July 31, 2009

Default risk-weights and purpose-weights are used to establish capital requirements for banks in Venezuela.

Sir on July 29, in Venezuela, the financial regulator, Sudeban, issued a normative by which the risk weights used to establish the capital requirements of the banks were lowered to 50%, when banks lend to agriculture, micro-credits, manufacturing, tourism and housing. As far as I know this is the first time when these default risk-weights and which resulted from the Basel Committee regulations, are also weighted by the purpose of the loan.

The way it is done Venezuela seems to lack a lot of transparency and it could further confuse the risk allocation mechanism of the markets (though in Venezuela that mechanism has already almost been extinguished) but, clearly, a more direct connection between risk and purpose in lending is urgently needed.

In this respect the Venezuelan regulator is indeed poking a finger in the eye of the Basel regulator who does not care one iota about the purpose of the banks and only worry about default risks and, to top it up, have now little to show for all his concerns.

I can indeed visualize a system where the finance ministry issues “purpose-weights” and the financial regulator “risk-weights” and then the final weight applicable to the capital requirements of the banks are a resultant of the previous two.

Does this all sound like interfering too much? Absolutely, but since this already happens when applying arbitrary “risk weights” you could also look at this as a correction of the current interference.

July 29, 2009

Stop subsidizing status-quo and taxing development.

Sir Mario Monti in “Watchdogs of the world, unite!” July 29, makes a powerful case for the need of strong antitrust enforcement to keep market competition alive, capitalize on “creative destruction” and minimize “destructive conservation”.

In the same vein I would also request the competition agencies to look into the anti-competition implications imbedded in the capital requirements for banks, by which borrowers who can dress themselves up as having a “low default risk”, when compared to the “higher default risks”, are subsidized by the cost savings that are produced by some extremely low capital requirements. That signifies a subsidy for status-quo (the known) and a tax on development (the unknown). This exaggerated conservative risk-adverseness has already taken us over the cliff of the subprime mortgages… with nothing to show for it.

July 28, 2009

Systemic risk, here, there and everywhere

Sir when you in “At your own risk” July 28, write about forecasts as “self-fulfilling prophecies” you are precisely describing a systemic risk in regulations. Systemic risk does not only signify a part of the system that becomes so large as to endanger the system, as that concept seems to have been exclusively interpreted lately, but it also includes the risk of introducing a threat to the system, a virus... like the concept of forcing upon the banks the use of credit rating agencies.

Now when you lecture University presidents about how the “public’s intellectual virtues – curiosity about other fields, aversion to dogma could do the discipline some good”, instead of “public” you could use “readers” and apply it to yourself. The ease, by which on a whim you exclude the opinions of some of your readers like me, shows you share the same problem.

What if I would send you an exclusive and mindboggling story? Would you have to let it go? Have you hijacked yourself? That is sure a systemic risk? Don’t you agree?

The credit rating agencies made mistakes, the regulators showed lack of judgment

Sir Arturo Cifuentes concludes “Time to start rating the full influence of bond graders”, July 28,“Leaving [the credit markets] at the mercy of the [credit rating agencies] that showed so much bad judgment in what was supposed to be their core competence seems like a terrible idea.” I must correct him. The credit rating agencies just made mistakes instead it was the regulators who, by giving the agencies the powers, showed a total lack of judgment.

July 27, 2009

Is Mr Robert Picciotto a closet central planner?

Sir Robert Picciotto a Council Member of The United Kingdom Evaluation Society in a letter titled “Competition will not cure rating industry ills” July 27, writes: “Objective evaluation is a quintessential public good that is unlikely to be generated by the market”.

I sure hope Mr Picciotto is defending a business interest of his own, because the alternative would make him an extremely fanatical and dangerous central planner. How can he write such nonsense precisely in the midst of an economic crisis that resulted directly from the global bad risk information that was requested by those financial regulators who believe that our financial markets should be guided by some very few experts?

“Objective evaluation”? Hah! They have not even agreed what exact risk is to be evaluated or for what purpose exactly.

July 25, 2009

Let the government charge for the protection racket services it already provides.

Sir your “Vice of necessity” July 25, where you start hinting at legalizing drugs so as to raise the taxes fighting this crisis needs, opens up our eyes to a lot of unexploited taxing opportunities.

Among these: charging for the protection services already provided to intellectual property right holders; imposing a special tax on government created monopolies and oligopolies such as those of the credit rating agencies; and finally a big special tax on all bonuses derived from capitalizing all those splendid arbitrage opportunities that the financial regulators provide.

Alternatively of course, and like what you seem suggesting, is to get out of protection racket altogether so that much of the illicit and informal economies that most probably are still growing at healthy rates, can join the rest of the economy and be taxed as all of us.

What does not seem logical though is to remain in the wishy-washy middle ground.

July 24, 2009

The investors know very well what is going on.

Sir Gillian Tett in “Investors are floundering in post-traumatic syndrome” July 24, writes that “the number fretting about inflation is similar to those concerned about deflation – with almost no one sitting on the fence”. No wonder, to be sitting on the fence presupposes governments know what they are doing and if they did why are we in this crisis to begin with?

Personally I am convinced we will fall over to the inflation side because the public debt will become unsustainable; there are other bottlenecks like oil out there; and I do not see sufficient political will to stop the printing press from working overtime.

What I do not agree is when Gillian Tett says that “investors lack the intellectual framework to make sense of what is going on”, they know perfectly well that it is the governments and the regulators who lack the intellectual framework to make sense of what is going on, as evidenced by the lack of efforts to ascertain we will not have a new cull of subprime financial regulators in Basel.

What are we doing to save ourselves from subprime financial regulators in Basel?

Sir Prof Lawrence J. White in “No monopoly on credit wisdom” July 24 writes “Credit wisdom is not located solely in Moody’s Standard & Poor’s and Fitch”. He is of course absolutely right, though the real question are: Should not our financial regulators have known that before they sent the market on a wild and crazy AAA chase guided by just three credit rating agencies? How unwise can we allow our financial regulators to be?

Frankly we did not need this crisis to know that and let me remind you that on January, 12, 2003, the Financial Times published a letter I wrote and that ended with “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

What are we doing in order to save ourselves from a new cull of subprime financial regulators in Basel? Not much, if anything at all.

July 23, 2009

FT is at long last very close to getting it, come on just one more push!

Sir about six years and 300 letters of mine later you are finally asking to “cut back the credit rating agencies quasi-public authority” Raters berated, July 23. A bit slow, and thick, but, nonetheless, well done!

Having said that when you refer to the EU’s recent directive on capital ratios I see you are still harbouring some confusion. Let me try to explain it again… letter 301?

The regulators arbitrarily imposed distortions in the financial markets when they decided, for instance, that in order to lend to a non-rated borrower a bank needed 8 percent in equity while for a triple-A rated only 1.6 percent is required. Even if the EU now rules that the banks cannot, no matter what, leverage themselves over some maximum figure, but leave otherwise intact the current structure of minimum capital requirements then, on the margin, all the distortions remain. You see in finance and in so many other things in life it is the marginal decision that counts.

By the way… is a job in a triple-A rated company more worth to defend than a job in a B- company? The regulators in Basel seem to think so.

The too few to follow is more dangerous than the too big to fail

Sir I refer to John Gapper’s “Squeeze the leviathans of finance” July 23. I go way back fighting the “too big to fail”, even when they were thought of being “too smart and expert to fail”, but let me assure you that a thousand small banks following one credit rating agency are still much more dangerous than the too large to fail with thousands of analysts.

And by the way the problem with the Basel minimum capital requirements is not so much that banks end up holding little capital but that these regulations discriminate among borrowers and who therefore go through all strange convolutions to dress up in AAAs.

Mark to market the government’s bail-out efforts

Sir Jonathan Guthrie in reference to the bailout of General Motors writes that if he was a US taxpayer “I would tell Fritz that I wanted my $50bn back”, “An industry running on romance alone” July 23. And he is fully in his right to demand that… but only after he had paid his share of the tax of course.

Perhaps what the US should do is to turn around and give a 50% tax credit for anyone willing to pay 100% of face value for whatever the government has received from GM in return for that assistance and then let these papers trade to see what the market considers them to be worth.

Problem though is that government would never dare themselves to be marked to market that way.

July 22, 2009

Shear madness or superb lobbying?

Sir as Joanna Chung and Aline van Duyn reports in “US rating agencies escape overhaul” July 22, the financial regulators seem intent to have the financial world and the banks to keep on following the opinions of the credit rating agencies as if nothing has happened. Is this the result of shear madness or superb lobbying?

July 20, 2009


Sir in “An exit will have to come, but not yet” July 20, by reducing us to some “sick” jokers worrying about inflation when there is so much “excess capacity and high and rising unemployment” you show utter disrespect to those of us who do worry about inflation resulting from hitting serious energy, public debt and climate change bottlenecks. I would say who ever wrote this editorial must be a baby-boomer living up to the motto “Après moi, le déluge”.

That said on the theme of quantitative easing let me remind you that just as a company repurchasing its own shares his main problem is that while doing so he really does not know how much the market values his shares.

July 18, 2009

Let the bankers earn their bonuses, through competition

Sir David Blake goes overboard titling “Why banking’s bonus culture should be defended” July 18. Yes, regulators should not try to micromanage the bonuses but “defend the culture”? No, what is evidenced by the extraordinary gross earnings available for bonuses is that the banks are not operating in a sufficient competitive environment, and much so because of the regulators.

It is the trading of non-transparent instruments in non-transparent markets; and the profitable arbitration of the risk weights concocted by the regulators that help to create those gargantuan gross earnings that need to be distributed. How the bankers and the shareholders then share the almost loot, well that is entirely their business.

We might have been better off with no regulation whatsoever, but while they regulate let the regulators respond to investors, borrowers, and taxpayers for those mind-boggling bonuses paid out to the bankers, or those mind-boggling shareholder value of banks that we have seen the last decade.

How do you get seignorage out of security?

Sir, in “Cheer up, Britain”, July 18, you describe how the UK is a safe place to live. Since in the market of safe havens there are many niches what the UK now needs is to find out how to get the most seigniorage out of that kind of security.

July 17, 2009

Taxation through reverse mortgages?

Sir in “Adapting to mediocre prospects” July 17 Martin Wolf writes “Let the cash-poor but land rich borrow their tax payments from the government and demand repayment on death”. Is Martin Wolf trying out as a modern Sheriff of Nottingham proposing the taxation through reverse mortgages?

Why does Mr. Wolf not go after the cash-rich to begin with? What does Mr. Wolf have especially against landowners? Why does Mr. Wolf for instance not go after all those intellectual property owners who are granted monopoly rights and protection by the state without paying anything special for that?

Safer does not mean less risk

Sir Martin Wolf in “Adapting to mediocre prospects” July 17 writes that the UK “must start by making finance safer”. Has he not learned anything? It was exactly doing this that the regulators, with their minimum capital requirements based on risk and the appointment of official risk surveyors, the credit rating agencies, led the world massively into the safest assets, houses, the safest country, the USA and the safest instruments, the triple-A rated securities.

If you want to get out of this crisis, even settling for mediocre objectives, the financial world has to learn to embrace the right risks and learn to avoid the unsafe safeness

July 16, 2009

Beware wasting scarce resources on green placebos

Sir I refer to your “Winds of change” July 16. For every dollar spent fighting climate change with green placebos such as hybrid cars, photovoltaic solar panels and sometimes even wind-energy, we have one dollar less in resources to fight climate change for real. This fact, quite astonishingly, often seems to matter the least to those for whom fighting climate change seems to matter the most.

July 15, 2009

We are climbing a ladder made of whipped cream

Sir Martin Wolf writes “After the storm comes a hard climb” July 15, and the title is indeed optimistic as it seems to imply as a first Hurrah! that we already hit bottom and as the second that we have got ourselves a good ladder. I am not at all sure the first Hurrah is true, let’s pray it is, but what I do know is that the ladder we are currently using is not solid enough for any sustainable growth. I would say the current ladder looks and feels like made out of whipped cream, and most probably is.

The remittances immense economic importance is rewarded with minimum political relevance

Sir in reference to your “Survival lessons for developing countries” July 15 and that discusses
the vital economic importance of remittances for developing nations I would like to contrast that to their almost non-existent political importance.

For instance, in the case of Honduras the remittances signify 25% of the GDP of Honduras. If we assume that the migrant workers remit 20% of what they earn we can then calculate that their gross earnings represents 122% of Honduras GDP. And so, if we divide the 122% by the net 75.5% GDP that was produced domestically, in Honduras, then we have that the Honduran migrant workers outside Honduras produce a bit more than 1.6 times what is produced in Honduras.

In other words it is the Honduras migrant workers that with immense sacrifices carry their poor homeland on their shoulder but yet no one asks their opinions in relation to the recent events in Honduras. Shame on the Hondurans back home, the minimum one could in such circumstances expect is that the migrant workers had at least 30 percent of the seats in the Honduras Congress.

The same Basel induced temptations keep plaguing the banks

Sir since it was the extremely low capital requirements that were authorized for banks whenever the risk perceived by the credit rating agencies was non-existent that started the stampede into subprime land, John Plender is absolutely right when he writes “Banks let off the hook as flawed model is preserved” July 15. It does not matter much if you increase the minimum capital requirement averages if, on the margin, you keep on interfering in the same arbitrary way in the risk allocation mechanisms of the market.

Today, the banks are still authorized to leverage themselves 62.5 to 1 on the loans they give to corporate borrowers rated AAA to AA- or need to capital requirements at all when lending to sovereigns rated AAA to AA- and so, today, all the temptations to head off in the wrong direction are still there.

July 14, 2009

A mystic crusade against debt?

Sir, there is too much debt because debt has been given huge fiscal incentives; that banks have in some circumstances been authorized to have extraordinarily high leverages; that consumer debt pushers have been able to act freely with an impudence that any drug dealer or casino owner would kill for; and that markets followed faulty risk rating signals that indicated some borrowers were risk-free no matter how much debt they contracted.

And there is nothing “mystic” with that, as the almost embarrassing manifest of Nassim Nicholas Taleb and Mark Spitznagel “Time to tackle the real evil: too much debt” July 14 would seem to indicate. The authors call for economic demystification by calling for a mystic crusade against debt.

I have professionally been involved with many debt to equity conversion operations and of course they are often very useful but let´s face it, at the end of the day, a loss is a loss is a loss, whether you are holding debt or equity, just that the latter usually allows you to bluff yourself a little longer.

July 08, 2009

“Small children small problems big children big problems”

Sir John Kay in “Our banks are beyond the control of mere mortals” July 8 discussing the qualifications of those in charge of our financial institutions concludes that “we would be wiser to look for a simpler world, more resilient to human error and the inevitable misjudgements”. I guess anyone except those puritans who expect our bankers to be from another world would tend to agree with that.

Nonetheless given that the world is not simple and that we should perhaps not want it to be simple either, the best we can hope for is first for no one to accumulate so much power that the results of any inevitable misjudgment will bring the system done; and second that the resilience to human errors does not hide the human errors while they are still small. In other words exactly what the very unwise regulators did when they invested so much regulatory power in the three amigos, the credit rating agencies.

July 03, 2009

Narrow banks could lead to a narrow future.

Sir Prof Sol Picciotto on “How to create narrow banks with purpose” July 3, suggests requiring from “any bank that benefits from state support to engage only in classes of transactions that have received regulatory clearance”. Sound great but what kind of transactions of those who got the banks into problems did not have regulatory clearance and of these which would not have received regulatory clearance? Those with AAA ratings?

We continue trapped in the belief that there was some sort of excessive risk taking that got us into this crisis while in fact what happened was that the financial world was authorized to engage into an excessive risk-aversion and that turned out so bad when the officially appointed risk-surveyors failed.

We continue trapped in the belief that there was some sort of excessive risk taking that got us into this crisis while in fact what happened was that the financial world was authorized to engage into an excessive risk-aversion that turned out bad when the risk-surveyors failed.

If we want a better world then let the banks be banks but if all we want is to desperately conserve then I guess we have to go for “narrow banks”.

July 02, 2009

Just don´t pay Harvard cash-up-front!

Sir Lucy Kellaway answering “Am I mad to invest in a Harvard course in a downturn?” July 2, does not tackle the real madness of it which is the way that the course would seem to be contracted with terms of $ 60.000 cash-up-front.

I would suggest a better offer to Harvard would be $3.000 up front to cover for your marginal costs and then 20% of any additional earning produced by the graduate during the next 5 years, even if that comes to be much more than $60.000. I mean that would make the so much recently discussed incentive structures better.

The Constitution of Honduras contains some strange things.

Sir I refer to your reports on the current situation in Honduras. Are you aware that one of the articles in the Constitution of Honduras actually states that you will “lose your conditions as a citizen if inciting, promoting or supporting continuance or the re-election of the President.” This, though sounding a bit crazy, could be indicative of that the whole issue of a re-election, towards which Manuel Zelaya was undoubtedly striving, is more of an existential issue in Honduras, and which if so would oblige us as a minimum to look much more carefully into what is really happening there.

Should there be an automatic sentence of the co-responsible?

Sir John Gapper is right when describing the sentencing of Bernard Madoff as “both necessary and rare” July 2. That said justice was not totally served. Had there not been a SEC you can be sure that the people who lost their money with Madoff might have lost even more money, in many other ways, but would certainly not have lost that same way with Madoff. Therefore perhaps all regulators involved should receive an automatic sentence for co-responsibility. One percent? One and a half years?

July 01, 2009

The too few credit rating agencies opinions to follow are a larger source of systemic risk than the “too big to fail”

Sir with respect to the “too big to fail” at a workshop on risk management in the World Bank in 2003 I told the financial regulators that “knowing that the larger they are the harder they fall on us, if I were a regulator, I would be thinking on a progressive tax on size” I can therefore evidence having stood up against the big while they were still believed invincible and few dared to do so. That said it is clear that this crisis, though it did hit some of the big especially bad, was not caused by these banks but by the “too few credit rating agencies opinions to follow” that were imposed on the system by the financial regulators. But as we can read from Martin Wolf’s “The cautious approach to fixing banks will not work” July 1, slowly and surely we are getting to the truth.

Martin Wolf now informs us that the median leverage of commercial banks in Europe in 2007 was 45 to 1 and of course it is “insane”, anyone knows that, so the real question becomes why did not anyone, including Martin Wolf, say so? The answer lies in the risk weighting of the assets that was done and in this aspect Wolf still has something to learn. When he says “the required bank capital must also not be risk-weighted on the basis of bank models, which are not to be trusted” he blithely ignores that the bank models has little to do with that because the essential parts of the risk-weighting is derived from the arbitrarily rules on minimum capital requirements concocted by the regulators and from the opinions of the appointed supreme risk surveyors.

There is regulatory financial protectionism of what is seemed as having a lower risk

Sir John Plender writes “Protectionism is coming at us from all directions” July 1 but fails to mention that financial protectionism that has been around for just a couple of years and that discriminates among lenders. On top of what the market charges for risks an unrated borrower has to pay for the cost of the bank having to put up 8 percent in capital while a triple A rated company gets away with the cost of only 1.6 percent. And then we ask why do inequalities grow?

Has this financial protectionism served us well? Absolutely not! I have even read Nobel-prize winning economist who though standing in front the monumental losses derived from financing the safest assets, houses, in the supposedly safest country, the US, and in instruments that carried the best credit ratings, still describe our current crisis as having originated by excessive risk taking. Ridiculous, they are either intellectually lazy or they have no idea of what they are talking about. It should be crystal clear that this crisis resulted from of an excessively misguided risk-adverseness and which got a tremendous boost from the regulators protecting what should not be protected.

Since it was an excessive risk-aversion that caused the crisis there is nothing wrong with a little more of risk-taking.

Sir the commissioner of Japan’s Financial Services Agency Takafumi Sato warns that “Tightening capital rules could increase risk-taking” July 1. Given that the current minimum capital requirements concocted in Basel authorize a marginal leverage of bank equity of 62.5 to 1 if the borrower has an AAA to an AA- rating it is hard to even comprehend what increased risk taking he refers to.

Excessive risk taking was not the problem. It was the excessive risk-aversion of the regulators that created an amazing regulatory bias in favour of what was perceived as being of little risk which brought this crisis upon us. In this respect we might in fact need some increased risk-taking.

This crisis did not originate from risky Argentinean railway projects but from investing in the safest assets, houses, in the safest country, the US, in securities rated AAA. Do you call that excessive risk taking?

Madoff got a sentence of 54.900 days. Should not the regulators spend one day in the slammer just for the sake of justice, just to help us restore some minimum accountability?