January 31, 2008

And US, get yourselves some more helpers too!

Sir Ricardo Hausmann tells the US “Stop behaving as whiner of first resort”, January 31; do not give “the US consumer more rope with which to hang himself”. Hear hear!

But as Hausmann says not only should the US not bet all on finding a dream-adjustment like reducing the over-consumption in the US “in a way that does not hurt longer term growth” by looking at what others (China) could do for it; it also needs “to keep on growing”.

The US has to be careful that the reduction of consumption does not diminish its size, since it is not only a matter of getting back into equilibrium; it is also about being able to take care of the outstanding stock of debt. And so “Stop behaving as a whiner and get yourself some 40 million more working immigrants to help you out!” could also be a valid message.

I ask why industrial China should be able to use rural China for their growth and not North America Central America.

Congratulations Basel?

Sir Ira Sohn in” Without Basel II it could have been so much worse”, January 31, says "thanks in part, to the Basel II regulations... a global systemic failure was averted". Come on! Be real.

Haven’t the authorities of Basel done enough of self-congratulation over the years to enlist what can only be explained as a spin doctor or a silly fan, and even managing to enlist FT in that?

Of course it is good that banks should take account of the pillar number 2 of Basel II that has to do with operational risks; especially since those rules should have been applied without any Basel regulation; and especially since more operational care might have even been retarded by the regulator not including it in Basel I and forcing banks to focus on other things.

But, what about the other 2 pillars? Pillar 1, the minimum capital requirements based solely on risk as measured by the credit rating agencies, drove the bank risks into no man land with doubtful guides. Pillar 3, market transparency, sounds now only as a bad joke when no one in the market seems to be in a position to understand what on earth is going on.

January 30, 2008

A tsunami is riskier when in a bathtub

Sir Robert Wade is absolutely right saying “Speed bumps needed to slow down capital flows” January 30. The biggest risk for the small bathtubs that the financial systems of the small countries represent, is not the drying up because for lack of water, but the drowning as a consequence of the tsunamis that the global financial oceans repeatedly generate.

Once again going alone!

Sir Martin Wolf’s warning that “Bernanke’s big gamble on reflation may work to well” January 30, is right on the dot in that the US should have first made certain that the rest of the world would collaborate before wandering off in the wilderness like a macho-do-it-yourself-cowboy.

Also for the US after so many years of liquidity injections I would prefer watering their identifiable problem sectors, like housing, with individual applications, micro-jet, instead of using a big hose, since before working sufficiently the land with that confidence building that allows it to absorb the water, the risks of flooding are large.

January 28, 2008

Authorized trading could be even worse than not authorized trading

Sir Frank Partnoy does quite well to remind us that for a shareholder a dollar lost is a dollar lost independent on whether it comes from an authorized trade or not, “Kerviel is just a part of a global rogue’s gallery”, January 28. In fact one could make the case that the huge losses on duly authorized but never really comprehended investments are much more worrying.

Come on what about that stiff upper lip?

Sir your “How to deal with sovereign wealth” January 28 reads like you are being very nervous about the sovereign wealth funds; asking for a code of conduct that would put order and limits on what these monsters could do to you. Come on what about that stiff uper lip?

Suppose these funds do not behave? Do you really think there would not be a market response to that? Would a Saudi Citibank or a Chinese Microsoft be able to keep the value of these companies in your markets if they are seen as having bad intentions?

This is a moment when the world really needs these capitals to recycle and help out and, if there is really anyone who would like to see a code-of-conduct it might very well be the investors who could want an assurance that your nationals will give them the most favoured investors status. By the way your editorial might very well have reduced in some billions the price they would be willing to pay for those assets they are thinking of buying.

January 26, 2008

Long live the Balkanization of criteria!

Sir "Davos call for end to fragmented financial regulation" is a first page story on you January 26 issue since Malcolm Knight the chief executive of the Bank for International Settlements complained about "the Balkanisation of regulation". Mr Knight might have a point, but, long before that discussion, we need to fully deal with the issue that the detonator for the current crisis was his institution's empowerment of some few credit rating agencies and their methodologies; and which resulted in giving the subprime-mortgages backed securities the wings to fly all over. From this perspective, a Balkanisation of criteria is also urgently called for. 
Yes of course, put some order in the house, nothing wrong with that, but, please, not by trusting some governess ordering your children telling around. Haven't you seen what monsters you have contracted? "Put up a couple of billions before next week or I down-rate you!" (Where is Maria?...The children need her!)
PS. In a statement delivered as an Executive Director at the World Bank on April 3, 2003 I wrote: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

FT should not lend support to the sophisticaters!

Sir in “The start of the great unwinding” January 26 you say “Complexity also adds to the dangers that any part of the hyper-financial system can bring down the whole” and you are right. Nonetheless, you follow it up by saying “Monoline insurers exemplify this kind of reef under the water” and this is clearly wrong; since having some undercapitalized insurers selling coverage while their good fortune last has nothing to do with complexity.

Many of us warned repeatedly about the counter-party risks with agents such as the monoline insurers and the reason it was hard to get that message heard was that it was so easy for them to find in their sleeves the sophistications that confused the issues and killed the debates. FT should not help the market to hide within the complexity in order to hide the simplicity, and perhaps a non-Davos retreat to reflect on what are the simple and time-honoured truths that lie behind the current turmoil could be a good place for you to start.

January 24, 2008

Any explanation?

Sir Sheila McNulty reports in “Profit at Conoco mask oil industry’s problems” January 24 why even with high oil prices international oil companies find themselves with limited access to resources and an unclear path for investment, and which obviously must impact the availability of oil around the world.

In reference to this may I ask why on earth have not the consumers and the oil producers been able to agree on long term supply/take up contracts based on a reasonable initial price; and slowly adjusted to the real markets by means of a running twenty-year average moving price? The governments could help out, acting as buffers, for instance by charging gasoline taxes also in accordance with the price stabilization scheme.

I truly do not understand why no government from an oil consuming country has not empowered some agents to go out in the market and negotiate on their behalf some decent terms on oil for its constituency; exactly the same way I cannot understand why the government from a producing country has not gone out there to negotiate some of the stability that their economy and constituency need.

Clearly the incentives of having long term contracts at reasonable and stable prices would help the much needed investments in oil exploration to take off.

January 23, 2008

Do not dig us deeper in the hole we’re in!

Sir, Ieke van den Burg when writing “We must have strengthened oversight of bank sector” January 23, seems to propose we dig ourselves deeper in the hole where in, when asking for the creation of “holistic” public oversight. That, just as the empowerment of the credit rating agencies meant will just increase the systemic risks of global failure.

As I see it the best way to go is to follow the tradition of not putting all your eggs in the same basket and therefore creating a progressive tax on the size of the banks. The larger the bank, the more it will hurt if it fails, so the more it should pay in insurance premiums.

Marx prophesied “a progressive diminution in the number of the capitalist magnates” and the best way I know of fighting Marxism is to stop this prophecy from becoming a reality.

At least let us guarantee some cyclicality in the bonuses!

Sir Prof Avinash D. Persaud in his letter “Bumper bank bonuses and banditry in the boom” suggests new regulatory capital requirements for the banks so as to get rid of a system that “adds to pro-cyclicality”. I could not agree more, especially since that would also help to reduce the “pro-cyclicality” produced by the credit rating agencies which is something I have been arguing since the Basel Accord started to be applied globally.

Though I also agree that the above is a much better way to take care of the salaries and bonuses of bankers than having regulators act directly on it, I would like to remind about the importance of fully restoring the powers of shareholders, in banking and in all other activities because as long as management have so much influence over their own bonuses there is not even cyclicality.

Who suckered who is the wrong debate

Sir George Soros writing about “The worst market crisis in 60 years” January 23, is right to say that resulting political tensions…may disrupt the global economy and plunge the world into recession or worse. Unfortunately he then adds coal to that fire when he speaks with venom about how “Globalization allowed the US to suck up the savings of the rest of the world”, knowing perfectly well this was mostly because of the immense reserve accumulations of dollars voluntarily made by governments, mostly to keep exchange rates artificially low in order to, in Soros phraseology, suck up jobs. Who suckered who is not the debate the world now needs.

That the US should have ignored the financing offers they received from the world and behaved with more discipline not one doubts, but neither would then other countries have been able to strengthen so much so that they now can perhaps take over some of the pulling responsibilities of a bit tired US economic locomotive. How that can best be done is what we should be debating.

January 22, 2008

If knowledge suffices then wisdom is worthless

If knowledge suffices then wisdom is worthless and sure enough our bank regulators placed more value on knowledge than on wisdom; which is the only way how you can explain such foolish behaviour as empowering the credit rating agencies with so much power over the financial flows of the world.

See where this has gotten us. All the very sub-prime awarded mortgages to borrowers that classified as subprime would have not been able to go anywhere had they not been blessed as prime collaterals for other securities.

One reason that stops the world from realizing the foolishness of it all is that the credit rating agencies are private, and we have all been pavloved into establishing a connection between private and free efficient markets. The truth though is that the private credit rating professionals are only outsourced bureaucrats working for some pompous Ministry of Financial Risk Elimination.

January 19, 2008

Cooperatives hit Wall Street?

Sir on the front page of your weekend issue January 19, the lead title says “Merrill to reform bonus system” and we read that they plan to “change the bank’s pay system so that it was ‛based more’ on how the whole company did; then on how the individual business did; then [on] how the individual did”

Will we perhaps soon hear Merrill suggesting all the companies they invest in to follow their cooperativistic movement lead; and also create a specialized hedge fund?

January 18, 2008

Could our economic weapons be slightly passé?

Sir Samuel Brittan’s “We have defences against a slump” January 18 reads like a brilliant general discussing what to do in the current war, with the weapons from the last war. Our problem now is that we have not yet been able to really identify the exact strain of the current economic hardship’s virus so as to know what could best work.

For instance, nothing of those reckless borrowing and reckless lending in the subprime mortgage sector would have gone anywhere had it not been for the credit rating agencies having been appointed as financial commissars by our bank regulators. Does this now mean we have to start by radically extirpating these agents from our system or do treatments suffice?

How do the French national hypocrisy reserves measure up nowadays?

Sir Philip Stephen in “Lovestruck Sarkozy gamble on reaching a happy ending” January 18, gets into the theme of “throwing overboard this ‛deplorable tradition of hypocrisy’ was refreshing”.

Given that national reserves of hypocrisy frequently are of immense values to solve problems or at least keep a lid on them to prevent them from exploding, it would be interesting to hear Stephens opinion on how these reserves of France stand up when compared to those of other nations.

It is not that I believe that hypocrisies have to be included on the balance sheet of a nation, but a special footnote on it, among contingent assets and liabilities, could be helpful in furthering our understanding of it.

January 15, 2008

Banks should not be allowed to turn into automated credit machines

Sir if the credit rating agencies were gubernatorial offices with bureaucrats instead of private companies I am certain many would be looking at them from a quite different perspective but the truth is they are their function is a regulatory one, to inform the markets where they can go and at what price.

John Dizard in “Time to see is established credit rating agencies make the grade January 15 tell us that we should count out the possibilities of going “back to a system where credit is dispensed by bank credit committees” as they “aren’t the people structures of capital available in the banking system to do that”. Well how sad, our banking system is the now only an automatic credit machine that follows what the piper says? Of course we have to get out of the current system…it is crazy… the horrendously badly awarded mortgages would not have gone anywhere had it not been for the prime ratings.

I am in no way predicating against the credit rating agencies, they have a role to fulfil and they should be able to compete favourably in the market of credit opinions, but what I am totally set against is bestowing them with so much power. Get rid of the system of calculating the minimum capital requirements for the banks based on risks as calculated by the agencies and you will immediately stimulate some of that credit analysis capacity that we would like to see in our banks.

Dizard and others spend time analyzing whether by changing the compensation structures of the credit rating agencies one could correct their current weaknesses. Of course that is always a good thing to do, but to think this would stop us from being led into even worse systemic risks, when thereby trusting even more those few empowered to tell us what to do, is just to blithely ignore all the lessons learned by mankind.

Martin Wolf did right opening the cage!

Sir who could have thought a year ago that we would read Martin Wolf say “Why regulators should intervene in bankers pay”, in the Financial Times, January 15, and agree that he has a valid point; that the system cannot stand to see many franchises of public confidence so savagely exploited by so few. Mind you, on a much different scale, that is exactly how we ended up turning over Venezuela into the hands of an instigator of hate.

Perhaps what we now need is a new layer of progressive taxes specially designed for those who earn more than 100 times the income per capita of the country. The argument seems also applicable to the area of intellectual property rights. When we the society agreed to award patents and invest money defending these so that new inventions would follow, we never did it in order to help the general managers of those patents to earn salaries like hedge funds managers or bankers.

But also what could be most needed, in this case for all, instead of new regulations, is to restore the power of the shareholders since as long as management can decide their own salaries, the market constraints have really not a chance to operate. There’s a fiction making its rounds in the world that the big salary checks are all well deserved and well earned. Who do you think put a spin on that theory?

January 14, 2008

Regulatory malpractice is not the same as laissez-faire

Sir Barney Frank the Democratic chairman of the House financial services committee argues “Why America needs a little less laissez-faire” January 14, and though he might be right on many points he would do well to also remember that our current financial turmoil-with-the-potential-of-chaos is in fact primarily the result of regulatory malpractice.

First, the minimum capital requirements based on differentiation of risks that were imposed on the banks by the regulators was the incentive for the banks to go from the originate and keep it on your balance to the current originate and distribute it to where it can’t be readily see mode.

Second, to believe that you could give some few credit rating agencies so much power without this sooner or later turning into the mother of all the systemic risks creation machine can only be explained with one word… naivety.Whether there were predatory subprime lenders or predatory subprime borrowers none of them would have gone anywhere had it no been for the credit rating agencies reinforcing the belief that risks are measurable and controllable.

And so, before we tackle and solve the above, the financial tsunamis will hit upon us time and time again.

January 11, 2008

Speaker’s Corner revisited

In 1872, the British Parliament decreed Speaker’s Corner in Hyde Park of London as a place reserved for free expression, and initially it attracted all those extremists who, although qualifying as nuts, still had the right to vent their opinions. Lately, we have all witnessed how the original Speaker’s Corner speakers moved into Speaker’s Studios and now radicalism, anarchy, or fundamentalism is voiced on prime-time television. All of us others considered as boring in-betweens, have now to settle gratefully for slots in after-midnight cable television, or Speaker’s Corner, (or FT when they published us).

Sir Cass Sunstein discusses the fundamental issue of “How the rise of the Daily Me threatens democracy” January 11, and he should be commended for it since indeed the most dangerous weapon for mass-self destruction in any society is divisiveness; as a columnist in Venezuela I should know; there I write in green but my readers can only read me in yellow or in blue.

The current sheer overload of information forces many to use a very simple though also very dangerous initial classification system that uses some basic common denominators. The one of these most recently used is of course Bush, and which has otherwise clear-minded people thinking: “Hugo Chavez speaks against Bush? Then he must be good!”

How do you fight it? The only way I know is by always pointing out the many shameful similarities of the extremes and trying to make life in the middle seem interesting, fun and chic. But, it still takes guts to swim in the middle of the river and not crawl up on an extreme safe shore!

January 08, 2008

Gold is but an insurance

Sir in “Gold is the new global currency”, January 8, you express hope that gold’s most bullish fans are proved wrong… but really, so do most of them. We all know that gold is one of those worthless things that can become extremely valuable just because other valuables become extremely worthless, and so we regard the increase of the gold price with the same enthusiasm we can have about someone collecting on our life insurance policy.

Just agents or champions of change?

Sir Gideon Rachman writing about “Obama´s message to the world” January 8, refers to John McCain’s support of the Iraq war and though this is indeed an important fact on its own, I believe that much more important is that this support is given knowing that it is not a popular stance; and the same could be said about his full support of the recent legislation package on immigration. Therefore, and not that I do not like Obama, I do, but McCain seems also to be a valid candidate for “change”.

Why do not those both these candidates team up and propose what the American economy could need the most, namely a hefty tax on gasoline/petrol consumption? That would propel them from being merely agents of change into real champions of change.

Don’t go overboard blaming the investment bankers

Sir, Prof Eric De Keuleneer sounds more than upset in his “Investment bankers have behaved like pyromaniac firemen” January 8. Of course many of them did wrong but, before he spits out more venom, and most especially before he suggests new and tighter regulations, he would do well to study how much the investment bankers have in fact only been responding to the current regulations. As I see it, in history of mankind, there have never been as stringent financial regulations as now, when everyone has basically been ordered by the regulator to follow the tune of the piper, the few credit rating agencies.

Take away some of the incentives for consumer lending

Sir, January 8, Stephen Roach argues that “America’s inflated asset price must fall” in order “to shift the mix of savings away from asset appreciation back to that supported by income generation” and which sounds desperately drastic when there are other means to do that.

Anyone who lives in the US and receives ten pre-approved credit card offers each week and still, six months into a crisis, has to answer five phone calls a day offering mortgages, must know that some other forces than asset prices must be driving debt creation.

Since so many seem capable to so easily switch from praising the US for being the locomotive of world growth to “being the main culprit behind the destabilizing global imbalances” let me at least point out what I think is also responsible for the current sad state of affairs.

The securitization of consumer debt which allowed the creation of low risk financial instruments, plus the introduction of the minimum capital requirements for the banks and which are exclusively based on risks, as perceived by the credit rating agencies, constituted a massive dose of incentives for the financial system to go after the consumers, in the US and everywhere. Taking away some of the incentives to offer unreasonable consumer credits might long term be a much wiser thing to do for a nation than having the price of their assets fall from the skies.

January 07, 2008

In the long term the credit revolution points to other problems too

Sir Wolfgang Münchau in “The credit revolution looks to the long term” January 7 looks for the bright side of our modern credit markets, which is something good. Doing so he brings forward the “subprime mortgage, a product that allows poor families without a credit record to finance a home”. Unfortunately even this might not be such a clear cut and run proposition.

It used to be that depending on his income, a potential home buyer could classify for more or less of borrowings, but the interest rate to be paid on the loan did not differ much between a “good” borrower and a “not so good” one. Not any longer. The current knowledge economy classifies the market in many more different types of credit risks, which of course causes more financial discrimination, for good and for bad.

A thousand dollars paid each month servicing a mortgage during 15 years, when discounted at 11 percent per year, because the borrower is deemed “risky”, is worth 88.000 dollars today. Exactly the same payments, discounted at only 6 percent because the borrower is deemed creditworthy, are worth 118.500…35 percent more! And here lies one of the real problems of the subprime debtors… not only do they have less money but the little money they have is also worth less.

Now add to the above that the credit ratings might not reflect correctly the repayment capacity of the borrowers and we can see how as a society could be drawn into an unsustainable structure.

January 04, 2008

There are carbon border taxes that do no sound that bad

Sir in the greening of globalization, January 4, you correctly speak out against carbon border taxes since these could be sheltering a new dangerous breed of protectionism. But, given that Europe and the world has to pay so much more for oil and has to see its environment so much more contaminated, just because the US does not want to restrain its consumption of gasoline/petrol perhaps a carbon border tax on US products that considers this would not be such a bad idea after all.

That business growth should not be an end in itself is a worthy end in itself

Sir Sir Samuel Brittan is of course right when he reminds us that “Business growth is not an end in itself” January 4. What more pleasant for all of us to be able to retire in a sort of economic production equilibrium to enjoy the “other” offerings of life? But, for that to happen, there are at least two things we must do.

First we have to work real hard on our current distribution machinery since before the needs of all your citizens are satisfied, which might include even those of the other poor in the world, you would not be able to relax enough if you always had to be looking over your shoulder to see if someone is taking advantage of your bliss to grow away from you.

Second you need to send much better economic signals on where you find yourself, as I at least would not want to get stuck on a level that requires me accompany my wife when she goes out shopping at 5 am in the morning in one of those strange sales that the US economy seems to require. For a start I have often suggested that instead of only adding to the economic indicators we need to start resting some of its costs. For instance every time someone has to leave whatever he is doing in order to answer an uninvited call, offering you something he could do without, then you should automatically rest a couple of quid from your GDP.

January 02, 2008

Let us pray that immediate financial adjustment is not too expensive

Sir Gillian Tett analysis some linkages between the bank crisis in Japan and the current difficulties encountered by the western financial system in a great article “Financial faith found wanting” January 2. Of course the title is a little bit insulting since what has been really been found wanting is the financial knowledge that was supposed to correspond all the investor’s faith deposited.

But what I really would like to comment on is that there is a very substantial difference between the management of the both crisis and we really do not know how this will plays out. Tett quotes Tadashi Nakamae with “Japan’s… banker’s stubborn refusal to recognise bad debts and authorities´secretive attitude amplifies the problem in the long run” and this is although true might also be a very low price for buying the necessary time to work it all out in a more orderly way. The current system with its minimum capital requirement rules bindingly agreed upon in the Basel Accord and the mark to market accounting rules; and that forces upon the banks rapid adjustments with no delays allowed might indeed result in less rain, in the long term, but could lead to a monsoon that though brief could destroy much more value. We will just have to see… and pray.

Finally let me also acknowledge the fact that at least one former regulator, Mr Timothy Ryan is starting to recognize their responsibilities in this whole mess saying “Former US bank regulators like me feel a bit responsible because we used risk-adjusted capital rules to put riskier assets of balance.” As I said, it is but a start. The part of appointing the credit rating agencies as the financial watchdogs of the world is still pending.

The US does not have to ride away in the sunset

Sir we certainly hope that anyone getting back to work on this January 2, 2007 reads the articles about America in the order you seem to suggest, first Niall Ferguson's scary "An Ottoman warning for America" and then the slightly more soothing "Prepare for a global economic downturn but not a disaster" by Wolfgang Münchau. Even so he must become extremely concerned.

I do not see things in America that bad since as life-long consultant with much workout experience I am used to immediately look for the reserve of important things that seems feasible to correct and that could generate a turn around. This particular reserve seems quite large in the US, and I am not just referring to the Iraq war.

If the US would though taxes raise their gasoline prices to European levels; put some corrections in their runaway health-sector costs; reform their bankrupting tort system; not keep over two million of their citizens in jails or prisons; accept that when the check arrives is not the best moment to sent away those who might help you pay it, like the immigrants, then we would have to conclude that the US has still a long way to go as the empire. Of course if the US can't find it in them to correct those things, it would indeed be riding away in the sunset in a The End, but then this would also not really be because of economic problems but because of something totally different.