March 31, 2009

And then there is also the “too bad to regulate”.

Sir Peter Thal Larsen writing about financial regulations in “A lot to be straightened out” March 31 comments on the option to submit the “too large to fail” to have to pay a hefty fee for the support they enjoy.

As an Executive Director of the World Bank (2002-2004) at a Risk Management Workshop for Regulators held at the World Bank in May 2003 as I said the following.

“Some old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, seem much wiser than today’s no burning at all that only allows for the build-up of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.Knowing that “the larger they are the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size.”

Sincerely do we really need regulators that have to wait for a catastrophe before coming to reason? Looking at the regulators utterly silly behaviour over the last decade or so it becomes clear that we also have a problem with regulators that are too bad to regulate.

March 30, 2009

FT should not give Alan Greenspan voice just so he can utter platitudes.

Sir you keep on giving voice, more than a third of your most important Comment page, second week in a row, to someone like Alan Greenspan who did nothing with all the voice he had to save us from this crisis, much the contrary. And then salting the wounds, he only uses it to utter platitudes.

In “Equities show us the way to a recovery” March 30, he says “Restoration of normal global lending could be as effective a stimulus as any fiscal programme of which I am aware” and that “restoring a viable degree of financial intermediation is the key to recovery. Failure to do so will significantly reduce any positive impact from a fiscal stimulus”. Do you believe there are some of your readers that are not fully aware of the above?

Do you believe there are some of your readers that are not fully aware of that a rising stock market could also be beneficial as the creation of capital gains augment spending and gross domestic product, whereas capital losses lower spending.

I do not wish to imply that Greenspan should be silenced forever, of course not, but the least we should be able to expect in order to give him additional voice is that he uses it for something really important.

Times are hard enough for the press but if the Financial Times does not do a better job of defending the quality of one of its most important pages then it will encounter even harder times.

March 27, 2009

A wanted safe haven is not the same as a wanted permanent home.

Sir Michael Mackenzie reports on “Concern at size of debt auctions” March 27, and of course they should be very concerned as so much of the current plans of helping the economy recover hinges on the possibilities of finding buyers for the US treasury bonds.

As I have often repeated the danger is that US confounds the eagerness of markets in finding a temporary safe-haven with a willingness of capitals finding a new permanent home in the US and that is as we all should know a totally different animal.

Also there is a clear and present danger in not being able to access the real market signals since the current rates out there have nothing to do with the rates required if the Fed was not doing so much buying. In some ways it is like a bank participating in buying some securities in order to make the harsh mark-to-market truth easier to digest. It only works over a short period of time.

That plus 20%

Sir when Adam Thomson reports that “Calderón challenges Obama on drugs war” he quotes the Mexican president saying in reference to the help the US should offer “The help should be equivalent to the flow of money that American consumers give to the criminal”. What a splendid logical and forceful reply. The only thing that could have been added is a “plus 20% since it is a just cause”.

Greenspan commanded an amazingly naïve and gullible generation of financial regulators.

Sir Alan Greenspan starts out his “We need a better cushion against risk” March 27 with his silly chorus that all this mess was because we trusted “the enlightened self-interest of owners and managers of financial institutions”. If that was true, why would the world have contracted the services of Mr Greenspan?

Thereafter he gets into more real explanations though, like accepting that “regulators cannot fully or accurately forecast whether, for example, sub-prime mortgages will turn toxic”. Of course not, when Greenspan and his buddies in Basel decided that a bank could leverage itself 62.5 times to 1 as long as it lend to corporations rated AAA by human fallible credit rating agencies they showed themselves to be amazingly naïve and gullible regulators

Greenspan also writes about the need for higher capital requirements for the banks but before this even more important is to get the financial regulators to stop meddling and imposing their own risks preferences on the banks and letting that to the market.

If only the AAA had applied

Sir Gideon Rachman in “Sensitive words” March 27 draws our attention to an extremely sensible institution, Companies House that has to approve the use of some sensitive words before they can institutionally be used “because they are thought to convey an impression of authority or trustworthiness”.

How sad that those using “credit ratings AAA” did not submit an application. It would have saved the world quite many trillions of dollars or what´s almost the same pounds sterling.

March 25, 2009

As a “global risk assessor” there is nothing like keeping the free press on its toes.

Sir Nicholas Stern is absolutely right in that “The world needs an unbiased global risk assessor” March 25, and his proposal on how to set up an independent institution for such purpose sounds absolutely right, yet I have to tell him to brave himself to the fact that it would probably not work. First because it is hard to see how the world would elect the right people to such place, instead of just the correct people. Second because it is hard to see how to guarantee that institution would just not turn into a club of mutual admirers. Lord Stern himself starts going down this last route of perdition when naming some possible candidates that he himself personally admires.

Let us look at the “unbiased global risk assessor” from our current perspective. Would it have been able to alert the world to what was happening? In such a way the world would have listened and acted upon the warning in a timely fashion? I believe not.

Also why use so many resources to try to identify the exact timing of when things go wrong instead of avoiding creating the conditions for things to go wrong. I myself even though I could never be sure of the exact timing of it knew that catastrophe was on its way when our financial regulators in Basel came up with such a silly idea that a bank should be able to leverage itself 62.5 time to 1 as long as it lent to corporations perceived as AAA or AA- by human fallible credit rating agencies.

No, much more important than creating this type of new oversight institution is to make certain that the old oversight institutions work. Like that the free press, like FT, are stimulated enough to pose the right questions, in time, and which for a starter requires their journalists not joining the establishment.

When I see a journalist in the audience frowning and frantically scribbling away on a block I know we got it right. When I see a journalist moderating a discussion as another one among the learned I know we got it all wrong.

Are we multiplying the systemic risk?

Sir I agree completely with Martin Wolf´s concluding reaction “If this is not frightening, I do not know what is” “Why a successful US bank rescue is still so far away” March 25.

Now, that said, one of the things that I find most frightening is the possibility that we could be concentrating too much our efforts on salvaging (or lynching) the Titanics instead of making sure that all other smaller vessels are doing fine. In other words, by insisting on helping all the “systemically significant financial institutions” are we not making these even more systemically significant?

What do we know about all the other regional and smaller community banks? Should we not care about these more?

Where have you been minister?

Sir Karl-Theodor zu Guttenberg is right reminding of us of the need to be very clear about what went wrong to cause this crisis in order not to unlearn the many good lessons we have indeed learned over time, “A new era of accountable capitalism”, March 25.

But, surprisingly then zu Guttenberg goes on mentioning as a principle that “risk supervision by rating agencies and financial authorities must be strengthened on a global level to prevent the build up of systemic risk”. Where has he been? Does he still not get it? It was the mingling on risk by the financial authorities that got this crisis started in the first place. Like when the financial regulators in Basel came up with the naive idea that a bank could leverage itself 62.5 times to 1 as long as it lent to corporations perceived as AAA or AA- by human fallible credit rating agencies.

March 24, 2009

It must hurt GE so much

Sir I have nothing whatsoever to do with GE but when Francesco Guerrera reports “Moody´s strips GE of triple A rating it has held for 42 years”, March 24, I truly commiserate with them. It must hurt so much being stripped of your AAA rating by one of those primarily responsible for your current problems.

March 23, 2009

In times like these more willingness to take risk is needed at the IMF and the World Bank.

Sir I entirely support Trevor Manuel´s “IMF needs reform to respond to changing mandates”, March 23, where he calls for much more diversity in the recruitment of staff so as to get more diversity of views. As a former Executive Director I would like that to extend to the World Bank too.

Having said that, there is tough little to be gained from more diversity of opinions if this is not welcomed and nurtured by the management. Currently, in the multilateral finance institutions, there is way too much risk-adverseness among their managers against anything that in the slightest way could upset their somewhat too comfy internal order. In times like these managers must also learn to scale up their willingness to take risk… on all fronts.

A regulatory bias that favours the big prevails

Sir Clive Crook recommends to “Strike faster on death-wish finance” March 23 and he is right though that would clearly require a dramatic reversal of the regulatory bias in favour of the big that now prevails.

In May 2003, at a workshop on risk management for some hundreds of financial regulators held at the World Bank, as an executive director, I said the following:

“A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises. Knowing that “the larger they are, the harder they fall”, if I were regulator, I would be thinking about a progressive tax on size.”

And, as you might guess, that recommendation went unheeded and I would even dare say unwelcomed… unfortunately.

March 21, 2009

The real question is what does the market have to say in general about retroactive laws?

Forget about the AIG executives, the real question to be made is whether a country that has to hit the markets to the tune of a couple of trillions in public debt can afford to be tinkering with such dangerous-to-confidence issues like retroactive taxes.

The 160 million in cost of the bonuses could pale in comparison to the additional margins the markets could charge the US in risk premiums in order to compensate for such unsettling behaviour.

The world has a serious shortage of elites.

Sir at long last we might now be starting to debate what should have been debated all the time namely how to ensure true accountability and true good governance that ensures that our human endeavors lead us to a better tomorrow instead of having us all sign up as baby-boomers on a Après nous le déluge.

Jessica Einhorn in “Corporate governance without a hint of systemic surveillance” begins putting her finger on important pieces of said debate pointing out that “few corporate managers today are permitted the luxury of thinking about long-term returns for their ever changing cast of investors”, “that regulatory activist… have special interests and they do act to further them through initiatives in corporate governance” and “that we need to hold our public officials accountable for thinking through systemic issues”.

Could the glue that help us overcome the above mentioned challenges be found anywhere else than in an enlightened elite of families capable of including all humans as heirs? I do not think so!

March 20, 2009

Do not tax Gekko-style risk-taking.

Sir Gillian Tett writes about “That secret desire for burst of Gekko-style risk-taking” March 20 and that must lie very close to the heart of anyone looking for a speedy recovery.

May I suggest she reads the following table derived from the Minimum Capital Requirements for the Banks issued by the Basel Committee under the Standardized Approach in order to cover for Credit Risk:

Rating of the ......Required Bank...... Allowed
Corporation ......Equity $100 Loan ...Leverage
AAA to AA- ..........$ 1.60 ....................62.5/1
A+ to A- ...............$ 4.00 ....................25.0/1
BBB+ BB- .............$ 8.00 ....................12.5/1
Below BB- ............$14.00 ...................8.33/1

From it she should be able to conclude that the regulators have imposed, on the core of our financial system, the commercial banks, a de-facto tax based on a loosely defined “default risk” and as measured by the credit rating agencies.

When as now bank equity is scarce and very expensive this de-facto tax on risk, which is charged on top of whatever the market commands for assuming higher risks, is extremely high. So, if you want Gekko-style risk taking? Start by not imposing special taxes on it.

The Turner report is not even close to being a watershed.

Sir I have tried to figure the why of Martin Wolf´s “Why the Turner report is a watershed for finance” March 20, but I can´t. A regulatory watershed implies some fundamental change in the basic paradigms used, and this is definitely not it.

As an example the Turner Review holds that “Credit ratings have played a valuable role since (i) good investment practice should seek diversification across a wide spread of investments; and (ii) it is impossible for all but the very largest investing institutions to perform independent analysis of a large number of issuing institutions” which only makes us ask: Have they not seen enough of that what matters is not the diversification within one institution but within the whole system? Have they not seen enough of the how expensive the too-big-to-fail are so as to insist in giving the larger institutions special rights?

But perhaps Martin Wolf illustrates best the shortcomings of the report when he writes “if everybody believes in the same (faulty) risk models, the system will become far more dangerous than any individual player appreciates”. Did you notice that “(faulty)”? Well that means that Martin Wolf, like the report, still believes that the risk models can be right and that if we all follow them we will find financial Nirvana.

Wolf also stands firm and refuses to understand that a credit rating is simply the result of a model that analyzes one type of risk, and that these simple one dimensional published result created more havoc than all the other sophisticated financial models put together and that without the AAAs would have remained stacked away as unsellable nerdy creations.

Long live the diversifications of views that can only be present in a free market!... though that does not mean of course that we not do have to get rid of the regulatory naiveté that actually reigns and that allows a bank to leverage itself 62.5 to 1 times, as long as it lends to corporations rated AAA or AA- by some very few eyes.

March 17, 2009

Europe, hand over two chairs, immediately, no discussions

Sir Trevor Manuel in his commendable, timely and important “Let fairness triumph over corporate profit” March 17, asks several “Can we…?” and to these our only answer can be “yes, we have no choice”. That is if we want to live in a reasonably peaceful world that is if we want to have a chance to adjust to the environmental and energy related dangers that lurk around the corner.

This article, like last week’s Luiz Inácio Lula da Silva’s “The future of human beings is what matters”, evidences clearly why Europe needs to surrender to the rest of the world at least two of the chairs it occupies at the World Bank and the IMF. Immediately! No discussions!

That said I would have preferred to see Trevor Manuel’s article titled as “Let reason triumph over corporate greed” and I have an inkling that so would he.

Whistleblowers of the world unite!

“Managers need to listen before disaster strikes” writes Michael Skapinker March 17. Everyone agrees none argue against it and still it is almost impossible to achieve most often because what management and others would qualify as disaster varies dramatically. Sometimes the only real disaster is the pure possibility of a disaster being acknowledged.

But what can we do? Let me have a go at it. Since a corporate climate that is unreceptive to whistle blowers could hide a time bomb credit rating agencies should never be able to give more that a B- to any company that does not achieve some minimum results in a yearly secret internal ballot held on various governance issues.

That could help some managers to start listening.

March 16, 2009

There is exactly where the going forwards must begin

Sir Tony Jackson really shows he got his priorities right with his “Proper or improper, banks need society’s control” March 16. This is exactly the type of issues that should be exhaustedly discussed before you sit down and start to try to regulate the activities of the banks.

It is exactly the total lack of a reference to what the purpose of the banks should be that allowed the regulators to build up regulation systems almost exclusively based on the concept of minimum capital requirements based on perceived risks, as if that is all that risk is all about, as if avoiding defaults is the only objective for our banks.

Jackson’s article deserved an op-ed place and I sure hope he manages to start a discussion on the simple basics before hiding in the opacity of the sophistications.

March 12, 2009

FT, please don’t give up on the market.

Sir if you believe that a super-regulator is capable to control systemic risk without generating new and even worse systemic risk it is clear that you must have already given up on the market and also that you have not learned one iota from this crisis, “Why the US needs a super-regulator” March 12.

If you really think that such a regulatory could perform miracles in a market “with extreme complexity” would it then not be better for it to take over the regulatory functions in the UK, Europe or even the rest of the world?

Who do you think these regulatory authorities really are? How come you are so completely sure they’re angels?

Cheap money? Cheap credit? Humbug!

Sir Chrystia Freeland in “The audacity for help” March 12, mentions “the era of cheap money” and “the end of cheap credit” May I suggest that the existence of an era of cheap money and cheap credit has just been a big bluff promoted to make money on expensive credit and that consumer credit is partially responsible for accentuating economic differences in the US and in most of the world.

That moment when a consumer buys something at a rate that exceeds the rate of inflation and pays more than the risk free rate he is in fact impoverishing himself and would have been better off postponing any consumption and purchases he does not absolutely need.

Look just at the current reality. The US treasury pays about .01% on its short term debt and a US citizen has to pay at least 1,690 basis points more, at least 17% on his credit card. Who except a credit card salesman or credit card company shareholder could even dream of calling that cheap money or cheap credit?

You want to see some of the wealth differentials reduced? Then teach the consumer about the worth of bargaining their purchases paying cash.

Doing a little sleeping with the enemy, aren’t we?

Though it is clear that the faulty ratings issued by the credit rating generated more real losses than what 50 Madoffs could have done it is amazing to see FT giving so much voice to the President of Standard & Poor’s to defend his business model “Re-evaluating and rebuilding a more useful rating system”, March 12, while silencing so much of the fundamental criticism against the creation of an oligopoly in the market of risk information, namely the systemic risks that this in itself generates. Doing a little sleeping with the enemy aren’t we?

March 10, 2009

You too FT

Sir in “The consequence of bad economics” you accuse our leaders of intellectual failure and blame their “unwillingness to see (or their wilful ignorance of) what markets need in order to produce good outcomes for society. I accuse FT of the same.

You say “People were not unaware of risks, but... The great mistake was to rely merely on self-interest in as imperfect and as important a market as the financial sector” and I have held for years, and in hundreds of letters to you, that it was exactly the reliance on self-interest that was missing in many of our regulations.

The minimum capital requirements for the banks which in the case of private corporations sometimes allowed for a 62 to 1 leverage, plus the official appointment of some external credit rating nannies, all in a globalized world slush away with funds, induced and facilitated some few reckless market participants to sell to the world a monstrously explosive systemic risk composed exclusively by perceived low risk AAA investments, and which all blew up. FT has mostly preferred to ignore these facts.

I agree though with your conclusions, “This was not a failure of markets... but the intellectual and moral failure of those who were in charge of it”... FT included, of course.

Complete truths are the best compasses

Sir as usual Gillian Tett has written a good article in “Lost through destructive creation” March 10. Having said that let me express two complaints. The first one is that when she writes “the banks were making such fat profits they had little incentives in questioning their models” one gets the impression that all or at least most of the banks were involved in the production of opaque assets and that is simply not true, the real culprits, they were few.

What also disappoints is the unwillingness of Tett to connect the dots between the opacity of the innovative financial instruments and their immense marketability. That is not merely explained by the fact that these instruments were awarded AAA ratings because for that to matter the credit rating agencies had to be invested with enormous amounts of credibility, and this is what the financial regulators erroneously supplied them with.

If we are more willing to bare all things as they really are and assign the responsibilities where they should really be then we might discover that we are in fact not that lost.

Muito obrigado!

Sir we should all give thanks to Luiz Inácio Lula da Silva reminding us that “The future of human beings is what matters” March 10. In days like these it is so easy to lose sight of the real priorities.

March 09, 2009

And the truths are the needed seeds for its reconstruction

Sir Martin Wolf gets to set the tone in the series on “The future of capitalism” and titles his opening article “Seeds of its own destruction” March 9. I object that for reasons I cannot explain he leaves out what some of us consider the fundamental causes for this crisis.

Wolf writes about “frenetic financial innovations”, “innovative financial systems” and of “how little banks understood of the risks they were supposed to manage” without even mentioning the fact that the Basel Committee ,with their minimum capital requirements for the banks, innovated to such an extent that banks were duly authorized to leverage their capital for instance in the case of corporations rated AAA and AA- to a never before heard astonishing level of 62 to 1; and that it was these capital requirements that gave way to the mother of all the regulatory arbitrage booms.

Also when Wolf writes on how “huge capital flows…largely ended up in a small number of high-income countries and particularly in the US” among other he suggests the US government programs but finds no place at all for the credit rating agencies. Wolf does simply not want to accept that the big explosion in the growth of the subprime mortgage market had very little to do with a FHA or a Fannie Mae and all to do with the excessively empowered credit rating agencies stamping their AAA sign on securities fabricated on Wall Street. Wolf simply refuses to ask himself why for instance Europe financed more subprime mortgages in the US than the US itself.

The current crisis is a remarkable fertile ground for all type of other-agenda-pushing and I have already heard arguments attributing it to Israel/Palestine, genetically modified seeds, increased narcotic production in Afghanistan, the military control of the political apparatus of the world and other similar mindless arguments. The only way we can avoid this crisis from degenerating into something even worse is to defend the truth and the whole truth about it.

Let’s be clear about the true origin of the financial “snake-oil”.

Sir Robert Shiller in “A failure to control the animal spirits” March 9 completely ignores that the “snake oil” the financial world bought was produced almost exclusively by the financial regulators, those who held that banks could leverage their equity 62 to 1 when they gave credit to corporations determined to be AAA or AA- by their official default risk surveyors the credit rating agencies.

Shiller writes that “It was part of a story that all investments in securitized mortgages were safe because those smart people were buying them”. He is wrong! It was part of the story that those securitized mortgages were safe because they “are AAA and if the credit rating agencies are good enough for Basel, they’re good enough for you”

March 07, 2009

AIG was only an addict and the Basel Committee its pusher

Sir Henny Sender in “AIG saga shows how dangerous credit default swaps can be”, March 8, writes interestingly about the “regulatory capital forbearance” trades but without mentioning a word about the financial regulators who created such markets.

If she would take her time to read the current minimum capital requirements for banks she would find that if a bank lends to a sovereign country rated AAA it can have as much leverage it wants, there are no limits. If a bank lends to a corporation rated AAA or AA- it is authorized by the Basel regulations to have a 62 to 1 leverage. If it lends to a corporation that is not rated or one that has only received a BB- the banks are authorized to leverage their capital 12 or 8 times respectively.

Understanding this extraordinary range of authorized bank equity leverage, from limitless to 8 times, all of it depending on the criteria the credit rating agencies... where would AIG have been without the concept of an AAA? ... she could have but reached one conclusion, namely that AIG was an addict and that the Basel Committee was its pusher.

Yes, it has indeed a lot to do with the battle among generations.

Sir John Authers is correct bringing in the baby boomers in the equation that explains the current crisis “Why baby boomers will put their faith in bonds”. March 7. I have in many letters to FT pointed out the problems with the generational transition between the baby boomers and those who will follow them. The latter had no incentives of buying their retirement roofs at the high prices the houses had reached, nor to start investing for their retirement at a Dow at the 14.000 level.

Now the battle among the generations has started for real. The baby boomers are opening asking for stimulus spending to bail them out. It is very difficult to see the upcoming generation capitulating early and pay the taxes that are needed to support that spending from transitioning into inflation.

March 06, 2009

A UK financed overnight?

Sir John Authers in “The Short View” March 6 writes about the Bank of England’s plan to buy long dated gilts…which will make money cheaper by reducing the rates on long bonds. That might be what happens with the marginal rate but not necessarily what happens with the average rate.

In fact what is being done is reducing the current interest rate cost of the public debt of the UK by reducing its average maturity and which could prove to be very costly tomorrow, like many Americans who entered into adjustable rate mortgages could attest.

It is indeed the Bank of England taking the short view. Let us see what happens when markets wake up and finds England financed overnight.

March 05, 2009

But Hank had company.

Sir John Gapper in “Too long in the spaceship, Hank” March 5, mentions that AIG´s “biggest money-spinner was regulatory arbitrage”. Exactly!

Before Basel banks and financial institutions always engaged in some regulatory arbitrage but it was mostly harmless. It was when the Basel Committee concocted a system of minimum capital requirements based on what they perceived as risk, and as measured by their risk sentries the credit rating agencies, that the real regulatory arbitrage business took off globally and turned into the extreme systemic danger it has proven itself to be.

And so if a Hank has been too long in a spaceship so has his fellow bank regulators.

I will gladly trade you one Basel Committee for a hundred of offshore financial centres.

Sir Avinash Persaud is absolutely right when he writes “Look for onshore, not offshore scapegoats”. The damage produced by the onshore enclave we know as the Basel Committee and all its regulatory derivatives, has caused hundredfold more misery than all offshore financial centres put together.
This does of course not imply that I would not like to trade away the financial centres too.

Revamp completely the minimum capital requirements for the banks

Sir (as you probably must gather from my hundreds of letters to you on the subject and that you decided to ignore for reasons of your own) I totally agree with John Stroughair in that “Rating agency system stifles innovation and competition” March 5. The fact though is that the reason that we even have to discuss the issue of the credit rating opining are minimum capital requirements for the banks issued by Basel which stifles something worse risk taking and promotes something really bad, the reliance on others.

Currently if a corporation is rated AAA to AA- a bank needs to hold only 1.60 dollars for each 100 of lending, which signifies an astonishing 62 to 1 of authorized leverage. But in the case of a corporation rated below BB- the banks need to hold 12 dollars for each 100 of lending, 7.5 times more than in the case of an AAA, notwithstanding the fact that the bank will most certainly be more careful when it comes to lending to a below BB- corporation than to a AAA.

The difference of 10.40 dollars of required equity, especially in times when bank equity is so scarce and expensive, is a de-facto regulatory tax on risk, levied on top of what the market requires for accepting risks and which stifles anything that smells innovation and which often implies more perceived risk.

In this respect it is not only the credit rating agencies we need to get rid of but also of the current malfunctioning system of minimum capital requirements based exclusively on the limited concept of default risks. Just as an example, is not the risk of the default of our planet because of climate change much worse?

A bit of navel-gazing, haven’t we?

Sir Paul Keating is absolutely right in saying that “Global financial confidence, once destroyed, requires myriad positive events and a heavy convergence of them to counter ambient pessimism and gloom”, “A chance to remake the global financial system”, March 5.

But then Keating lists issues, like better IMF governance, which is of course a very laudable thing to do, I support it completely, that in my opinion are almost irrelevant to the confidence of markets and perhaps even to most of the official actors.

For example when he mentions “the government of China has no intention of dealing with its surpluses by letting its real exchange rate redirect national resources, especially when such action risks putting it into the hand of the IMF” I would argue that the voting rights at the IMF, at this particular moment, is one of the very last real concerns of China.

Also whether the G20 structure “is truly dynamic” or the old Breton Woods arrangements are reformed sounds currently as some pure and unashamed navel-gazing.

Since it was the G10 that by means of endorsing the concoctions of the Basel Committee empowered the credit rating agencies so much that the whole world followed their AAA signs over the subprime precipice, I cannot honestly see how the markets would regain confidence in any sustainable way from a concentration of bureaucratic powers in a G20.

Does Keaton really believe a G20 success spells recovery? Is he long or short on G20 derivatives?

March 03, 2009

Pushing for a green recovery requires also reducing the conflicting market signals.

Sir Joseph Stiglitz and Nicholas Stern write “Providing a strong, stable carbon price is the single policy action that is likely to have the biggest effect in improving economic efficiency and tackling climate change”. Since it is always harder to bailout from a financial crisis than from a climate change crisis, although I come from an oil country I agree. “Obama’s chance to lead the green recovery”, March 3.

But these green market signals would be more effective were we capable of reducing some of the competing signals, for instance those present in one of the most important drivers of world capital namely the minimum capital requirements for the banks as defined by Basel.

Currently for a bank to make a 100 dollar loan to a corporation the banks currently need to have an equity that ranges from a minimum of 1.6 dollars to 12 dollars, a whooping 7.5 times the minimum, which depends on the risk assessments produced by the credit rating agencies.

Since bank equity is scarce, and expensive, especially now, this means that besides what the market would normally be charging for assuming a high perceived risk, the regulators have imposed an additional de-facto tax on risk. This would be great if “default risk of a corporation” was all that mattered. But what about the default risk of our planet? What if most investments in projects destined to fight the risk of climate change presented more risk than projects that increased the risk of climate change?

What if the securitized finance of car purchase financing gets an AAA rating while the project to install a solar panel only achieves a rate below BB-? Is it logical then that the financing of a solar panel needs 7.5 times more bank equity? I don’t think so!

March 02, 2009

The credit rating agencies were not just innocent bystanders

Sir, Vickie Tillman, Executive Vice-President of Standard & Poor Ratings Services, in “Rating firms do not capture risk in one measure”, March 2, writes, “credit ratings are opinions about future default risk and do not address the many other risks that have affected debt securities in recent months and accounted for the bulk of losses reported by financial institutions … policymakers should review regulations that may inadvertently encourage undue reliance on ratings. If rating opinions are used as benchmarks of creditworthiness – which, incidentally we have never encouraged – other benchmarks and factors should be considered as well.”

Does this mean that I have wrongfully been accusing these poor credit rating agencies, that they are only innocent bystanders and that they have nothing to do with this crisis that is going to result in so much misery for the world? Of course not!

Granted, the primary responsibility lies with the regulators who enabled the regulatory framework that incited this crisis and then with those investment bankers who took advantage of the system failures but in no way should we allow the credit rating agencies to go free of any historic guilt; as we should neither allow those financial newspapers that still have the gall calling the credit rating agencies “indispensable” something that even the credit rating agencies would not dare to do, to wash their hands.