the musicians, the credit rating agencies, who were to perform the music to which the bankers were ordered to dance. As much as I could object the generous severance checks to the dancers much more do I object that our bank regulators are not held accountable and are now almost expected to dig deeper in the hole we find ourselves and which can only lead to even wilder dancing.

November 12, 2007

Give the banks some time to adjust

Sir currently when financial assets like the bonds collateralized with subprime mortgages suffer a downgrading by the credit rating agencies, a bank, according to the minimum capital requirements, has to come up with new capital in the case he did not have more capital than needed. When downgradings become epidemic, as currently is the case, this might force such a scramble for bank capital that it could make matters worse.
Again, many downgradings are really not about the assets turning sour but more about discovering that they always were and so really the capital should have been there from the very start, and if so why the rush to now fix it all immediately if the rushing might turn into panic?
In this respect I would suggest that our bank regulators start thinking about giving the banks some time to adjust their capital base, for instance by giving them at least one year to come up with more capital for any asset that is suffering epidemic downgradings.
Why should bank regulators be so lenient? Well for a starter they were the ones who got us into this mess with their minimum capital requirements adjusted to risk invention and with their appointment of the credit rating agencies as their financial commissars.

Please give us a New Oil Deal!

Sir less than ten years ago the price of oil was less than ten dollars per barrel, the Economist wrote in "The next shock?" March 1999, that "in today's condition the price would head down towards $5" and Sheikh Yamani was the toast of the town with his cute ''The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.'' Of course all that set us up for low investments in oil exploration and as a consequence the current high prices of oil.
It should therefore be quite clear that when now "Opec seeks assurances on oil demand from consumer nations", FT front page November 12, so that they can invest, it behoves the consumers all over the world to come up with some constructive proposals. The world needs urgently a New Oil Deal and the only ones standing in between consumers and producers to reach it are those who just want that deal for themselves.

November 10, 2007

We are all in this together

Sir Krishna Guha, in "The world's currency could become America's problem" November 10, describes several scenarios for the decline of the dollar but steers clear from the big question of whether the markets will keep their confidence in our current monetary and financial system if the dollar goes haywire.

After the dollar gave up the last appearances of gold backing in 1971 (Guha might have only been a child then) the world basically accepted a system based on the capacity of their governments, or politicians, to guarantee some sort of financial discipline and which so clearly amounted to an act of faith that it was made explicit by including the "In God we trust" on the currency.

In this respect if the markets come to completely lose their trust in the word of the US governments and their politicians this does not necessarily imply that they will have more trust in the word of other governments or politicians but it could in fact lead them to lose their confidence in all of them, at which point the dollar-yen-yuan-euro value becomes utterly irrelevant, leading to a global scramble for assets to barter, at any price, and perhaps having the prices of the shares on Wall Street quoted in ounces of gold.
And so what do we do now with this piece of knowledge? Unfortunately very little, since while the markets keep having trust in the system there is no major benefit being short of faith. Whether we know it or not we are in fact all in this together.

November 09, 2007

We might be better off ignoring the credit rating agencies

Sir Gillian Tett in “It’s no wonder agencies are so jumpy over monoline saga” November 9, mentions that Fitch has sort of graciously conceded the “monolines a period of time in which they can raise fresh capital to avoid downgrades”. What financial Frankenstein’s monsters have our regulators created?

Where do they get the powers from to give this sort of instructions while simultaneously telling us that they are only giving opinions and which in terms of the First Amendment means they are not responsible for anything? Perhaps the best we can do is for all regulators to give immediate orders to the market to ignore anything the credit rating agencies say and then take it from there.

November 07, 2007

Sergeants and generals

Sir when reading Simon Ward’s “How the Bank of England broke its own rules" November 7, I suddenly had a vision of the sergeants drawing up battle plans at headquarters and the generals kept busy running the trenches.

Absolutely, the Basel Accord is the root of our current financial turmoil

Sir I must voice a Hurrah John Plender! for his article titled “The Basel Accord sits at the root of the ongoing crisis” November 7. If we are ever going to have a fighting chance of getting out reasonably well from our current financial turmoil we have to make our regulators more accountable for their mistakes.

Plender refers to how through the minimum capital requirement calculations imposed a regulated arbitrage opportunity was created that forced and stimulated the creation of a parallel financial world that ended up much more difficult to comprehend. To this we would also add the fact that when the regulators then appointed the credit rating agencies as their frontline commissars, then really they set the table for the systemic risks to build up.

Also when Plender asks “whether top executives, let alone non-executives, can really understand the risks being run in such large, complex [financial] institutions”, worrisome as that might be, much worse is having to ask whether our bank regulators really know what they are up to.

What we need is not to cap the oil prices but to give them a decent floor

Sir the real oil crisis occurred in 1998 when the price of barrel fell under $10 per barrel and the Economist wrote in "The next shock?" March 1999, that "in today's condition the price would head down towards $5", and this is what primarily explains the current high prices of oil. Had the consumer countries acknowledged the growth in demand that for instance China would bring to the market (IEA did not say a word about it for years) and expressed their willingness to enter into those reasonable long term contracts that would have allowed producing countries to make the massive investments needed we would most probably have faced a completely different energy outlook.

From this perspective Ricardo Hausmann "Biofuels can match oil production" November 7, and that has 95 countries investing billions of billions in cultivating 700m of acres just in order to cap the price setting capacity of OPEC seems to say the least an astonishing proposition. The question to ask Hausmann is what he will do with those 700m acres when oil having been at last given such a real price floor really starts the pumps. Why don't you give OPEC a price floor without having to go into the environmental and economic nightmare of cultivating 700m of acres that will have to be subsidized in the future and that we pray will not include the Amazon?

November 05, 2007

What are the costs of not allowing immigration?

Sir you are absolutely correct when in your editorial “Migration debate” November 5 you call out for more “fact-based analysis, not rumour-based angst”. You also say that “Any debate about immigration must begin with asserting the truth that immigration makes most existing residents better off” and though I gladly sign up on that principle, I must remind you that the most missing piece of evidence in the whole debate, is the analysis of the costs of not allowing immigration.

November 02, 2007

It’s not just abiut the targets but also about how you throw the darts

Sir, Paul de Grauwe opines that “Central banks should prick asset bubbles”, November 2, and though that might be right in terms of monetary policies, whether the central banks throw their darts at inflation targets or assets bubbles, does not excuse them from acting with wisdom when regulating the banks.

When the regulators imposed their minimum capital requirements on the banks based exclusively on risk assessments performed by their commissars or Blackstone type subcontractors, the credit rating agencies, they should have known a reaction would follow. First that many assets deemed more risky by the banks than what the appraisers thought them to be, would probably stay in their balance sheets while all those assets deemed less risky than appraised, would find new balance sheets where to hide out .

Second that the credit rating agencies would turn into the mother of all the systemic risk builders and contagion agents allowing profitable arbitration in risks, mostly through securitization mechanisms. Let us remember that all this subprime mortgages mess would have had no chance of going global, had it not been for the banks being able to sell the mortgages because the credit rating agencies provide these with AAA travelling documents.

Maids for your professionals or professionals for your maids?

Sir Martin Wolf is absolutely right when in “Why immigration is hard to tackle”, November 2, when he says that “this is no area for stealth” and requests more transparency. For instance he makes a good point when mentioning that the “impact on the gross domestic product of migration should be measured after subtracting the incomes earned by the migrants” although perhaps there is also a need to differentiate between temporary and final migrants. Where I am not really sure is when he mentions market-compatible systems like auctions of work permits to be better than arbitrated point systems since neither one of them seems to be covering the problem that could be caused by in relative terms favouring the highest added value workers and therefore implicitly perhaps relegating your own to the lower earning sectors. Do you want to allow a foreigner to work as a maid so as to give your own professionals a better chance or do you want to give the foreign professionals a better chance and have your own work as maids? Not an easy proposition to handle.

Personally what I most favour, everywhere, is massive temporary worker programs so as to allow for the market to cover its short term needs without necessarily forcing the society to enter into long terms commitments. To make these temporary programs more feasible I am currently investigating the use of private insurance companies to guarantee compliance (going back home) instead of putting the burden on already overly stretched migration authorities.

The main obstacle to the development of temporary worker programs lies ironically in the arrogance of developed countries believing that anyone who gets there wants to stay there forever. So instead of making good livable room for all your temporary needs what you are getting is more and more permanent fixtures.

November 01, 2007

What do we really want from our banks?

Sir over the last two decades we have seen hundreds if not thousands of research papers, seminars, workshops conferences analyzing how to exorcize the risks out of banking; and if in that sense the bank regulation coming out from Basel was doing its job; and centred around words like soundness, stability, solvency, safeness and other synonyms. Not one of them discussed how the commercial banks were performing their other two traditional functions, namely to help to generate that economic growth that leads to the creation of decent jobs and the distribution of the financial resources into the hands of those capable of doing the most with it.

At this moment when we are suddenly faced with the possibilities that all the bank regulator’s risk adverseness might anyhow have come to naught, before digging deeper in the hole where we find ourselves fighting the risks, is it not time to take a step back and discuss again what it is we really want our commercial banks to do for us? I mean, if it is only to act as a safe mattress for our retail deposits then it would seem that could be taken cared of by authorizing them only to lend to the lender of last resort; but which of course would leave us with what to do about the growth and the distribution of opportunities.

October 29, 2007

Too many monkeys with razorblades!

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

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

Sir, I am sorry but you’ve got a lousy short term memory

Sir you say it is “Time to avoid a subprime future” October 29, and then discuss the efforts that have to be made to avoid individual fraudulent behaviour of borrowers and lenders since “human nature and markets being what they are” history will repeat itself. Surprisingly though you leave out the fact that all the individual frauds would have gone nowhere, had it not been for the blessing they received by the credit ratings agencies. In another editorial the same day “Memory’s ghost” you rightly speak about the great importance for countries to keep hold of their bad events in its past so as to not resurrect them. Therefore, in the case of the subprime affair I can only conclude you suffer of a truly lousy short-term memory. I am so sorry.

If you really want to avoid a subprime future in mortgages or any other sector it is clear that the first thing you need is to remove the quasi-regulatory role of the rating agencies since the fact remains that the better the credit rating agencies might get at what they are doing, the greater their capacity of leading us down the precipice of ever larger systemic risks.

October 26, 2007

You can’t sleep on the mattress and put it to work too!

Sir Sir Samuel Brittan in “How to put money in the bank” discusses the very important aspect of banks being able to pay back the deposits when so asked. But a bank is not awarded its franchise only to serve as a mattress but also because it is supposed to help generate job creating growth and distribute the opportunities to those capable of doing the most with the funds deposited.

Missed in the current debate is the fact that bank regulators have over the last two decades imposed through their minimum capital requirements a quite severe regulatory arbitrated bias against what is perceived as risk; and which has altered the flow of funds away from entrepreneurs into consumer financing; and which has clearly affected development as such; and unfortunately now it seems that all of these sacrifices have come to naught, when we are discovering that risks never left town but just went into hiding.

When now the banking regulators might be tempted to dig even further in the hole they find themselves in, let us hope they remember to put a cap on the amount of sacrifices a society can afford to do just in order to get itself a safe financial mattress where to put the retail deposits.

Supernanny as a super decent jobs generator

Sir it is fascinating how different you read things depending on what you are looking for. Being convinced that the capability of generating decent jobs is the glue that holds society together and that the harshest scarcity the world now confronts is the lack of decent jobs, what most attracted my attention in Tim Hartford’s “Supernanny insists that you have the right to opt out” October 26, had nothing to do with libertarian philosophical issues but more with the pragmatic job opportunities that a really proactive Supernanny could help to create.

For instance Harford mentions a smoking permit that would require a doctor’s signature, which essentially signifies a job opportunity. Although I could discuss whether the smoking permit should instead of a doctors signature require an economist to approve it instead to attest to the need of reaching an equilibrium between the individual’s and the society’s utility functions, what most struck me was the job generating capacity a really proactive Supernanny could have, especially if he wants to take advantage of our current technological advances.

For instance using Skype Supernanny should make it obligatory to consult daily with an expert if the chosen tie really matches the shirt. Live on line checking on whether we are brushing our teeth correctly should also be able to generate some very decent and useful teeth brushing supervisors jobs. Now as we of course do not want to impose too much on the personal freedom of choice of people one could also auction out a certain number of permits that would allow to smoke, to wear unmatched ties and to sloppily brush your teeth.

October 17, 2007

The regulators caused this financial Katrina

Sir, Gillian Tett in “Questions hard to answer” October 17, “A key reason why banks have sliced and diced in recent years is that these rules allow them to hold less capital against loans.” The “allow them” part does not really cut it and the phrase would be more accurate had it said “The bank regulators created regulation that provided the incentives for the banks to slice and dice.” Bank regulators made the rules and the banks acted in accordance, as they should. Can you imagine it any other way? If we are going to get out of this financial Katrina without setting us up to even worse storms we better be very clear about what caused what.

Let us first get rid of the financial commissars

Sir Chris Giles in “Credit squeeze leaves a long shadow” October 17, says that “credit rating are in the spotlight for providing the same rating to complex structured products and simple corporation debt with very different structures assumptions and liquidity”. If this is what we believe the problem to be, just an error in calculations and that new and better technique could take care of, then we have not learned anything and we will just set ourselves up for even a worse financial Katrina than the current. The real fundamental problem starts with the appointment of the credit rating agencies as the financial commissars that the market must heed. We all know that just cannot end well.

October 15, 2007

The environment needs a freed Gore

Sir in “Drafting Gore” October 15, you are absolutely right about that politics still pull a lot of weight for the Gore camp probably especially so for his closest aids. Many of us cannot wait for Al Gore to make clean break with the politics that tie his hands and so that he will at least be able to utter the word petrol-tax. It is a bit strange to say the least to see a country like Norway, and that even though an oil country applies immense taxes on the domestic consumption of petrol, because of his efforts for a better environment, awards the Nobel prize to a man that does not even mumble about the need of taxing more the consumption of petrol in the USA.

One thing is the appetite and the other what you eat

Sir of course Wolfgang Münchau is right with his “Boring central bankers got us into this mess” October 15 in the sense that they provided those negative real interest rates that fed the appetite for a credit boom and an asset purchasing boom. Having said that he should not be too cavalier about the role of the credit rating agencies who having been so much empowered by the bank regulators, made things so much worse by suggesting to the gourmands some really bad courses, like the so sub-primly awarded mortgages to the subprime creditors.

If Gore is really right then Lomberg is really right

Sir Clive Crook when reviewing Bjorn Lomberg’s recent book “Cool It”, “An inconvenient Danish pasting” October 15, underlines the differences between the Gore camp and the much smaller group of Lomberg followers. This is somewhat unfortunate because the more the truth in Al Gore sermons the more the need for a truly sceptical attitude that considers carefully every opportunity costs, not only to help us to attack the problem wisely but more importantly to keep at distance all those peddlers of green magic potions that could sure tempt us into monumental waste. If on the other hand Gore is not right and climate change induced calamities are not waiting for us around the corner well then a little waste does not matter that much since it would just constitute another drop in that brimming bucket of wasteful spending and throwaway investing

October 12, 2007

Development rating agencies?

Sir Saskia Scholtes and Chrystia Freeland report that “Moody’s to revise ratings by end of year” and that it is now contemplating something to be marketed as “fundamental value”. Now, if that rating is only to be based on risk considerations then it does not really seem to be of such fundamental value to me.

Of course a bank should be able to repay his deposits and that is why bank regulators in Basle are using risk to establish the minimum capital requirements. But a bank’s function is not only to be able to return the deposits but also to help promote growth and development and to assist the society in the distribution of opportunities. Otherwise a mattress would suffice.

In this respect, besides the credit rating agencies, we perhaps should also be thinking of incorporating the criteria of development rating agencies and opportunity distribution rating agencies into the capital requirements of a bank. Only then would we be able to start talking about really fundamental values.

It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope but it is a real tragedy when developing countries copycats it and falls into the trap of calling it quits.

October 10, 2007

The one and only focus of Basel is risk-adverseness

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

October 09, 2007

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

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

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

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

If you need a hole, dig it now!

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

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

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

October 05, 2007

It really is about subprime subprime

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

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

October 04, 2007

Let us beware of upgrading the storm to a hurricane

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

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

September 27, 2007

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

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

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

September 26, 2007

It behoves us all to stand up to the bank regulators

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

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

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

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

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

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

September 25, 2007

I need to fluoridate

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

Regulators, please make the financial flows free to flow again

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

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

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

September 24, 2007

Caught between moral hazards and moral duties

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

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

It is who dwells in the houses that really count

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

September 21, 2007

Then get rid of those paranoid-schizoid bank regulators too

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

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

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

On some dangerous impreciseness

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

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

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

Sir, Philip Stevens ends his “Modern-day parable of the run on Northern Rock” on September 21 questioning “Why should we trust anyone?” though a far more precise question would be why should we should be forced to trust anyone? Describing how “the squall became a hurricane because the risks of subprime lending had been carefully concealed in the mortgage securitisation market and then scattered to the winds” he should have remembered that what allowed that to happen were the prime ratings awarded to these instruments by the credit rating agencies.
Stevens, the doubter, even mentions almost with sadness that “it is too late, even if we wanted to, to roll back the frontiers of financial innovation” but of course that is not needed when all that is called for is some more scepticism with regard to the gold in California.

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

September 20, 2007

And who pays me?

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

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

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

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

September 19, 2007

Some of God's greatest gifts are unanswered prayers

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

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

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

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

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

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

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

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

Bore where are you?

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

Does Observer know the difference?

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

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

September 18, 2007

Stop them from digging!

Sir, Paul Davies and Gillian Tett in “Moody’s talks of rating reform”, September 18 quote Brian Clarkson, the President and chief operating officer of Moody’s saying “One of the issues we are talking to regulators about is the possibility of creating tools to address liquidity and market issues”. And we can just pray for that the regulators know about the real meaning of “when in a hole, stop digging”.

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

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

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

September 17, 2007

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

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

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

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

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

September 13, 2007

Do we then need two world banks?

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

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

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

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

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

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

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

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