November 30, 2009

Is Greece becoming Germany´s fart-payer?

Sir Wolfgang Münchau writes “Greece can expect no gifts from Brussels” November 30, and which makes us reflect on what it would have looked like if for instance Greece still had the Drachma and Germany the Deutsche Mark. 

In such a case Germany would have had to be doing the Chinese styled currency weakening on its own instead of having Greece and others euro-black-sheep average the Euro down for them. And clearly Greece would be able to devalue and use that politically more friendly approach of being able to inflate yourself out of the problems, instead of having to impose Germanic discipline on their citizens. Come on, does not Greece deserve a little gift?

Rumours have it that in old Venezuela the fine ladies of society were always accompanied by a small coloured boy whom they could hit on his head whenever a lady farted. These boys were known as fart-payers (paga-peo). Could it be that Greece is becoming Germany´s fart payer?

In a world with reduced lebensraum it might be time for the Dollar II

Sir Jeffrey Gartner tells us “We must get ready for a weak-dollar world” November 30. It sounds like wishful thinking since what we need to get ready for is for a weak world, since it looks like the business model of most countries is out of synch with so many realities, among others the diminishing lebensraum that energy scarcity and environmental threats are signalling.

Also, when Gartner writes about a multi-currency framework as an alternative to the dollar, but says that”this regime will take time to devise” this is just another way of ignoring that, if we do not want to use gold, the only alternative to the dollar, for the time being, is the dollar II, to which the old baby-boomer dollars can be converted at a rate of ??? The dollar II would be a more transparent and perhaps even less socially traumatic than that of “camouflage a slow-motion default” by means of inflation.

What a world! A citizen admonishing monetary authorities “to meet secretly”, “perhaps between Christmas and New Year, to start discussions... (to avoid spooking the markets)” Has Gartner not heard about gate-crashers, twitter and facebook?

November 27, 2009

If all the bright students went to Wall Street… who became the regulators?

Sir Avinash Persaud declares “risk is a chameleon” and then describes many absolutely perfect reasons why no one should build a bank regulatory system centered around capital requirements based on perceived risks; all this reasons perfectly ignored by the regulators, “Boomtime politicians will never rein in the bankers” November 27.

Having often in serious jest forwarded the idea that perhaps bank capital requirements need to be higher for what is perceived as risky since that perception could introduce pro-cyclicality and carelessness into the system I fully agree with Persaud’s comments on risk.

Persaud also asks “why the universities and press, falling over themselves to kick bankers today, did not play a more effective counterveiling force” hindering the bankers from capturing the regulators. To phrase that question one has to assume the expert PhDs and expert reporters really knew what was going on, but seeing that so many of them are still not capable to free themselves from the paradigms they bought and wake up to the real facts, that might not really be the case; which is of course even more unfortunate for us all. They say that all the bright students went to Wall Street… if that’s true, then who stayed at the universities, who went to the press and who became the regulators?

November 20, 2009

The mother of all the systemic risks is believing that the systemic risks are under control.

Sir if systemic risk is strictly defined as the issue of institutions being too large for a financial system then I fully agree with William Donaldson’s and Arthur Levitt’s “Tackling systemic risk is no job for the status quo” November 20. But, if we by systemic risk also mean the risks that can be introduced to the system, then I would not want to see a “systemic risk oversight board” (SROB) be in charge of it, precisely because of the systemic risk that the belief that systemic risks have been controlled represents.

Have the regulators not learned their recent of what happened to them so recently when they appointed the credit rating agencies as their sentries, and then went to sleep? Don’t the regulators know that they were the ones who introduced the systemic risk of having the system believe that default risks were accurately measured?

I completely understand the proposal, but the answer is no!

Sir Martin Wolf’s wish to “Tax the windfall banking bonuses” November 20 is such an honest and truly understandable “populist” proposal that it makes us fret what lies in store for the world. In essence it signifies that governments should have the right to claw back in taxes any earnings that resulted from any government largesse. I can already hear future taxpayers lining up the arguments for not having to pay their taxes and asking instead the taxman to go after the neighbour who received an indirect untaxed interest subsidy on his mortgage. Is not this the mother of all slippery slopes?

And then also remains the issue... should a "confiscatory" tax like the one proposed be applied retroactively?

If I, on the spot, must venture an alternative proposal I would prefer decreeing that any compensation in excess of a specific amount, paid in the financial sector, or in a company that has received government support, can only be paid out with shares that are non-tradable for ten years. That I believe would better help to realign the incentives to work for all of us.

If not already here, high-octane populism is waiting for us around the corner, so whatever we can do to postpone or dilute it the better.

The taxes not yet paid might remain unpaid tomorrow

Sir Gillian Tett is absolutely correct on that the rhetoric on the taxpayer footing the bill for the banking crisis is wrong in the sense that no taxpayer has yet done so, “Can today’s philanthropy fend of future bank-bashing, November 20.

But when she in that respect suggests the bankers to prepare themselves for tomorrows bank-bashing she forgets that those who really will face the possibility of some true bashing are those trying to collect those taxes. From what little stress-testing I have been able to do of the willingness of the taxpayer to pay up for this crisis, my feeling is that those taxes are going to remain uncollected.

November 19, 2009

For jobs, the US also needs to eliminate regulatory discrimination against job creators.

Sir you write the “US needs fiscal action on jobs” November 19, but that won’t suffice. It also, urgently needs regulatory action on jobs. As is, the US is still, like other countries, through the capital requirements for banks based on perceived risk, actively discriminating against those best positioned to provide new fiscally sustainable jobs, namely the entrepreneurs and the small businesses

How many ounces of gold richer am I?

Sir when reading Gregory Meyer and Henny Sender report that “Paulson starts gold fund amid record prices” November 19, and all of the rest noises or sounds on gold, I cannot but help questioning how long it is going to take before we ask our private investment bankers inform us not only of the returns produced in dollar or euro terms, but also of the returns measured in ounces of gold.

November 18, 2009

But FT and the experts can’t stop themselves from admiring the “emperor’s clothes”.

Sir Peter Dunkley refers to “published intellectual nonsenses that were later to become the bank risk capital rules” and splendidly analyzes the new industry in regulatory arbitrage that resulted from these. “Another flawed idea – but regulators might be convinced” November 18.

This, which is great writing from an economics teacher in a college in Switzerland, stands in stark contrast with the way that for all practical purposes the Financial Times and other “experts” still seems to be in awe of the “emperor’s clothes” of the Basel Committee.

November 16, 2009

Financial Times, is not the City your home team?

Sir in “Gain the advantage” November 16 though you accept that London will still be an important centre you are certainly not cheering up what I expected would be your home team. The arguments you give of stricter global regulations and the concerns of being at the mercy of fickle finance for tax revenues have little to do with the international importance of the City.

I am not a Londoner but if I was I would be cheering the city asking it to forget Basel with all its stupid anti-risk biases and ask my banker to look into themselves and bring out again all those merchant-bank instincts and traditions that made the City great to begin with.

If there was ever a moment for professional risk-taking bankers this is it!

It is a great plan but what about its implementation?

Sir in “Gain the advantage” November 16 you analyze what could take the place of finance in Britain and you suggest world-class education, avoiding punitive taxes on business and helping new businesses to flourish. What a plan! Unfortunately I guess most countries will develop a similar strategy but very few will really achieve the results that make them stand out. What would you suggest in terms of implementation? Or is this a trade secret?

November 13, 2009

Ethics is also about not preventing financial crisis at any cost

Sir Philip Booth in “Ethics alone will not prevent financial crisis” November 13 asks: “If I can make a few million from a securitization – is that creating a dodgy financial product to generate fees for the bank or does it reduce mortgage spreads for poor homeowners?” In some cases there can be no doubts.

In a business based on convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with a little help from the credit rating agencies, reselling that same mortgage in a securitized version to risk-adverse Fred in $510.000 yielding him an expected return of six percent, and pocketing as a result of it profit of $210.000, anyone should be able to understand that some sort of foul play was involved somewhere.

And in reference to the title of Booth’s article we should also never forget that preventing financial crisis from happening might be just as unethical, if with that prevention we stop society from taking the risks it needs to move forward. In this respect the current bank regulation which determine the capital requirements exclusively on the basis of perceived default risks, are, simply put, very unethical.

November 12, 2009

This is a very untimely moment to force the rebuilding of bank equity

Sir often when I mention the impact of the Basel II regulations many observe that they were not really in effect, completely ignoring that just the announcement of these regulations, and especially their approval by the G10 in June 2004 immediately led the financial sector to initiate adapting to them.

When Caitlin Long writes “Wall of US maturing debt threatens to extend the crunch” November 12, she somehow seems to ignore that much of the effects of all the speculative quality debt that is coming up for refinancing in the next years are already here, which is one of the reasons why regulators should not wait to lower the capital requirements for this type of BB+ or below rated debt.

Capital requirements should be increased in a pro cyclical way when times are good and reduced when times are bad. It does not really help to rebuild insufficient capital reserves at the wrong time… that will just make the capital reserves even more insufficient.

November 11, 2009

Solipsism is an endemic condition in oil rich Venezuela

Sir your “Bolivarian bully” November 11, is completely right in all except the subtitle where you mentions “chávez´s 100 years of solipsism” Indeed we agree in that chávez is a particularly bad case of extreme egocentrism, but the real truth is that Venezuelan solipsism is rooted in the centralization of the oil revenues and that it therefore affects all our governments whenever oil prices are high.

The centralization of oil revenues is what has made it so hard for the opposition to develop an alternative to chávez, since in a rent seeking society the important factor is not who spends the best but who seems to care the most about you, and in this chávez has been a truly formidable politician.

Venezuela´s Berlin wall will only fall the day the citizens manage the will to take away the oil checkbook from their local solipsistic tropical sheiks.

To get the real jobs you have to also be willing to take on the real risks on main-street.

Sir Jeffrey Sachs in “Obama has lost his ways on jobs” November 11, makes very clear and relevant observations, from a central-planners point of view. That said there are many other difficulties on main-street, and these should not be forgotten. Our real job creating machines, the small businesses and entrepreneurs, are being crowded out from access to bank credits, while the banks are rebuilding their capitals, and the financial regulators, even while they were so recently cheated, insist on their love affair with what they think are “low-risk clients”.

When banks lend to a triple AAA rated corporation they are required to hold 1.6 percent capital but, when they lend to a BB+ or lower rated risk or an unrated entrepreneur, the banks are required to hold 8 percent, in other words 400 percent more capital.

The difference of 6.4 percent in bank equity, if the cost of bank equity is 15 percent represents about a one percent regulatory tax on perceived risk, and which has to be added on to whatever interest rate spreads the market already charges for perceived risks. This, unlawful, discrimination against risk, is something that Jeffrey Sachs would do well to add on his list.

Please reprint this article once a month.

Sir John Kay´s “Powerful interests are trying to control the market” November 11, should be obligatory reading for voters and policymakers alike. Please consider reprinting it about once a month, as the truths therein exposed are so swiftly forgotten, not the least by people who knows and believes it all to be the truth, John Kay and me included.

Social engineering

Sir I also belong to those who like Martin Wolf have a special relation with the cold war and it might be very difficult to transmit its real meaning to those born after the fall of the Berlin wall.

With respect to Wolf’s “Victory in the cold war was a start as well as an ending”, November 11, I have two comments.

The first is that we need to pray for that the size of the recent “piecemeal social engineering” and by which the government supported the markets, was not too big a piece, so that we will not choke on it. I do feel it could have been fed to the market in more nutritive and digestible forms.

The second comment is to remind Mr. Wolf that the most recent “utopian social engineering” to hit us, was when the financial regulators thought they should and could drive risks out of the banks.

In order to keep the lights on you need to reduce capital requirements

Sir Daniel Schäfer in “Keeping the lights on” November 11, writes “Bankers say that there is a time bomb ticking that could explode next year, when banks, already under pressure to deleverage, may be tempted to cut credit commitments on the back of companies presumably dire 2009 results”.
It is precisely because of that highly countercyclical “pressure to deleverage” that I am begging for the financial regulators to urgently decrease the capital requirements for all those BB+ or lower rated, or unrated, and that having in no way been the source of this crisis are now the most castigated by the need to rebuild the equity of the banks.

November 10, 2009

I dare you to think about the horrors of a world with no bubbles.

Sir Frederic Mishkin wrote “Not all bubbles present a risk to the economy” November 11. I go one step further and hold that it is the absence of bubbles that would drive the economy into the ground, in just a few decades, and that what most drives the economy forward is precisely the probability of finding yourself a nice little bubble to float up on.

I dare you at FT to think about the horrors which a world with no bubbles would imply. Ah you want controlled bubbles? Are you going to use bubble rating agencies for that? Good luck! What I want are financial regulations that do not discriminate against risk and that are willing to risk the bubbles instead of embracing the certainty of staying on ground or even underground.

I do not want the regulators worry so much about the crisis, but instead worry about how to increase our possibilities that the bubbles takes us somewhere we want to go.

Recovery Inc.

Sir in “Dodging the graft”, November 10, you discuss the needs to strengthen the UN Convention against Corruption, because it still lacks teeth.

In Washington in September 2009 in a conference titled "Increasing Transparency in Global Finance: A Development Imperative.", organized by Task Force on Financial Integrity & Economic Development Lord Daniel Brennan QC outlined the Caux Round Table's initiative to develop a private recovery agency for registering, recovering, and restoring corrupt assets. How about that for teeth?

I immediately saw in front of me a corporation listed in the New York and London stock market called Recovery Inc and therefore published soon after an article in Venezuela suggesting to do the same on a local basis, in order to take advantage of our very favorable market conditions and ample supply of inside knowledge.

Lord Daniel Brennan´s conference:

November 07, 2009

Send Sigrid Rausing to speak to the Basel Committee

Sir your Life & Arts section carries an interview of Sigrid Rausing by Isabel Berwick, “Discreet charm of the super-rich”, November 7. In it Rausing declares “Risk avoidance is the real risk” and thereby proves herself to be a more worthy financial regulator that all those whose misguided risk avoidance pushed the financial system to search excessively for the triple-As. Look where that got us! The Basel Committee wimps, even after proven so wrong, are still incapable of understanding that their role is to develop prudent and intelligent regulations that support the risk-takers instead of building up a false sense of security that lulls and numbs investors and savers alike.

When in the interview we also read Rausing discuss how equality and human rights issues have been allowed to confuse the relations between employer and employee, clearly for the detriment of all, and then says “There’s got to be another way” she also shows an openness and willingness to changes and challenges that our current financial regulators, buried under their own paradigms, would benefit from.

Would it not be an incredible learning experience for the regulators of the Basel Committee to have to sit down, for at least an hour, and listen to the opinions of people totally unrelated to the financial sector, like Sigrid Rausing? With luck, that could help to get them out of their current incestuous thinking mode.

It suffices to read the recent report on financial regulations submitted to the G20 by the Financial Stability Board to know they do need it, urgently. The reports is all about stability and higher capital requirements, and nothing about how to finance the risk taking entrepreneurs who are the only ones really capable of giving us the real and sustainable jobs the world needs. As usual they don’t care an iota of what happens with the rest of the world as long as their banks are stable... and then they dare to talk to us about moral hazard?

Note: Most recent background material
A YouTube on the taxing of risks in the Home of the Brave
An article in Martin Wolf’s Economist Forum
My “conspiracy” site

November 05, 2009

In trade and carbon, though borders do not matter, distance does

Sir Angel Gurría is right in that “Carbon has no place in global trade rules” November 5, when referring to what happens on the borders. That said carbon has a very real place in trade, when considering the distances and means by which that trade has transported. If the concerned world which will be meeting in Copenhagen does not affect trade, then it is clearly not concerned enough or simply irresponsible. In fact, a stiff carbon tax on transport, might be just what the doctor ordered to revive all those local and otherwise inefficient jobs that have been lost earning the benefits of trade.

The regulator should regulate not discriminate

Sir Dirk Bezemer in “Lending must support the real economy” November 5, points in the right direction, but yet fails in connecting all the dots. When a bank lends to the really real economies, the unrated or BB+ and below rated clients, it is required to have 8 percent equity, while, when lending to or investing in anything related to an AAA rating, then the bank gets off the hook with only 1.6 percent in capital. This signifies a de facto subsidy to those who least need the support and, in relative terms, a tax on those who most in need of support. Therein resides the fundamental equivocation of the current bank regulations designed by the Basel Committee.

While the banks are having to rebuild their capitals to make up for all those “no risk” AAA rated operations that went gone wrong the real economy, we have to see to that the really real economy is not crowded out from access to bank credits. In this respect I am doing what I can to pro-bono lobbying in favour of temporarily reducing the capital requirements for banks, when lending to unrated clients or to BB+ and below rated clients, to 4 percent; and that later, once out of the woods of this crisis, when capital requirements are further strengthened, the capital requirements are the same for all type of access. A regulator is there to regulate and not to discriminate.

November 04, 2009

It is indeed hard to find the right moment for sacrifices

Sir in “Private behaviour will shape our path to fiscal stability” November 4, Martin Wolf tells us that it “would have been a monstrous blunder” to lower the private sector surplus through an adjustment that destroyed private income, but also, that not to do so, is a case of “adjustment postponed” which leads to a surge in leverage and new bubbles. I guess it is all about balancing the need for finding the right moment to quit smoking with the fact that once in your grave there is no such need... and so the closer to the grave the higher the incentives for a postponement.
Is this not really a case of this generation of baby-boomers against next generation of baby-boomers?

November 02, 2009

You can’t explode a bubble and have it too

Sir are we in the future going to have to read Nouriel Roubini’s “The mother of all carry trades faces an inevitable bust” November 2, as another example of how we were warned about the risks? I hope not. First because it does not contain a single word about the what-to-do and also because it ignores that all traders, though aware that yesterday’s results has little to do with tomorrows, just in order to make a living, need to keep the dancing halls open and the public dancing.

In comparison, Wolfgang Münchau’s “We must not be too late with starting the Big Exit”, and which calls for starting to increase the interest rates in the US, is a more valiant effort to face the sad truth that you can’t explode a bubble and have it too.