August 30, 2007

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

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

August 29, 2007

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

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

Barack Obama is looking in the wrong direction

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

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

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

August 24, 2007

But the regulators should have known!

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

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

August 23, 2007

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

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

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

Misleading advertisement

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

August 22, 2007

But what are the non-professionals to do?

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

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

August 20, 2007

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

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

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

August 18, 2007

On calling the credit rating agencies poker hands.

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

Unshackle us from the credit rating agencies…please.

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

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

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

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

August 17, 2007

Chávez is in fact out of control.

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

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

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

The regulator’s human folly

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

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

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

August 16, 2007

Do not blame the messenger!

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

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

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

August 15, 2007

Just do no harm

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

We need to repair what fear brought us last time

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

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

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

August 14, 2007

Please unshackle the markets

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

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

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

Where the buck really needs to reach

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

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

This time though ignorance was mostly fabricated

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

August 13, 2007

On eating green

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

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

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

August 11, 2007

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

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

August 10, 2007

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

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

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

Markets also abhors experts not behaving like experts

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

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

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

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

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

Does procreation include the possibility of adoption?

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

August 08, 2007

Liberty and security also requires consensus

Sir, although Willem Buiter might be fundamentally correct when he says “For the sake of liberty and security: legalise all drugs” August 8, he should also remember that for the sake of that same liberty and security he needs to frame his idea in such a way that it is acceptable for the majority. In this respect and making reference to Moisés Naim’s interesting book “Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy”, (2005) and that reminded us of how much of the illegal world was interconnected, perhaps a more consensus reaching approach could be to identify the whole world market of illicit and legalize it at a rate of 5 per cent a year starting with the more digestible. Otherwise they way the world is going its illicit part is soon going to be wealthier and stronger than the licit… and that is more dangerous than hundred al-Qaeda put together.

Also while discussing these issues let us never forget that strict social sanctioning is normally a far more efficient route to go than the strictest of the law enforcements.

That is not the route!

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

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

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

August 07, 2007

Wrong answer!

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

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

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

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

August 06, 2007

And be careful with the regulator risk

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

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

August 04, 2007

Matchmaking on the web is still a quite chancy affair

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

August 03, 2007

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

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

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

August 02, 2007

We need to eliminate the financial fortune-telling franchise.

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

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

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