April 30, 2008

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

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

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

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

April 29, 2008

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

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

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

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

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

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

April 28, 2008

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

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

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

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

April 23, 2008

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

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

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

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

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

April 21, 2008


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

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

April 19, 2008

Clarity is needed for credibility

Sir you rightly say that the “Climate Policy must be credible” April 19 and one of the basic requisites for that is clarity in the use of terms.
When on a simple water bottle you might find information such as calories=0 (thank god the implications of something different would indeed be frightening) there is no way to find a clear-cut definition on what is meant by for instance “clean energy”. The closest we get is to some mumblings about energy that causes little or no harm to the environment and which will not get you that far down the lane of credibility either.

April 18, 2008

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

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

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

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

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

Sometimes formal limits signify fewer limits

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

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

Let us not forget the rental options

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

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

April 16, 2008

FT you’re obsessed!

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

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

Sissy banks and sissy markets?

Martin Wolf in “Why financial regulation is both difficult and essential” April 16, says “It is impossible and probably even undesirable to create a crisis free system”.
Wolf falls way short since in fact even trying to create a crisis free financial system poses extreme dangers, being that risk is the oxygen of development.
No matter what, the world does not belong to the risk adverse and the real risk is not banks defaulting, the real risk is banks not helping the society to grow and develop. Not having a hangover (a bank-crisis) might just be the result of not have gone to the party!

What we then must do before rolling up our sleeves to do regulations, is to have a fresh look at what has been ignored for so long namely what are the financial institutions and specially the banks to do for us?
In that sense we need to stop focusing solely on the hangovers and begin measuring the results of the whole cycle, party and hangover, boom and bust! For instance the South Korean growth boom that went into a bank crisis in 1997-1998 seems to have been much more productive cycle for South Korea than what the current boom-bust seems to have been for the United States.

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

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

April 15, 2008

This is indeed an embarrassing low for FT!

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

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

April 10, 2008

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

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

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

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

April 09, 2008

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

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

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

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

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

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

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

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

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

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

But Greenspan does share the blame

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

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

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

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

April 07, 2008

It is stunning how Greenspan can keep a straight face

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

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

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

Stop dodging the issue about the credit rating agencies

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

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

April 03, 2008

Regulatory outsourcing creates confusion

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

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

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

April 02, 2008

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

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

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

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

April 01, 2008

Whose side are you really on FT?

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