October 31, 2008

Inside or outside the Euro-fence

Sir I refer to your “Ring-fencing the vulnerable in a crisis” October 31. I had always held that the biggest problem with walls, borders or ring-fences is that, except perhaps for the very short term, you can never really be sure you have ended up on the right side.

A country finding itself inside the Euro-fence receives indeed some protection, at least temporary, but it also means that its responsibilities to fight it out are the greater… and it can still run out of freshwater.

What would have happened with Iceland had they been living inside the Euro-fence? What would be the price extracted from Iceland to allow it now some Euro protection? Would the younger generations of Iceland accept paying that price because of their parents’ follies? Should the parents of Iceland ask their kids to sign up as guarantors and help to repay for their parents’ follies? Might some Euro countries actually be envious of the non-Euro Europeans who though perhaps suffering more might also get over it faster?

Out there, in the real world, nothing is perfectly clear.

October 29, 2008

The regulators took us back to the dark ages!

Sir though I agree with most of John Kay’s “Could Napoleon have coped in a credit crunch?” October 29, I protest vehemently when he says that “The financial innovation that was once the means of spreading risks is now an unmanageable source of instability.” The source of instability was not the financial innovations per se; the prime source of instability was that those financial innovations were rated triple-A and that we so much believed in the ratings.

In Against the Gods Peter L. Bernstein (John Wiley & Sons, 1996) wrote that the boundary between the modern times and the past is the mastery of risk, since for those who believe that everything was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. Now and as far as I am concerned, when the bank regulators put so much faith into the credit rating agencies, they inadvertently took us back to the past.

Après us le déluge?

Preventing a global slump is indeed a priority as Martin Wolf says October 29, but relying solely on government to do so could mean breaking the back of their finances, further inflaming “xenophobia, nationalism and revolution.”

We need to help governments to be able to help in ways that keep their credibility and therefore, instead of talking about tax cuts, knowing that so many new and urgent real life spending needs will knock on their doors soon, more than recommend tax cuts, as if those had no costs or as in let-our-grandchildren pay, we need to start thinking about new taxes that could be perceived as legitimate and interfering little with the economy.

I am floating around two new tax proposals. A special tax on all profits derived from intellectual property rights that will help to pay for the costs of enforcing those rights and a progressive corporate tax based on market share and that, among other, could help to keep in check the too big to fail risks.

Another possibility is that governments use very long term zero-coupon bonds when providing assistance buying up portfolios or mortgages, remember the Brady bonds?. That could at least buy them the time needed for economies to reflate back to where this new public debts can be duly serviced. Yes, “deflation is lethal for indebted economies” but so is public debt when it surpasses the level of what is perceived as manageable.

A case for massive immigration?

Sir in “Learning to live with excess debt” you hold that though “deleveraging is needed but authorities are right to slow it” and you also warn against “overstretching” solvent states as “currency meltdowns could follow” and you therefore conclude that “the only viable alternative is to accept current debt levels and try to grow the economy to match them” October 29.

In practical terms what does it mean? That the US should accept the help of many million more immigrants, preferably legal, so that they can help to grow the economy and pay its fiscal costs?

But first make real sure reserves are worth something, when needed.

Sir George Soros, October 29, writes that “America must lead a rescue of emerging economies” and of course he is right. Who else could? Who else would?

Having said though when Soros then writes about the possible assistance the IMF might give a country like Brazil in terms of “$15bn, a pittance when compared with Brazil’s own foreign currency reserves of more that $200bn” he reminds us that the rescue efforts also includes making sure those $200bn are to be worth the same $200bn when Brazil might need to use them, and that by itself will require immense efforts, primarily, by the American taxpayer.

In God… and in the American taxpayer we trust!

October 28, 2008

When in a panic, think, for a millisecond at least!

Jeffrey Sachs tells us: 1.- Extend swap lines to all main emerging markets. 2.- Have IMF extend low-conditionality loans to all countries that request it. 3.- Discourage big banks from withdrawing credit lines from overseas operations. 4.- China, Japan, and North Korea should undertake a coordinated macroeconomic expansion. 5.- Middle East needs to recycle all their cash. 6.- US and Europe should expand exports credits for low and middle income countries. 7.- US and Europe should follow an expansionary fiscal policy. According to Sachs "At the least it would put a floor on the global contraction that is rapidly gaining strenght. "The best recipe for avoiding a global recession", October 28.

Even if we would accept Sachs very optimistic view on the fiscal outlook as true, we should ask whether this is wasting aspirins or throwing real medicine at the problems? Compare Mr Sachs´ advice with what Michael Skapinker, on the same page tells us that Wal-Mart is doing to enforce ´sustainability, demanding "rigorous environmental and social standards", "An ethics lesson from an unlikely quarter".

The big question becomes then, should we now pull out all the stops in order to regain equilibrium on what might be a path to unsustainability or should we use this crucially decisive moment to provide the incentives to explore other perhaps more sustainable routes? In the panic it is still wise to take a brief time-out and think about what door to use. In fact our world at large is not only looking for an escape door for a financial crisis, it is looking for a door that can lead it to a better place. But, of course, neither do we have all the time to make up our mind… it is burning out there.

Do we dare to answer?

Sir Thrainn Eggertsson in his “Long-term consequences may be ruinous for Iceland” October 28, is really asking us… “Is Iceland not better off following the Argentina route? If our sons and daughters were from Iceland, do we dare to answer that question?

October 27, 2008

Instead of avoiding risks we must embrace the right risks

Sir, Lawrence Summers writes "The pendulum swings towards regulation" October 27. He is right but, when reminding us of the "need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact", he should be aware that this also requires the pendulum to swing away from the regulations. Currently the single objective pursued by the regulators, with their strict minimum capital requirements for the banks based on default risks and the empowerment the credit rating agencies as the supreme risk overseers has nothing to do with transformational impact but, ironically, only with avoiding a financial crisis.

Lawrence Summers also holds that "we need to reform tax incentives that encourage risk taking, regulate leverage and prevent government policies and prevent government policies that give rise to a toxic combination of privatised gains and socialized losses." He sounds so right, but he is so wrong. The privatization of gains and socialisation of the losses has nothing to do with the regulations per se but with the lack of the know-how and the political will of how to react when the regulations fail. And, specifically on risk, what we most need is to encourage the right risk taking as it is the oxygen of human and economic development, while avoiding creating disastrous risks in areas like housing and that, almost by definition, should be among the least riskiest parts of our economy.

The right intention but for the wrong intervention

Sir Johnny Munkhammar and Dick Kling tell us the “World needs less government intervention” October 27 and, in general, I agree. That said when they say that “The US, government, on a massive scale subsidized home loans to people who could not afford it” they are dead wrong, and they should be able to see that those incurred losses doing so were mostly private investors, who are now paying the costs and perhaps receiving themselves, as investors, a massive subsidy from the government.

And so if we are going to do well with less government intervention, let us get rid of the worst, namely the minimum capital requirements for banks based on vaguely defined risks and the risk information oligopoly awarded to the credit rating agencies.

October 25, 2008

Did Congress never ask Greenspan about his opinion?

Sir with reference to your editorial “Saying sorry” October 25, if anyone had answered “I presume that the self-interest of organizations, specifically banks and others, is such that they are capable of protecting their own shareholders” we would never ever dream of appointing said person to anything that has to do with banking regulations. Since this is what Alan Greenspan now tells us he always believed does that imply that, in their confirmation hearings, the US Congress never asked him about his views? Can Bernanke be hurriedly recalled to Congress for a brief follow-up question?

The saddest part of the story though is that had only Alan Greenspan regulated according to his beliefs, he would never ever have imposed upon the banks the opinions of some few credit rating agencies, and these agencies would therefore never ever have been officially empowered as the supreme risk guides, and therefore they would never ever have been so much enabled to have so much of the market follow them over the subprime precipice.

October 24, 2008

Global confusionism!

Sir Philip Stephens in “Globalisation and new nationalism collide” October 24, tells us that the summit of world leaders announced by Bush in order to “advance common understanding of the crisis” would be a success “if the leaders did no more than reach the beginning of understanding”, which presumably means admitting, like Greenspan, that they never understood much of the boom either.

But the summit could also be helped by each party bringing forward mutually helpful proposals. For instance China had a business model based on lending the US money so that it could buy from them which thereby creates jobs the Chinese. And, as so many business models do, it did fine until, in this case until the US could not afford to take on much more debt. What now? If they do not lend the US more money, Chinese could lose their jobs and China could lose a lot on their actual dollar loans to the US.

It might therefore be time for a US public-debt to Chinese jobs conversion plan. In it millions of Chinese workers would pay 10% of their gross Chinese salaries to the US in order to retain an access to the US markets. At a Chinese salary of 500 dollar per month, to repay this way the current 1 trillion dollars of outstanding US debts to China (no interests), that should take only about 10 year, for only about 167 millions of Chinese.

Are you also to tango away your public-debt?

Sir of course we understand that you do not ask how much it costs when you send out a fire truck to answer an urgent alarm, but from there to imply that it will not costs us any money, as Sir Samuel Brittan, seemingly a Laffer curve believer extraordinaire, like us to think, is a bit too stiff upper lip or too blasé for my taste. “The big myth of taxpayer cost” October 24.

If it was that easy why do we not all have ourselves a couple of fiscal stimulus packages a day? It is just like listening in to the many statements about the US bail-out plan becoming profitable. If so, why does the US Treasury not take over all investment banking activities and save us all from having to pay any taxes?

Incredible amounts of virtual monopoly-money-wealth will burn up in the current crisis but the public debt will remain real; and could become too large to handle and perhaps force you down the Argentinean route, in order to tango it away.

October 23, 2008

What bond of trust is he talking about?

Sir Alan Beatty titles his report on Congress hearings about the credit agency’s role in this current crisis quoting Henry Waxman the chairman of the of the US House of Representatives oversight committee saying that the rating bodies “broke bond of trust” October 23.

Hold it there… what bond of trust is he talking about? Most market participants were never aware of the existence of any bond of trust, except perhaps of one with their regulators. Most market participants simply thought that the credit rating agencies knew what they were doing. And why should they not think so when even the financial regulators thought so?

October 22, 2008

Let us now pray this was the last waking up from a wish-dream for a while

Sir Martin Wolf rightly calls out the fact that “The world wakes from the wish-dream of decoupling” October 22, although, sincerely, I have yet to meet anyone that was not long in emerging markets that really believed in that.

But when Martin Wolf, sounding a bit like a financial policy macho-man, says “this requires Keynesian remedies. Budget deficits will end up at levels previously considered unimaginable. So be it.” we must now pray for not having to wake up from another wish-dream where budget deficits were decoupled from the lack of confidence in currencies and the consequential inflation.

I would be much more comfortable recognizing that there are some real limits to budget deficits and thereby force the need to assign priorities intelligently to what can be done.

In doing so, I would absolutely agree with Martin Wolf that one of the first things to be done has to be “enhanced procedures for restructuring debts of bankrupt households” since the only way we could be sure of that what in that area is being done is sufficient, is that whatever remains in the mortgages duly merit the triple-A rates previously wrongfully awarded.

End of story…now what?

Sir how sad that the Washington Consensus is just a mythical phrase coined by John Williamson and not a document or a statue because, if it was, we could at least burn or topple it just to get over it, once and for all, and save us so much unnecessary obsessed rambling about how malicious it was, even though most of us agree that whether the recipes in that consensus worked or not had mostly to do with what ingredients were used, who cooked and how the cooking was done.

In “The Fund faces up to the competition” David Rothkopf, October 22, sort of gleefully talks about the IMF having soften their conditions for helping out, without reflecting on the possible fact that they now are just prescribing painkillers instead of remedies, because they, like all, have run out of answers.

The alternatives that Rothkopf seems to favour as he says that “Mr. Chávez distributed four times as much aid in South America” are plain ludicrous since the source of that help is the higher price that has to be paid for oil; and for countries like Honduras and Nicaragua no aid comes even close to being as significant as the remittances sent by their workers, from the US.

The Washington Consensus as interpreted and implemented did not work, at least so we think, end of story; and so now what?

The Basel Consensus on bank regulations has demonstratively really not worked, but there we have unfortunately not yet reached the phase of “end of story, now what?”

FT, be very careful going there!

Sir you say “Pakistan needs IMF help badly” October 22, and that the Fund should be flexible without compromising on reform. Sounds right! Then you argue that Pakistan should spend more on education and less on the military which also sounds right until… “The country has an unresolved conflict with its archrival, India, over Kashmir; has been sucked into fighting on its Afghan border; has a weak government; and is nuclear-armed” and then I am not so sure. What has to be searched for with urgency, the timing could be good as the crisis will afect India too, is an immediate search for how to solve the conflict since the last thing you would like to do to a nuclear-armed party is to weaken his other options.

October 21, 2008

Keep it up Jennifer Hughes!

Sir we have all been following for some time now Jennifer Hughes spirited and continuous defence of the accountants with respect to that they should not be forced to do the dirty laundry for the financial regulators and be forced to be more flexible on their mark to market principles. Since I am not an accountant and I have quite often been a bit critical of them (especially on the issue of the few big accounting companies left) I could have easily been tempted to join the choir had it not been for Jennifer Hughes´ very sensible reports. We much appreciate her efforts.

The market is what it is and how then everyone accommodates to it is a completely different issue. If flexibility is what is needed then let the regulators be more flexible. I for instance cannot believe how the regulators, so far into the downward rating spiral, still force the banks to take into account for their minimum capital requirements the by now quite discredited opinions of the credit rating agencies.

October 20, 2008

Yep 9 different credit ratings per security would do it!

Sir Roman Frydman, Michael Goldberg and Edmund Phelps tell us that “We must not rely solely on the rosiest ratings” October 20, and that “No single individual or institution can render a definitive judgment on the riskiness of securities. Friedrich Hayek showed that only markets can aggregate knowledge that is not given to anyone in its totality”, which is of course absolutely right.

But then they tell us “Rating agencies and issuers of securities have to help the market perform this function” and in order to do so “when assessing an asset, agencies should be required to report at least two ratings and the methodology used to arrive at each: one assuming that historical patterns will continue and at least one other assuming the reversals in the trends of major variables” which is of course totally incongruous with their first statement.

Unless their idea is to have the credit rating agencies reporting so many scenarios that they dilute themselves in a sea of irrelevance… Yes, that is an idea on how to get rid of the credit rating agencies without having to tell them so. Let us ask for nine scenarios covering the range between an AAA and a Caa2!

October 18, 2008

Thou shall not induce the markets to trust some particular information agents

Sir, in the Life & Arts of October 18, in very small letters, your readers are told they can go to ft.com/magazine for an article on how the credit rating agencies got it so badly wrong… which sort of implies that the human frailties present in the CRAs could somehow be avoided in the future… and so that we could trust the CRAs even more.

Is the FT building up some defences against an accusation of having downplayed the role of the CRAs in this crisis? Do you not think this article merited to be printed in the Financial Times; when the world is so dumbfounded confronting a financial crisis of immense proportions and the role of the credit rating agencies lies at the heart of it?

The article “When junk was gold” by Sam Jones is not bad but does not classify as good either, since one cannot understand how he could have left out mentioning how the bank regulators in Basel, in the mid 90s, empowered the credit rating agencies with oligopoly rights in the risk information markets, and thereby elevated exponentially their influence.

Sam Jones writes “lawmakers may not have the appetite to go after the rating agencies. The world’s financial markets have credit rating hard-wired into them… going to an investor-pays model is probably too big a change to ask for more broadly. American and European market regulators seem happier to push for a much-reformed status quo.”

I am not so sure of this. Just like there are many new regulatory proposals based on identifying and managing the behavioural patterns in the relation between borrowers and lenders, there are also many like me who argue that the behavioural patterns between security vendors and investors has to be realigned, and in this respect consider that the number one reform needed, in order not to repeat mistakes that could be even more catastrophic, is for the regulators to avoid empowering any supplier of information in any special way.

October 15, 2008

Can we trust the taxpayer?

Sir, Martin Wolf in “Governments have at last thrown the world a lifeline”, October 15, though duly acknowledging all the many risks still has the rose-tinted glasses on, especially when comparing the size of the estimates of how much the financial systems needs to be helped with that of the overall size of the economies. Nothing wrong with that, in fact, a good citizen-journalist has a responsibility to keep on smiling even when it is with a stiff upper lip.

But thinking about the growth of other fiscal demands; the decrease in fiscal offerings that the current crisis will create; and being less optimistic than Martin Wolf about the government’s capacity to claw back the fiscal assistance they now provide, without the help of “creative” fiscal accounting, it is also time to responsibly talk about the lifeline to governments, namely the taxes.
The dollar bills, for which value the US is responsible, have printed on them the brief prayer of “In God We Trust”. A more substantial version would be “In God We Trust to see that the politicians and the bureaucrats do not print and circulate more dollars that what the economy could back or, otherwise, that the American taxpayer finds it in him the capacity and the willingness to pay taxes so as to make up any shortfalls.”

Can we trust the taxpayer? I am not at all sure of that. I have the impression that the various “bubbles” have also helped to disguise that our tax systems have lost much of their credibility, and the world seem to be screaming for more progressiveness of taxes, at least so as to take care of the fat-cats.

In this respect we need to find new equitable taxes that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy. Thought there has been some loose talk of flat-tax, carbon-taxes and financial transaction taxes we have not really seen much of tax-development for many decades now.

October 14, 2008

That they did not know it does not mean they should not have known it!

Sir John Kay in “Banks got burned by their own ‘innocent fraud’”, October 14 writes: “Is the deception of others more or less venal when one has also deceived oneself? That question must be left for moral philosophers – and historians of our era – to answer”.

Absolutely not! We cannot afford to leave this question to moral philosophers or historians.

The question that John Kay poses paints out the possibility that the guilty party is innocent because it “has also deceived” itself and this, in this case at least, is unacceptable. The Financial Regulators should have known that creating a system that empowered so much so few with providing information to the market as the regulators did with the credit rating agencies was bound to lead to a crisis like the one we are having.

The Financial Regulators might argue that “they did not know it”, but that only puts the burden squarely back on us to place the regulation of the financial sector in the hands of persons capable of knowing such fundamentally simple things of life and financial markets.

October 13, 2008

The system was not overwhelmed by innovation it was overwhelmed by negligence

Sir I bet that Clive Crook does not know of anyone who knows of anyone who knows of anyone that has lost a single dollar giving a subprime mortgage on too generous or outright stupid terms to anyone who classifies as belonging to a subprime sector.

But I do bet that Clive Crook knows of many persons or institutions that have lost fortunes investing in securities collateralized with mortgages just because these securities were rated AAA by one, two or even three of the three credit rating agencies that everyone, including the financial regulators uses.

In this respect unless Clive Crook classifies a mortgage given on stupid terms as an innovation he is absolutely wrong about “A system overwhelmed by innovation”, October 13. The system was overwhelmed by the sheer negligence of those sentries that the regulators appointed and empowered, the credit rating agencies, and the negligence of the regulators and the market participants who thereafter went to sleep in the belief they no were safe.

October 10, 2008

FT… how come?

Sir I refer to your Special Report World Economy 2008 published with occasion of the meetings of the World Bank and the International Monetary Fund in Washington this week.

In it Paul J Davies in "High noon chimes for collateral with no name" says "A system that simply trusts in collateral without regards to its particulars is one that fosters the creation of ever more hideously complex problem". Since the principal reason for the current turmoil is not that the system trusted too much the collateral but that it trusted too much others to do their job of analyzing it, I would have worded it instead as "A system where participants are led to believe so much in the opinions of some few credit rating agencies…"

Also Norma Cohen in “Race against the storm” mentions that “The infection in the credit markets, by all accounts, began with mortgages, specifically those to borrowers with poor and patchy credit” but this completely ignores the fact that most of the market did not lend to borrowers with “poor and patchy credits”, most of the market bought AAA rated securities.

UNCTAD for instance is perfectly clear about what has happened and in their policy brief titled "The Crisis of the Century", released on October 6 they state "There are a few quick regulatory fixes that can be taken at both the national and international levels. The first is to reassess the role of credit rating agencies. These agencies, which should solve information problems and increase transparency, seem to have played the opposite role and made the market even more opaque."

Now in your 12 page special report, surprisingly, the credit rating agencies are referenced only once, and that is when you have to report on the opinions of Christine Lagarde, France’s finance minister.

How come? What strange and dark silencing forces are in action at the Financial Times? They seem to be much present at the World Bank and IMF meetings too.

I have saved a copy of this Special Report by the Financial Times as evidence… though I do not know of what, yet.

October 09, 2008

Why does Martin Wolf keep mum!

Sir Martin Wolf in “Asia’s revenge” October 9, (the why for the title is not very clear), spends many paragraphs describing the accumulations of huge surpluses with many origins that recycling went to pursuit better opportunities in the US and failed miserably. Wolf puts much of the blame on a “housing bubble” but as he admits this is partially a circular argument since part of the house bubble was also a response to the huge demand for investments those surpluses created. Also let us remember that in all other countries, house bubbles as large as or even larger than that in the US, have not resulted in anything as destructive like what came out of the build up of financial instruments around the subprime mortgage sector in the US.

Wolf quotes Carmen Reinhart and Kenneth Rogoff saying “Over a trillion dollars was channelled into the subprime mortgage markets, which is comprised of the poorest and least creditworthy borrowers within the US” and which is of course true. The question though is how come Martin Wolf avoids even posing the most natural and most important question of… How come they did that?

UNCTAD in their policy brief titled “The Crisis of the Century”, released on October 6 state “There are a few quick regulatory fixes that can be taken at both the national and international levels. The first is to reassess the role of credit rating agencies. These agencies, which should solve information problems and increase transparency, seem to have played the opposite role and made the market even more opaque.

And of course Unctad is absolutely right. It was the credit rating agencies, empowered by the regulators that guided the recyclable funds into subprime swamplands.

Again, why does Martin Wolf keep mum on it?

Unctad more on top of financial issues than FT?

P.S. Why can I be accused of monomania, writing so much on what I believe is the very harmful error of empowering the credit rating agencies too much while those ignoring this blatant mistake are not accused of a similar obsession?

October 08, 2008

Don’t even dare to paint a rose garden!

Sir one think is to minimize the costs for taxpayers of the financial crisis but to say that “Taxpayers should benefit from any upside as a result of a recapitalization” points to a whole different ballpark, “Bold moves to fight fire” October 8.

Creating illusions of profits for the tax-payer sounds like a good natured Ponzi promise but that, if really believed possible, will most certainly end up making it all even more costly to the taxpayer.

First take a time-out to think about the purpose of our banks.

Sir Martin Wolf in his “It is time for comprehensive rescues of financial systems” October 8, seems to be responding to panic, with some panic. Better focused is John Kay when in “Public assistance must first protect the taxpayer” he tries to limit the panicky reactions reminding that “when governments intervene in the banking crisis, their objectives should be equally narrowly focused and on what matters to the public and not what matters to the banks.”

Wolf mentions that the finance ministers and the central bankers who will soon convene in Washington “must travel with only one task in mind: restoring confidence” I agree, though I must ask… confidence in what or whom? It is important for these leaders to take a brief time-out first in order to think about what the purpose of our banks should be. They have not done thought about it for the last couple of decades, ever since the bank regulators convinced them that the only important thing in life was that banks should not default.

As a foreigner in the USA I am truly amazed with how much societal importance is given to credit scores… as if that is what life is all about. Pushing credit down the throats of people, for instance with subprime mortgages, cannot and should not be priorities of banks, at least not those that merit taxpayer bail-outs when things go wrong.

Yes, availability of credit must urgently be restored… but given our limited resources is equally urgent to prioritize what most urgently needs and merits credit. Is putting a floor under real estate a priority? Perhaps, but surely only as long as that floor stand not in the way of young people searching for affordable housing solutions.

October 07, 2008

No, it was the regulator who overshot his limit!

Sir Gideon Rachman's "Conservatism overshoots it limits" October 7, evidences that so many are still fooled by appearances. Rachman writes about the "fervent faith in the market" while blithely ignoring the fact that the single most important origin of the current crisis was that the financial regulators put their whole faith in the credit rating agencies to measure adequately risks, whatever they meant by that, and that in doing so they empowered the credit rating agencies to exercise undue influence over the markets.

Instead of speaking about the investment bankers as the shock-troops of the Reagan-Thatcher revolution, I wonder where he gets that from, he should better speak about the shock-troops of those who held such a fervent faith in regulations they believed they could drive risks out of the financial system for ever. The fact that credit rating agencies are dressed in private clothing should not confuse anyone, for all practical purposes, they are just risk measuring Kommissars bureaucrats working for a financial regulator who clearly overshot his limit.

The only reason why "regulators and politicians [and investors] believed so firmly in the magical and self regulating qualities of the market" was that everyone believed the sentries sent out to keep an eye on it would always be awake.

Rachman quotes Greenspan rhetorically asking "Why do we wish to inhibit the pollinating bees of Wall Street?" It is now high time to ask Greenspan´s successors "Why should we keep on inhibiting the risk measuring diversity of the market?"

Be careful in not promoting the dark ages

Sir John Eatwell and Robert Reoch in “‘Greater transparency’” will not reduce systemic market risk”, October 7, conclude that “Those who argue that greater transparency is the answer don’t understand the question”. Since, to get there, they argue that “Greater transparency means more firms share the same information” in which obviously they are right, but follow up with, “and have access to the same procedural knowledge and even the same modelling” and which obviously has absolutely nothing to do with transparency, it is clearly they who don’t understand what has happened.

The information on how badly the subprime mortgages were being awarded was out there for anyone to see, had they taken their time. The problem arose in that no one felt there was a need to do so, after the regulators non-transparently favoured few information digesters, the credit rating agencies, to do the modelling and number crunching on behalf of everyone.

October 06, 2008

Genovia goes back to gold!

Sir no one could dare argue against the wisdom of keeping cellar space for wine, that could be so much needed to help celebrate that what you have invested in gold does not glister, which is something like celebrating that no one has collected on your life-insurance policy, or drowning your sorrows because all you got left is gold (and the wine you are drinking) as all the rest has become worthless.

Of course rushing into gold can as you say be a risky business, “All that glisters” October 6, but let us also remember that for those blessed with resources to do so, not keeping something in gold might be even more risky.

These day’s I have much wondered what would happen if on FT’s front page the principality of Genovia announces that they are indeed going back to gold parity. If Ireland can run their “brave” guarantee schemes, why cant Genovia?

October 04, 2008

Goodbye blissful ignorance!

Sir you insist calling it a “bail-out” plan, when it could just as well turn out to be a take-down plan. The whole world will be watching how the 700 billions are spent putting pressure on buying as cheap as possible and…who is going to be able not to market their investments to the results of this “bail-out”. Goodbye blissful ignorance!

The mother of the differences between intentions and outcome.

Sir in reference to John Authers’ “Consequences game plays out to bitter end” October 4 he leaves out the most stunning divergence between intentions and outcome which happened when the regulators tried to live out their bedroom fantasy of a world without bank defaults and created their minimum capital requirements for banks based on risks and appointed the credit rating agencies as their Kommissars of Risk… and just look at where that got us.

Though of course, some of us have been saying for years, that this is exactly the consequence of trying to micromanage some risks in an ocean of risks.

And what about the Basel Consensus regulators?

Sir John Willman in his “Fear and loathing in the aftermath of the credit crisis” October 4 dares not to speak about what will happen to those Basel Consensus regulators that got is into this systemic risk-information leveraged financial crisis.

If you set up a system that is composed of a.- minimum capital requirements for banks that are based on risk; b.- the empowerment of few agencies to measure the risks; and c.- the need to immediately respond and mark to market the consequences of any change in the perception of the risks, then you have gathered up the necessary and sufficient elements to guarantee that, sooner or later, you will suffer a financial tsunami, exactly along the lines of the one we are currently seeing.

October 02, 2008

Are the regulators incapable of learning?

Sir in “Brussels stiffens bank capital requirements”, October 2, Nikki Tait reports that there is legislation coming that will “require credit rating agencies to register and meet standards if they wish to operate in Europe.” Does this mean that now at long last we will be able to really trust the credit rating agencies? Are the regulators incapable of learning?

It was not magic…though it might be.

Sir John Gapper in “The banker’s fall will be fatal” October 2 writes: “In mortgages, Wall Street found a magical combination of financial leverage and lack of transparency… that allowed investment banks to make money from information-starved investors.”
Not true! John Gapper knows well it had nothing to do with magic and all to do with that credit rating agencies were empowered by the regulators as experts on risks and guides to no-risk land and hey messed it up, as had to happen sooner or later.

And so, if on magic, the real question is… what have the credit rating agencies and the regulators done to John Gapper so that he is capable of ignoring the facts?

October 01, 2008

They must evidence why the bail-out is not give-away.

Sir Martin Wolf in “Congress decides it is worth risking another depression” October 1, with respect to the failure of Congress to approve the bail-out plan writes that “It is understandable because the use of taxpayers money to buy so-called “toxic” mortgage-backed securities from the greedy fools who created the crisis is hard to tolerate”. With it, unwillingly, he helps to reinforce the belief that there will be a considerable give away of tax payers money to the monsters. Of course if Martin Wolf really believes that to be true, then he should of course object to the plan, no matter what.

The objective of the plan is to try to establish a market price for instruments no one knows what they might be worth; and its biggest problem is that it was never sufficiently explicit on how they intended to go about so as to avoid giving away tax payers money. If the plan from the very beginning had been limited to the use of reverse auctions, to acquire a certain low percentage of many different tranches in many different issues, we might not have fallen into the current quagmire.

By the way there was of course much greed greasing the road to crisis, but the qualification of “fools” needs to be reserved exclusively for the regulators who thought they could appoint the credit rating agencies as their sentries and then calmly go to sleep.

The bail-out plan needs to be spelled out better, really letter by letter.

Sir you say in “The bail-out failure and blame game” October 1 that lawmakers should ask for more “oversight rather than stricter regulation on how deals be arranged”. This would be right if it was possible to identify some responsible for the oversight that could be trusted by all. Unfortunately, this does not seem to be the case.

When, on the same page, we also read the letter from Krzysztof Rybinski and that describes the bail-out plan in terms of Hank and Ben wanting to give money to John and Tim because, drunk, the broke four windows a table and burned a sofa it really evidences how much more clarity is needed in order for everyone to know that the purpose of the plan is in fact to establish a present value for the windows, the table and the sofa, and so that damage assessments can proceed.

Now, if you do not spell that out letter by letter, how can one avoid anyone believing Mr. Rybinski is absolutely right?