Americans, how sure are you it is not Mr. Jones that you should blame?

The fundamental driver of the unease with globalization is the reduction of the share of decent salaries paid in the gross global production (GGP) and since “decent salaries”, whatever that means, has almost exclusively to do with the developed world, there is a growing grumbling in the western world that this globalization thing might not have been such a bright idea after all.

Clearly, if an American holds that the world has to stop growing, immediately, so that he can go back to his 2 dollar per gallon of gas, he has a point, though he would also have to explain what to do with a paralyzed world.

Devesh Kapur, Pratap Mehta and Arvind Subramanian, “Is Larry Summers the canary in the mine?, May 14, worry that American liberal intellectuals might now team up with Lou Dobbs and produce a pure local US knee jerk reaction, which would be both dangerous and unproductive for the whole world, instead of teaming up with them in finding some valid solutions for all. They are very right about that.

Americans should know that when you build an isolation wall the worst part is how difficult it is to be 100% sure that you got stuck on the right side of it and so, before shutting themselves out, they would de well trying to get at the root of who are really capturing a larger share of the GGP, since besides from those obviously benefiting from the commodity boom, one of the culprit might even be their next door neighbour, Mr. Jones.

But we did what the market told us to do not long ago!

Sir Martin Wolf tells us that “The market sets high oil prices to tell us what to do” May 14, but we should not forget that the same market, less than a decade ago, priced the barrel of oil under 10$, and according to some pundits it was heading for 5$, and that in fact many of our current problems are derived from doing exactly what those low prices told us to do.

Martin Wolf also quotes the International Energy Agency in order to establish a case for extremely tight oil markets but what was this agency saying just a few years ago? Why are they to be more credible now?

What Martin Wolf does not mention are the alternatives to the short term markets in oil and that some long term take up contracts between producing and consuming countries, based on some reasonable in between prices, could create stability and reduce volatility in the oil markets for the benefit of all...less the short term speculators of course.

There is indeed a case for a league of “real” democracies

Sir Robert Kagan writes about “The case for a league of democracies” May 14, and of course there is such a case, as long as we are talking about real democracies. Many citizens around the world pray for the existence of a club where only governments that show their own people their utmost respect could be members, and where not belonging to it, helps to send an unequivocal shaming message.

Now for this to be a true example-setting club, it should not be possible to become a member by sheer political wheeling and dealing, but only by meeting a set of very strict criteria that go much further than just having a popular vote.

For instance Venezuela though presumably having a popular elected government, should not be able to be a member of such club since though it is a very polarized country it yet has a Congress that includes 167 members who are in favour of him who wishes to be called ‘Commander’, and none, zero, zilch, of those many who are not the least in agreement with that. Additionally Venezuela, as an oil cursed country that by centralizing the revenues from the oil in the State has a government that is wealthy and powerful independently of its citizens, should obviously not be admitted to a club of real democratic leaders.

And then on top of it all there is the regulatory tax on risk.

Sir I could not be in more agreement with what Eric De Keuleneer has to say in his letter “Step up competition for banks and rating agencies”, May 12 in relation to taking away the powers the credit rating agencies have been given to distort the markets, as you must know having received at least 100 of my letters on the subject over the last years. That said Mr. De Keuleener does not mention the current tax that the minimum capital requirements for banks impose on risk.

Under the current Basel I Standardized Approach, a low risk corporate loan (rated AAA to AA-) requires a bank to hold only 20% of the basic 8% capital requirement, meaning 1.6 in units of capital, while a much riskier loan (rated below BB-) requires it to hold 150% of the basic 8%, meaning 12 units of capital. If the current cost of capital for the bank is 15%, then the bank's carrying cost for the low risk credit is 0.24% (8%*20%*15%) while the bank's carrying cost for the high risk credit is 1.80% (8%.150%*15%), thereby producing an additional cost of 1.56% that must be added on to the normal spread that the market already requires from the higher risk credit when compared to the lower risk one.

This mind-boggling 1.56 basis points regulatory tax on riskier but frequently more needed credits when compared to low risk but often not so productive loans, dwarves any Tobin tax proposals both in terms of costs and distorting signals, but it is blithely ignored.

What is the purpose of the financial institutions?

Sir Evelyn de Rothschild writes passionately that “Ethical standards must be restored in finance”, May 9 and we all agree. That should begin though by clarifying what is the purpose of the financial sector since without that ethical standards would indeed be hard to define.

In fact given that the current purpose of the financial institutions seems to be extracting as much profits and bonuses as possible from them, some could even argue that there has been quite a lot of ethical behaving lately.

What is the purpose of our banks?

Samuel Brittan in “The financial crises of capitalism” May 9 says that “The beginning of wisdom is to recognize that boom and busts have been a feature of capitalism from the start”. Let us hope our bank regulators read it since instead of regulating so as to maximize the benefit from the boom and minimize the cost of the bust, ever since the Basel Accord in 1988 they have been set exclusively on avoiding the bust and which is clearly unwise.

How long has it been since any bank regulator has asked himself the question of what is the purpose of the banks? It cannot be simply that of avoiding a bank crisis as that is just stupid.

But in all this slicing and dicing there is no cube with the fathers and mothers of the US

Sir Jurek Martin in “Do not let Limbaugh pick the president” May 8, says “We are slicing and dicing the great American Community as it has never been sliced and diced before. Every component part is in play – black, white, men, women, Hispanic, Asian, rich, poor, old, young, Protestant, Catholic, evangelical, Jew and non-believer”.

To this we would then also add the slicing and dicing that the US Census Bureau does when reporting on the characteristics of citizens who voted or not in the elections and which, to Jurek Martin’s components adds: Nativity Status (whether born in the US or naturalized), Marital Status, Educational Attainment, Employment Status, Tenure (whether they own or rent the house), Duration of Residence at the place where they now live, Veteran Status and the Region where they originally come from.But surprisingly, at least to me, no one seems to be interested in the cube represented by fathers and mothers! Since the backbone of a nation is its people and the backbone of its people is God and families one has to wonder whether someone is taking the US backbone for granted.

Please visit!

The bankruptcy of the finance sector regulations

Sir Martin Wolf lists a quite comprehensive “Seven habits that finance regulators must acquire” May 7, though I missed two things.

The first is a definition of what we should have the right to expect from the regulated financial sector since hopefully it must be something more than just for it to avoid defaults. And how can you regulate without an objective?

Second, when Wolf mentions that “Capital requirements must be the same across the entire financial system, against any given class of risk”, this is way too important to leave at that, since it signifies that the fundament basis for all current Basel regulations, namely minimum capital requirements allocated on the basis of risk of default alone, has proven to be a bankrupt concept; with in this case “bankruptcy” being an unusually appropriate term.

By tinkering with risk and forcing upon the markets the “opinions” of the credit rating agencies overall societal risk has only increased and this has to change. Basel, do not go forward to Basel II or III, go back to the drawing board altogether!

Don't forget to sack some regulators too!

Sir William Cohan writes "Regulators must seize the chance to reform Wall Street", May 2, and though I agree with most of what he says I can't help thinking that we must also seize our chance to reform the regulators before they take us to That-Place-That-Must-Not-Be-Named.

Our bank regulators have now for two decades forced upon us a system which sole objective has been to avoid financial turmoil, as if that is all that banking is about, and they have not even delivered on that!

Come on, that the bank regulators should get sacked when they do not perform must be the first pillar of any reform. This is turning out to be the mother of all the non-accountabilities.

We also need to review "normality"

Sir it is understandable to wish for a return to normality as could be read from your "No quick end to the credit squeeze" May 2, but one of the very few good parts with any crisis is the opportunity it brings to reappraise whether we agree with "normality". This is a moment to step back and have a long deep thought of what we really want to get out from our financial sector and from our banking regulations, since just keeping us out of turmoil is clearly neither enough nor deliverable.

Just because they are private doesn’t make the credit rating agents less bureaucrats

Sir John Authers in “The Short View” of May 2 asks the relevant long term question “should the S&P’s ratings be this important”, and answers with a no “As we have learnt from the credit crisis, it is dangerous for so many to put so much weight on one rating agency’s judgment”. He is right. The fact is though that as long as the regulators keep empowering these agencies to decide so much on how much capital the banks have to set aside for each credit based on the ratings, too many will indeed put too much weight on one rating agency’s rating, and there is no way around it.

I just ask what if those credit rating agents had worked for the regulators. All hell would have broken loose. Our confusion arises from not being able to see through the veil that the outsourcing to the private sector signifies, so as to comprehend that the credit rating agents are just simple credit-risk-measuring-bureaucrat-commissars.

Risk is always relative!

Sir, John Gapper titles a bit prematurely "The return of high-risk optimism" May 1, when in fact we are yet only going through "the coming home of low-risk pessimism" phase; and in fact he mostly discusses the losses on "safe securities".

What is finally true is that risk itself is a very relative concept and I have argued for years that while all those low risk instruments could be truly low risk instruments from a financial investment perspective, they could just the same be the most risky investment from a long term societal development point of view. For instance the "safe" financing of cars placed in the perspective of the climate change threats.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Frightening!

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

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

Clarity is needed for credibility

Sir you rightly say that the “Climate Policy must be credible” April 19 and one of the basic requisites for that is clarity in the use of terms.

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

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

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

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

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

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

Sometimes formal limits signify fewer limits

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

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

Let us not forget the rental options

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

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

FT you’re obsessed!

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

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

Sissy banks and sissy markets?

Martin Wolf in “Why financial regulation is both difficult and essential” April 16, says “It is impossible and probably even undesirable to create a crisis free system”.

Wolf falls way short since in fact even trying to create a crisis free financial system poses extreme dangers, being that risk is the oxygen of development.

No matter what, the world does not belong to the risk adverse and the real risk is not banks defaulting, the real risk is banks not helping the society to grow and develop. Not having a hangover (a bank-crisis) might just be the result of not have gone to the party!

What we then must do before rolling up our sleeves to do regulations, is to have a fresh look at what has been ignored for so long namely what are the financial institutions and specially the banks to do for us?

In that sense we need to stop focusing solely on the hangovers and begin measuring the results of the whole cycle, party and hangover, boom and bust! For instance the South Korean growth boom that went into a bank crisis in 1997-1998 seems to have been much more productive cycle for South Korea than what the current boom-bust seems to have been for the United States.

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

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

This is indeed an embarrassing low for FT!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But Greenspan does share the blame

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

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

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

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

It is stunning how Greenspan can keep a straight face

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

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

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

Stop dodging the issue about the credit rating agencies

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

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

Regulatory outsourcing creates confusion

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

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

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

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

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

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

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

Whose side are you really on FT?

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

Mr. Clive Crook. Now you please repeat after me too

Sir Clive Crook is absolutely right when titling “Markets need more than a patch-up” March 31, and ending it with “We need an entirely new model” as in between he really wavers around among a world of possibilities.

Now given that Crook gives so much weight to the issue of moral hazard that he orders us to “Repeat after me: you encourage recklessness if you protect people from its consequences” and which I duly did, I would love Crook to return the favour and also repeat after me that “you encourage carelessness if you make it to be seen that risks could indeed be measured and nominate credit rating agencies as duly qualified to do just that.”

Regulators really have tremendous workload cut out for them especially when they have not yet really decided the objective of their regulation correctly, since avoiding defaults and crisis cannot be the only societal role of a financial system.

Eerily peculiar recommendations

Sir Lawrence Summers writes about “Steps that can safeguard America’s economy” March 31, and suggests “that a top priority for financial policy has to be increases in the level of capital held by financial institutions” and “have Congress insist that [the government sponsored enterprises] stop paying dividends and raise capital substantially as they expand their lending”.

Given that we heard so many times during the last years about how well the financial institutions were capitalized; and that the lack of capital had nothing to do with how this crisis came about, since even the over leveraging of financial institutions had more to do with the lack of common sense, these recommendations sound eerily peculiar indeed.

Why not suggest they stop digging in the hole they’re in first?

Give the banks time instead of bailouts!

Sir in your editorial of March 29 “Not yet time for a bail-out of time” you mention that “Governments can also help by facilitating renegotiation of mortgages. The principal aim is to avoid unnecessary and costly foreclosures.” That is nonsense! The principal and perhaps only aim of any renegotiation is to make the credit viable, ideally taking it out from the shadows of the subprime world and bringing it in to the prime world, where all debtor and creditors can enjoy lower interest rate return requirements.

Now also and though I fully agree that it is not time for a bail-out of banks, it is definitely time to give them some more time to react. This whole affair of putting the banks against the walls just because of the change of mind of credit rating agencies is too harmful. At least give them a year to find and make the new capital increases by allowing them to use a 12 months moving average to account for market changes in the value of their investments. And this way tax-payer does not have to step up to the plate as fast either, or even at all.

Too much ‘Group think’ C’est la vie!

Sir Gillian Tett in “Banking oversight and the danger of ‘group think’” March 28 mentions the “difficulty the staff of the Financial Services Authority’s (FSA) face in terms of challenging the dominant financial creed” mostly because they lack the glamour needed to be allowed to question the glamorous.

Something similar happens when a modest MBA like me, with only 30 years street experience, in only a developing country, tries to get through to journalists to alert them of what has and is really happening out there, only to be ignored because it is so much more glamorous when appearing surrounded by PhDs. I guess c’est la vie! Regulatory authorities will not get to see the full truth, and neither will the journalists, not even some columnists.

Now if Gillian Tett sees danger in the above when occurring in FSA she should have a look at what happens in that mutual admiration club composed by The Basel Committee on Banking Supervision, the International Monetary Fund and all their members the Central Bankers…talk about the mother of all ‘group think’ they even have their own checks and balances, like The Financial Stability Forum. The World Bank and that should presumably do some of the questioning, was just told to shut up and harmonize.

A subprime dollar? Not the end of the world; but a change of collateral may be asked for

Sir Martin Feldstein’s “The dollar may be falling at just the right time” March 28, is a timely reminder that it is not necessarily that bad for the dollar doing upon other currencies what other currencies have done to the dollar; and that there is no need to look at it all as the end of the world… even though it might be the end of that money that was backed only by the trust in the government and that has had a run for almost 40 years now, some say amazingly.

To insulate us from realities? Thanks but no thanks!

Sir John Kay writes “Why more regulation will not save us from the next crisis” March 26, and though he is absolutely right I do not make the same inferences that he does. Just for a starter, I believe that if we do not have a next crisis, that could just the same be the symptom of that we are not doing enough… getting out of bed has its risks, but staying in bed leads you nowhere.

Also, when Kay argues that we should “insulate the real economy from the consequences of financial stability” and meaning with it that the governments should “protect small depositors” (how are they identified?) and mentions “to restrict the use of retail deposits as collaterals for speculative activities” he is in fact proposing something like forcing us to invest exclusively in government papers… and as if that carried no risk to us.

We do know about many different efforts going on in trying to create absolutely risk free environments for retail deposits and that is not only arrogant and preposterously silly but also quite dangerous… much like the belief that the credit rating agencies could be imposed as official risk surveyors without themselves tuning into a huge systemic risk.

Wake up Mr. Wolf!

Sir Martin Wolf holds that “The rescue of Bear Stearns marks liberalisation’s limit” March 26; as if we have had some true liberalisation. 

He is wrong. Much the contrary, never before have the financial markets been so regulated as they are now with the credit rating agencies, empowered by the regulators, deciding over how much each bank needs to pack their rucksack with reserves; and most of what has happened since imposing the minimum capital requirements imposed on the banks through Basel I, has been the result of regulatory arbitrage. 

Wolf quotes Ben Bernanke in a speech that “makes one’s hair stand on end” saying that much of the subprime mortgage lending of recent years was “neither responsible nor prudent”. 

Mr Wolf. You know what makes my hair stand on end? That all the market did was to follow the criteria of the credit rating agencies that felt that such mortgages were good enough to make up prime collateral. Wake up Mr. Wolf, before we can start to think about the limits of liberalisation we still have much to think about the limits of regulations.

PS. Credit ratings as a systemic risk

The truth as always lies somewhere in the middle!

Sir Michael Skapinker in "The market no longer has all the answers" April 25 writes that though the hands-off regulatory policies have clearly been discredited even in the eyes of hardnosed free-market fans no one knows what to do now and that "Trawling leftwing and far-left wing websites is instructive, because they clearly have not got a clue either".

May I invite Mr Skapinker to trawl the radical middle too? From the middle we protest the sheer thought of the financial sector having had a hands-off regulatory policy since in our view never before has the financial sector been so much nannied as with the empowerment of the credit agencies as the officially outsourced regulatory risk surveyors. Had these agencies not worked undercover as private agencies I am sure all hell would have broken out long ago.

But from the middle we also protest any deepening of the regulations that starts without taking a huge step back and realizing that to regulate the banks, with the sole objective of avoiding a bank crisis, as it has been done for almost two decades now, is totally meaningless.

We need banks to do much more for society than simply avoid risks and survive and therefore we need to clearly define what their whole purpose is. How on earth could you regulate without doing that?

We do not need FT to be a Besserwisser

Sir in your “Muzzle the market manipulators” March 22, you just come through as a Besserwisser saying “All long term-investors can do is ignore rumours, ignore share price volatility and concentrate on the facts. Easier said than done, in a world where there are more finance courses on how those real not that good Besserwisser and rumourmongers we know as the credit rating agencies could change their opinions than there are course on how to analyze the rated companies themselves.

We better not leave bank regulation in sophisticatedly skilled unscrupulous hands.

Sir Martin Wolf in his marvellous “Why today’s hedge fund industry may not survive” March 19, describes how the hedge fund industry by acting as bookies arranging the betting on low probability events manage to profit handsomely while these events do not become the certainty that they indeed must become, at some point; and that this clearly attracts the unscrupulous and the unskilled. Wolf also frets that the hedge fund managers by copying each other could produce a real disastrous stampede of non-events and says “the more one believes this is how an unregulated financial system operates, the more worried one has to become”

What Wolf fails though is in connecting the dots with between the way the hedge funds operate and how our banks are currently regulated. The regulators, exactly like hedge fund managers, have been able to collect their praises upfront for a system that by favouring size tends to unload failures into an even greater accumulation of risks; that by using minimum capital requirements exclusively based on short term default risk leaves us not considering sufficiently all the other risks; and that by imposing upon the market the credit rating agencies as their official risk measuring bureaucrats, will just guarantee that we all will, sooner or later, follow them and fall off the deepest of the cliffs.

We should not fret the unscrupulous unskilled as much as the unscrupulous skilled and sophisticated… the last conform the really dangerous wild bunch. And please, do not tell me that some of our current bank regulators do not have it in them to know this is all true. I sincerely believe that Greenspan knew it all along but he did nothing about it!

What we need is trusting doubters

Sir Gillian Tett in “A lack of trust spells crisis in every financial language” March 18 should also remember that usually an excess of trust equally spells the origin of a crisis in any language. Tett spells out in no ambiguous terms that “the key to resolving this crisis will not lie with just the injection of billion more of central bank dollars; instead what is needed is restoration of credit” which is exactly trust.

That said and as true as it is, this time around let us please make certain that what we build is some reasonably doubting trust and not that type of blind trust that could only come out of such a preposterous idea that you could leave the issue of managing risks with some minimum capital regulations for the banks based solely on one risk type, namely default, and measured over a fairly short time horizon by some humanly fallible credit rating agencies.

A really scary title… coming from a former Federal Reserve chairman

Sir it is frightening a former chairman of the US Federal Reserve like Alan Greenspan titling an article with a “We will never have a perfect model of risk” March 17, since he should know that if we even came close to believing we had such a model, then this would constitute on its own the greatest risk machine ever seen.

Greenspan is right when in his conclusions he argues that “our most reliable and effective safeguards against cumulative economic failure [is] market flexibility and open competition” but which is also why Mr Greenspan should now at least have the decency to repent from having helped to impose the opinions of some few credit rating agencies upon the markets.

Does winning but not getting the expected odds paid out really make it a loss?

Sir Prof Louis T. Wells commenting on March 14 on Alan Beattie’s article “Concern grows over global trade regulation” March 12 hints at what I have always found as one of the most intriguing questions in matters of foreign investments. If you require a high rate of return to invest in one country and thereafter you obtain a lower return but that is perfectly in accordance with your expectation of returns in lower risk countries should you be satisfied or should you feel let down because the risk did not materialize?

Having said that and returning to Mr Wells´ real issue, the validity of international arbitrary courts and proceedings, let us also never forget that those that in the long run are mostly hurt by closing down courts and proceedings are those that being weak most need them…and they should therefore be the ones most careful with not shooting the messengers.

And no one called Mr Sharma’s bluff!

Sir, in View from The Top March 14 you have Devin Sharma, the president of Standard & Poor’s saying “Ratings play an important role in the capital markets by providing opinions on creditworthiness” and nobody called his bluff. Had it been true then we would most likely not be in our current mess, though perhaps in another one.

The truth is that the credit rating agencies give much more than opinions since empowered by the financial regulators they do in fact give orders to many of the actors in the financial market of where these can or not go, and to the banks with respect of how much capital they have to set aside for each credit.

Striping the credit rating agencies of these really crazy powers is one of the most important things to do if we are to avoid future financial disasters that could prove if possible even more lethal than the current one; and so that they then can go back to just providing opinions.

Mr. Wolf, this is no a black plague that will just soon be over

Sir Martin Wolf in his “Going, going, gone: a rising auction of scary scenarios” March 12 seems reduced to being a chronicler of the black plague. In truth, what should the world care about a couple of trillion more or less in losses when in fact it is our whole financial system that is under siege and there is nothing right now that promises us a brighter and better day.

Much more important then that to tally the losses it is to make certain that our scarce rescue forces are send to save the real economy and not the virtual parts of it; which unfortunately seems to be what our regulators have come up with pouring monetary resources on the fire while praying this will not turn out to be gasoline for the inflation.

Also start mending what got us into this mess. Fixing those minimum capital requirements for banks solely based on risk assessments for short term defaults; give the banks time to adjust their capital ratios when this need is sprung upon them by surprising down-ratings; take away the frankenstenian powers given to the credit rating agencies; make certain that those mortgages that have been turned into viable mortgages by means of a reduction in the principal or rate adjustment are not longer valued as subprime; make sure that mark to markets means what it says without self-enforcing the panic of a mark to the markets-fear-anticipation; force the managers and directors of financial institutions to sign an affidavit stating that they have an inkling of what they are doing and freeze the bonuses paid to financial executives pending final results seems like a decent place to start.

Spend your limited ammo on the real world!

Sir one would expect you to be right saying that the “Fate of finance lies with real economy” March 11, but one of the conclusions one should also draw from that is that all the assistance provided by governments in a world with scarce resources, should be targeted at the real economy and not squandered away on some frontiers that seem more virtual than real.

Better confused than wrong!

Sir Saskia Scholtes writes that “Agencies’ differences add to confusion” March 11, describing how credit rating agencies differ in their appreciation of companies in this case of bond insurance companies, to which I would just have to add a Hallelujah!, since it is clearly better being confused than wrong.

It is precisely the fact that the whole concept of risk relates to so many different variables that can be analyzed with so many possible methodologies over so many different time horizons, and that makes it impossible to come up with a true risk assessment, that the world should never have allotted so much power and influence to some few credit rating agencies.

The mess these credit rating agencies got the world into by all three of them giving prime ratings to securities collateralized with junk mortgages, is bust just a small example of why we should welcome more of the confusion that reigns in real life and that real investments are all about.

This is a mark to the markets anticipation of a crisis crisis

Sir Wolfgang Münchau tells us that “Central bankers cannot stop this contagion” March 10 and he is right; how could they?... when no one is really sure about what is going on in that no mans land between the primary financial asset such as a subprime mortgages or municipal loans and their final expression in the financial markets in the form of some type of sliced and diced derivative contract.

For instance Münchau speaks about a “hugely contagious solvency crisis … spilling over into municipal debt, corporate debt” though we have yet to see any significant municipal or corporate debt defaults. This is not a mark to market crisis; it is more a mark to the market’s anticipation of a crisis crisis.

Therefore, central bankers should stop throwing real money at anything virtual that hurts, like blindfolded children trying to hit a piñata; and carefully keep their monetary munitions for the many real world problems that could break out down the line… like those very real subprime mortgages that have already started to default.

The born again financiers

Sir Aline van Duyn in her report "Banks spend $500m on Ambac shares" March 8, quotes Michael Callen the chief executive of Ambac saying that "The market gods were totally against us"; which must be very humbling to say for a member of a profession that so recently believed themselves to be the gods of the market.

That said the operation also begs the answer for how the banks are going to account in their books for the registry of what basically amounts to an expense in order to avoid having to expense even larger losses if the credit risk insurance provided by Ambac is shown to be worth less than a prime rating.

We need the regulators to backtrack on their own ideas

Sir Francesco Guerrero wants "ideas to stop backlash from regulators" March 8 and there is nothing like reminding them of the blame they have in this mess.

A market with many participants measures many type and dimensions of risks, applying many different time horizons and using many different risk measuring techniques. The final result might not be perfect but at least it avoids the risk of leveraging excessively on any presumption and opinion that might turn out to be dangerously mistaken.

It was when the regulators forced the market to give special consideration to what some few credit rating agencies told it about risks of default over a short period of time, that the information capacity of the market was constrained and extremely dangerous regulatory biases and fresh systemic risks introduced.

Although there is such a thing as prime mortgages awarded to the subprime sector it was only because credit rating agencies gave good ratings on securities collateralized with badly awarded mortgages, that this pure junk could grow into incredible volumes and travel so far that a German bank became their first casualty.

And there are currently almost more courses given about how to analyze how the credit rating agencies might change their ratings that there are about analyzing the underlying credits and companies.

This has to stop, urgently; and it is not a question of the credit rating agencies becoming better at what they do since that will only force or induce us to follow them even more to a precipice.

A Nobel prize-winner should not make such a statement

Sir Joseph Stiglitz and Linda Bilmes while defending their book The Three Trillion Dollar War (that I have not yet read) March 5 from some comments made by Tunku Varadarajan on March 3 say with respect to the price of oil “we attribute only $5-$10 to the war” and this is just a plain wrong statement, from a pure economic point of view.

All the terrain between the marginal extraction cost of oil and its market price is complete no mans land and so no one, not even a Nobel prize-winner, could therefore attribute any of it to any specific condition. If there is just one barrel of deficit in the supply, speculation and desperation could lead to any price; just like one barrel of surplus could start a movement towards equating the price of oil to its marginal cost.

That is why less than 9 years ago pundits predicted $5 per barrel of oil with the same ease other predicts $100 or more. That is why there is the extreme volatility in oil that wets the appetite of so many speculators. That is why it is impossible for me to understand why producers and consumers have yet not entered into long term production and take up contracts that could benefit them both.

A flat tax is what a flat world needs!

Sir much as I wholeheartedly agree with the intentions that John Christensen and David Spencer express in their "Stop this timidity in ending tax haven abuse" March 4, and that establishing a network of bilateral tax agreements will not be sufficient to solve the problem of world wide tax evasion, I do not believe that what they propose in terms of shifting the focus "towards the infrastructure of cross-border economic crime, including accountants, lawyers and financial institutions" will cut it either. On the contrary we could just be opening up new growth opportunities for those many illegal and illicit organizations that thrive so much on all our prohibitions.

What I would suggest is to go instead for a real worldwide tax transparency by making all countries sign up on an easy to understand world wide flat tax. This would help to remove the incentives to geographically arbitrate taxes and that keeps so many accountants, lawyers and financial institutions in the business "legal and intelligent tax avoidance"; and that keeps so many governments from not knowing whether they are giving true and needed tax incentives to attract investments or just being taken for a ride.

In all, a flat tax is precisely what a flat world needs; and by the way, just in case, a flat tax can be construed as a progressive tax too.

A crash capital replenishment is bad for the banks

Sir let us suppose you have gone to your doctor for regular checkups and because his balance had broken down you never discovered something was very wrong and as a result you had become seriously obese. What would you say if the doctor when discovering his mistake sends you on a crash diet, even though that could be life threatening?

This is exactly what is happening in the financial sector when the banks, after it was discovered that the credit rating agencies that were imposed on the banks by the regulators got it all wrong, and they are now ordered to replenish their capital… immediately… while the conditions are as adverse they can be. Who on earth could benefit from this? Only those who shorted the banks.

A rational doctor would work out a medium or long term plan for a diet and a rational bank regulator would give the banks ample time to come up with new capital.

And by the way, for the record, I do not own a single bank share.

PS. We normally know if a weight is lying to us…but how we love it for that!

Nothing but BIG!

Sir February 29 David Wrighton reports that AIG announced “almost $15bn of writedowns and losses related to subprime mortgage exposures” but that according to Martin Sullivan, the chief executive, “AIG had the ability to absorb the current volatility while committing the resources to grow and take advantage of the opportunities”.

Sir I must admit to feeling frightened by these expressions of nothing but sheer bigness.

Don’t just blame Basel II, Basel I where it started is also to blame

Sir Harold Benink and George Kaufman wrote that “Turmoil reveals the inadequacy of Basel II” February 28 and I disagree. Basel II has not even been fully implemented yet and what the turmoil really reveals is that Basel I is also inadequate.

Among other Benink and Kaufman recommends more discipline in the oversight by the markets but mention as a problem the lack of incentives for professional investors to use information in an optimal way. Of course they are right. What is the sustainable incentive in a system that no matter what the bank could think of a credit it is still the credit rating agency that calls the shots? The way out of this conundrum that I have been proposing for quite a while now is to include the minimum capital requirements calculated as current with the help of the credit rating agencies as a footnote and impose on the banks a minimum percentage of capital to assets requirement, for instance 8 percent.

Doing so would free us not only from the regulatory arbitrage that has stimulated banks to hide risks in other places but also from that systemic risk produced by the credit rating agencies and that has entities like the monolines sweating out ways of how to respond to crazy ultimatums type “you got five days to find capital or I downgrade you and you’re history”, something especially painful considering that if the credit rating agencies had done their job correctly in the first place the monolines would never have been in their current predicament.

PS. Update December 2012. When I wrote this comment I was not aware of how much of Basel II had been implemented in Europe and I had also since 1997 been expressing concerns about Basel I. 

Sovereign funds are not really that sovereign

Sir John Kay when arguing “Sovereign wealth investment is a force for stability” February 27 says “the lesson of history is that the problems are for the investor not the investee” and that “Investments across borders binds us together by creating actors with much to lose from political tension”. Both arguments clearly point to the fact that when push comes to shove, once committed to an investment, sovereign wealth funds are not really that sovereign.

These days the International Monetary Fund is drafting good conduct rules for the Sovereign Wealth Funds. I wonder if they should take the opportunity to include some good conduct rules about how the countries receiving the investments should behave… or would that infringe too much on someone’s sovereignty? There are arbitrage procedures to settle investor against country dispute but, do these apply in country against country cases?

The bank regulatory system risks turning itself into a Polish cavalry

Sir it is when Martin Wolf expresses concern over how the financial system works that he really makes it clear “Why Washington’s rescue cannot end the crisis story” February 27.

This is no ordinary crisis that requires an ordinary cavalry led by a John Wayne to rescue some poor pioneers from being scalped by the Indians. No, this is a much more serious affair that starts with having to question some of Wayne’s adjutants, the credit rating agencies, about their role in seducing capital inflows from foreigners to a non-existent El Dorado, by telling stories about great ratings around the world’s market-fires.

And so, to really end this crisis we need to revise the overall fundaments of the current regulatory system because if not, next time, our valiant John Wayne could end up commandeering something like the last charge of the polish cavalry against enemies much more dangerous than some yelling Sioux.

They have not even imagined how right they are

Sir having for more than thirty years argued about the dangers for the bathtubs of a small economies to lie completely open next to the global financial oceans exposed to their tsunamis I could not but fully agree with the general direction of Dani Rodrik’s and Arvind Subramanian’s “Why we need to curb global flows of capital” February 26.

Having said that I would much rather use the term “slow” than “curb” because it is the speed of how the financial resources move that causes the most damages.

But let me put forward a much more important comment. When the authors say that one should not be “too optimistic about the potential of prudential regulation to stem excessive risk-taking” they are more right than they have imagined in their wildest dreams or wildest hypothesis. In fact, it was precisely the running away from the risks, forced upon the financial market by the regulators through their minimum capital requirements for the banks and that was based exclusively on risk-assessments carried out by the regulator’s own outsourced risk overseers, the credit rating agencies that set us up to all what is currently happening.

Help the subprime´s go prime

Sir for a holder of a house mortgage the worth of it depends on the credit-worthiness of the debtor. For instance a thousand dollars paid each month servicing a mortgage during 15 years, when discounted at 11 percent per year, because the borrower is deemed “risky”, is worth only 88.000 dollars today, but exactly the same monthly one thousand dollars when discounted at only 6 percent because the borrower is deemed creditworthy, is worth 118.500…35 percent more! Herein lies one of the real problems of the subprime debtors… not only do they have less money but the little money they have is also worth less.

Lawrence Summers in “America needs a way to stem foreclosures”, February 25 speaks about the need for the creditor, when they “accept a write-down in the value to their claims, to retain an interest in the future appreciation if the homes on which they have mortgages”. This might be correct from an economist’s long term point of view but unfortunately bears little or no relevance to our mark-to-market accounting rules that do not look at future house values. Instead, was the creditor, when accepting a write-down, to obtain an additional guarantee that improves the rating of the mortgage, then the creditor could immediately cash in this on his balance sheet.

It is amazing how little money up-front can go a long way solving long term problems. If you want to go down memory lane, a similar principle was used behind the “Brady bonds” issued in the 80s to help developing countries manage their debts. Is it not time for some similar creativity to help your own citizens?

Sorry music industry, the ball is completely in your park

Sir in “The ISP police” February 23 it is when you say “The music industry meanwhile, must help itself and offer cheap, accessible downloads to expand the legal online market” that you get to the inescapable truth about the piracy of music at the internet.

For bad and for worse, the internet signifies and immense technological breakthrough and that has the power of changing society even more than music, something which as a true music lover it pains me to say.

We can not therefore hold back the society from fully exploiting the potential of the internet just in order to accommodate to the collection of music copyrights; much less can we afford to criminalize the hundred of millions of persons that are de facto and de jure infringing on copy rights; much less can we afford to dedicate scarce resources in the pursuit of these crimes when there are so many worse threats calling for our attention; much less can we afford to create in the music market another booming market opportunity for the entrepreneurs of illegal activities.

And so, sorry music industry, the ball, or in this case the song, is completely in your park

Recognizing you don’t either have a clue is a good place to start

Sir in your “Dangerous animals in the banking zoo” February 23 you suggest that the banks need traders with trading mentality in order to supervise the traders. This might indeed help to reduce some operational risks but, unless you have managed to tame those supervising traders into non-trader bankers the question then becomes who will supervise them.

Exactly the same fundamental approach as you are suggesting led the regulators to appoint the credit rating agencies as the knowledgeable risk overseers and see how far that has taken us. The credit rating agencies have now become themselves our largest systemic risk creator running around correcting their mistakes, downgrading here and there and placing ultimatums like “raise your capital in 48 hours or I will downgrade you”.

No, why do we not try something of the old traditional sensible stuff like not getting involved in something we do not fully understand and place through the banks professionals with sufficient moral standing to admit to that fact when it is true.

Come to think about it why does not FT give a good example and spell out that it does not understand it at all either, before suggesting we dig ourselves deeper in a trading hole.

Sounds like a lot of butterfly wing flapping!

Sir Marc Chandler in his “This is the rainy day Japan’s reserves are meant for” February 22 suggests that Japan should give $242bn of their reserves to the Japanese so as to boost the internal demand. Great idea! Pity though that bringing home $242bn while the sun is not really shining on the US economy sounds a fraction more than a butterfly flapping its wings and will cause some other effects to the economy of the world.

The credit rating agencies are private public servants.

Sir Jean-Louis Beffa and Xavier Ragot in “The fall of a financial model” February 22, describe the “present standard model of financial capitalism” as “mainly based on the self-regulation of the financial sector, which alone assesses the risks produced by its financial innovations”. Sorry, in what world do they live?

Currently the most important risk assessments are not provided internally by the financial sector but forced upon it by those outsourced risk-measure government bureaucrats we all know as the credit rating agencies. The fact that these agents are private does not make them less public servants

Careful with the systemic risks of supremacy

Sir Gillian Tett is at her most insightful self when she recurs to the background in anthropology to analyze the financial sector as she does in “CDO buffs who schmooze could resolve a financial mess” February 22.

Now if only she drew more on that background when drawing her conclusions then all would be great, since as she goes into a trance of supremacy founded expectancies wishing for schmoozing geeks or geeky schmoozers, we start to shiver thinking of an even worse generation of systemic errors than those that the credit rating agents are already providing the financial sector. No, humanities best and only hope might be that geeks and schmoozers don’t fusion into one.

A proposal for a reasonable regulatory forbearance

Sir Martin Wolf in “America’s economy risks the mother of all meltdowns” February 20 quotes Nouriel Roubini mentioning as one of the reasons that the Fed finds it so hard to head the danger off is that “regulators cannot find a good middle way between transparency over losses and regulatory forbearance”. I do not agree. It might not be perfect but a good way to start doing that would be to give the banks a longer time to adjust their capital requirements to the down ratings produced by the credit rating agencies on credits that should never have received good credit ratings to begin with.

I mean what is the need to compound the misery of the banks by forcing them to raise new capital immediately? To do so amounts almost to extortion that could only cause banks having to raise unnecessary expensive capital; which would do no one but some vultures any good. It is like the doctor suddenly informing a person that he has gained hundred pounds over the last two years and forcing him to shed that weight before next Tuesday. A scalpel?

If I were a bank president I would be raving mad with the regulators. First they tell me I have to raise capital in accordance with what their outsourced credit rating agents tell me and then when these go madly wrong they make me pay for it immediately.

Think tanks are also to be blamed for their lack of thinking

Sir Desmond Lachman from the American Enterprise Institute writes that “Greenspan will have to be called to account for regulatory failings and his interest rate policy” February 20. That might very well be so but others must also recognize their failings in the process. For instance not alerting to the abominable systemic risks that could be created by investing so much power over the financial markets into the hands of the credit rating agencies is more than proof that very little thinking occurred in the think tanks.

How the Financial Times got duped

If the Bank of England had decided to appoint some bureaucrat to rate credits for the purpose of deciding how much capital the banks needed to set aside in order to be allowed to give any credit I am sure the Financial Times would be up in arms screaming something about a bloody central planning. But by outsourcing these exact same functions to the private credit rating agencies, the central planners managed to dupe the Financial Times into believing that this was indeed the voice of the market.

In the letter from Michael Djordjevich “The lessons of the sad demise of bond insurance” February 19, we read “Rating agencies that held the key to the future of this industry accepted this concept of intertwining two basically incompatible risks”. I wonder what it will take for a Financial Times to realize that a bureaucrat is still a bureaucrat and a human is still a human prone to human error no matter if he is in public or private employment.

Sir, please help us to get the central planning monopolies that the outsourced credit rating agencies really are out of the financial world. In just a few years the credit rating agencies have managed to turn themselves into one of the biggest systemic risk the world faces.

FT should take care not to become a pink pamphlet

Sir with Ingram Pinn’s caricature “Olympic Spirit” February 16, which could easily have appeared in an extremist pamphlet, FT has let us down.

To even imply that the US qualifies to compete in the world league of torture (in this case waterboard) is to completely lose the perspective and play right into the hands of those foes of the US and of the rest of us who would love that to be so. I do fear this “without favour” of yours!

Assign to the diasporas a chair at the World Bank

Sir Michael Fullilove in “The world must adapt to diasporas” February 15, holds out that the “world would profit from developing an understanding…of diasporas issues” and I could not agree more.

As a former Executive Director at the World Bank (2002-2004) I believe that instead of wasting our time reshuffling the votes among geographically bound my-own-backyard interests, we need to assign one of the chairs at the board of the World Bank to the working emigrants community (and another one to the multinationals).

In 2007 the emigrant workers of El Salvador remitted to their homeland 3.7 billion dollars which, if this amount represents fifteen percent of their earnings means that their gross income was around 24.7 billion dollar. The official GDP of El Salvador, if we reduce it by the amount of the remittances, is then only 14.8 billion dollars. Now, you tell me ¿where is really El Salvador? Should not the Salvadorian diasporas have 50% of the seats on the Legislative Assembly of El Salvador?

Doing the same operation as above for the whole world we calculated that the Gross Diaspora Product is greater than that of the GDP of India, perhaps even China’s, and so why should not the diasporas sit at the executive board of a World Bank in globalized times?

Does FT have a conflict of interest?

In your editorial “Subprime chains” February 13, when writing about the wrong incentives that led to the current crisis; even asking for “regulation that increases the average size and stability of brokers”, as if size of a brokerage firm has anything to do with the accumulated stability of a market (if anything the contrary), you do not even mention the fact that had it not been for the good ratings given to the subprime mortgages backed securities by the credit rating agencies neither banks or brokers would have had neither the tools or the incentives to create any subprime mortgage mess.

I know that McGraw-Hill owns Standard & Poor’s. Does FT have a similar conflict of interest that could cloud its “Without fear and without doubt” with relation to the credit rating agencies?

An explanation yes, but not an excuse for the cowards

Sir John Kay is right when in “Bankers, like gangs, just get carried away” February 13, he puts the bank bosses role in perspective by arguing that “the gang leader, despite his apparently unquestioned authority, is frequently the prisoner of the gang members.” This applies to so many different realities, like one could currently even say that a hugo chávez is a prisoner of the hugo chávez gang. Let us remember though that this could serve as an explanation but never as an excuse.

The fact that it might be easier to pinpoint guilt on a Jérome Kerviel does not really mean that he is more guilty that all his superiors who delve in matters that are much harder to understand; since the not understanding a iota but not being man enough to be able to say so is what mostly lies behind this current financial turmoil.

FT seems not to want to see the forest because of the trees.

Sir your editorial “Ratings reform” February 12 shows that you like others quite stubbornly do not really want see the forest because of the trees.

You write it is ”meaningless to say that the ratings agencies were wrong in hindsight – the question is whether they made responsible use of the data they had in 2006 or early 2007”. Hold it there! This is not a question of given points for performance or style in a high jump contest. The credit ratings were empowered by the regulators to impose on the market their criteria not because they were going to responsibly use any specific methodology but because they were supposed to be right! If they cannot be right...who cares about whether they act responsibly or not... we do not need them...in fact the more credible they are the more the dangers that we will follow them where we should not.

Yes I do blame the credit rating agencies, who should as a bare minimum inspected a sample of the subprime mortgages offered as a collateral to see if they even belonged to the same universe of data they had before taking them as a good guarantee, but, much more do I blame the regulators who empowered the credit rating agencies to begin with and thereby set us up to extremely dangerous systemic risks.

Stripe the credit rating agencies´ powers

Sir “Ratings agencies move to restore the credibility” by Saskia Scholtes, February 7 and “Rating agencies face struggle to make the grade” by Michael Mackenzie, February 9 are but two of thousand of articles that refer to how the credit rating agencies will try to make amend and become better.

Unfortunately, our real underlying structural problem goes into the complete opposite direction. The more the few we have empowered to tell us about where to go get better at it, the more likely we all are to follow them where we should not go.

Allow for credit rating agencies, they are useful, but please stripe them from their artificial powers.

Would shorting England be acceptable?

Sir Christopher Caldwell concludes his “Why Kerviel is so unsettling” February 9, saying “The problem is not the rise of the super-empowered individual. It is that the super-empowered individual tends more and more to be an amoral individual.” He is right of course but how did we get here?

We have currently a system that allows for the creation of all kinds of amoral vested interests…like making profits out of an increased mortgage default rate, something not much different from having allowed Englishman to short England and created a group of nationals with a transparent and legal vested interest in Hitler winning the war.

Also when Caldwell refers to “What is striking here is the contrast between the mediocrity of the trader and the scale of the catastrophe” this is really peanuts when compared to the contrast between the super-sophistication of the financial wizards and the credit rating experts and the scale of our current catastrophe.

Unsettling indeed is how we settle to focus on Kerviel as our convenient scapegoat. Hang Kerviel we’re innocent!

Installing fire detectors at the insurers against fire

Sir William Gross is most probably right in that “Rescuing monolines is not a long term solution” February 8, but it might be an expeditious short term approach to buy us some time to find a solution or at least lower the temperature of an overheated financial system.

That the whole issue is tremendously confusing there could be no doubt. It all sounds like having to help the insurance company that covers your home against the risk of fire, to pay for the installation of fire detectors in their offices, so that they do not burn up and leave you standing alone on your yet unburned but still at risk of a fire property.

Narrow banks just reflect narrow minds

Sir, as the confusion that reigns in the financial world grows more people will hang their hopes on the alternative of “Narrow banking” which by restricting some banks to hold only liquid and safe government bonds is supposed to provide us a super-duper safe bank.

Let me sincerely doubt that just because we already show so much faith in governments and politicians accepting their currency based on their implicit well behaviour we are to be much safer by depositing those funds back with the same governments and politicians.

In the current bank regulations that emanated from Basel little is spoken about the almost conspiratorial subsidies to public debt that have been created by requiring so little bank capital to be held against it and that thereby also signals that the public debt does not carry risks. With such behaviours how surprised should we be seeing the current levels of public debt growing and growing… until the true reality of risk catches up?

What happens to the environment is indeed a risk that finance ministers should talk more about

Sir the finance ministers from the US the UK and Japan speak with one voice when in “Financial bridge from dirty to clean” February 8, they say that without a global investment framework built on market incentives the global deployment of clean energy technologies is going to be very difficult but they also note that not doing so will be very risky for us all.

Well this is exactly the sort of real societal risks that were ignored by financial regulators when they designed the minimum capital requirements for banks based on a very narrow definition of risk namely that of a default. If a default occurs because someone was trying to help the planet it would seem like something more acceptable to the society if there were no default but the bank was financing the purchase of a new car that will produce more carbon.

It is not that I am saying that banks should take stupid risks in environmental protection projects…but neither should finance ministers through their regulations create non-transparent subsidies for what just the credit rating agencies believe are low risk projects while ignoring all other risks faced by humanity.

If a bank lends a AAA corporate client a 100 dollars the bank need 1.6 dollars in capital if it lends to riskier below BB- reacted environmental project the bank needs 12 dollars in capital. Is this what the minister’s mean with market incentives?

Basel II just keeps digging the hole of Basel I

Sir, Charles Freeland a Former Deputy Secretary-General of the Basel Committee on Banking Supervision considers “Basel II a big improvement on outdated model” February 7, and the outdated model he refers to is Basel I which has been in place for only about ten years.

I do not think it of Basel II as an improvement but jut as a further digging ourselves into a very dangerous hole. Now, instead of going back to the freedom of the markets, besides keeping on using the outsourced bureaucrats of the credit rating agencies to measure risk (Basel I) we are with Basel II also allowing some big banks to do their own internal risk modelling, and this even when we have recently witnessed how much intrinsic risk these models create by themselves and how bad they can really be. This is all plain crazy!

I would much prefer setting an 8 percent minimum capital requirement on all the credits (including those to the public sector) and assist the market producing the information it needs to take it from there.

And, just to make certain we do not put all the eggs in the same basket, I would start thinking about a progressive tax on the size of the banks. “The bigger you are the more it will hurt if you fall on me and so the higher must the insurance premium I charge you be”

But why should we keep the financial sector caged?

Sir Martin Wolf explaining “Why it is so hard to keep the financial sector caged” February 6, gives us ground to ask… are we supposed to cage the financial sector?

Besides offering a safe passage for our savings is not the financial sector also there to assist the society in the generation of decent jobs and the distribution of opportunities?

We have for soon two decades been led by the bank regulators into a risk-adverse frame of mind that carries with it significant other risks.

I hold that instead of minimizing risks, which one could do at least on paper by not taking any risks; and instead of focusing only on the possible crisis event, we need a much more holistic view and that at least starts by measuring the full results of the boom-bust cycle to see if, on the whole, it was worthwhile for the society at large, and most specially for future generations.

The Financial Times has teamed up with the International Finance Corporation (IFC) which is part of the World Bank Group to offer "The Sustainable Bank of the Year Award” and where it recognizes "the bank that has shown excellence in creating environmental, social and financial value across its operations." It is a great idea but why not take that opportunity to reflect upon that none of those worthy goals receive any incentive from the regulator, who's only concern in life is lessening the risks.

Not to risk anything for nothing is much worse than to risk all for something. Let us never forget that risk is the oxygen of development and that “No woman no cry” was not written for us to stop crying.

The irony of it all is that the regulator in all their risk/adverseness also created those new sources of systemic risks that have acted as detonator for our current turmoil; namely the empowerment of the credit rating agencies as their outsourced bureaucrats in charge of measuring the risks; and whom the markets blindly followed into subprime quick-sand laden swamps.

Harmonizing also carries its risk

Sir Francisco González is most probably a great banker and I suppose he can tell us a lot of “What banks can learn from this credit crisis” February 5. Unfortunately both he, as a banker, and just as the regulators are, find themselves to close to the trees to see the full forest.

For instance when Gonzalez speaks in favour of more harmonization it sounds oh so sweet, but I shiver, because history has told us that humans run almost the same risks of harmonizing around good ideas than around bad; and so the expected result of it all is less volatility…until a very big bang. Exactly the same way we got into our current mess…credit rating agencies were doing well, we left down our guard, and to the floor we went, knocked down with some really crazy prime rated subprime mortgages.

As I see it the only financial regulations that really works is to install the continuous questioning of it all, and to but your eggs in as many baskets as possible; even though a Mr González running a super-basket may not particularly like it.

González consoles us with “the good news is that the crisis has exploded during a phase of robust global economic growth and before it could produce long-lasting damage”. Yes, let us all pray that he is indeed right, but never without forgetting that this could just as easily have happened under much more dire circumstances.

Clarity about what?

Sir Michael Mackenzie and Stacy Marie Ishmael report that “Moody’s offers to change debt rating system” basically substituting a number up to 21 for their current letters, presumably to increase clarity. Clarity about what? Risks? In that case the more confusing the reporting system perhaps the less prone it is to transmit the sense of clarity and exactness that does not exist. In this the current system is more adequately confusing.

FT Sustainable Banking Awards

The Financial Times and IFC have teamed up to create the following competition.

"The Emerging Markets Sustainable Bank of the Year Award recognizes the emerging markets bank that has shown excellence in creating environmental, social and financial value across its operations."

Sounds great but, if creating environmental, social and financial value across its operation is as I gather the promoters believe a worthwhile goal, then why do they not ask the regulators to send clearer signals about it to the banks in the emerging nations.

From what we can observe the regulators are currently signalling minimum capital requirements based exclusively on the reduction of risks as perceived by those outsourced risk surveyors we know as the credit rating agencies.

But if you want to give incentives so as to obtain the results the promoters seem to wish, then you might be better of sending clearer signals than those of a competition. For instance why do you not set up minimum capital requirements based on the rating of environmental, social and financial value creation? And, if you do, why not throw in something about job creation too, which also seems something quite worthwhile for the banks to do.

That is if course unless all what is meant when referring to sustainable is solely the sustainability of the banks themselves.

Don’t blame Basel II, it’s Basel I that got us here!

Sir, you are publishing many letters, like for instance on February 4, that blame Basel II for our current financial turmoil. Not true. The genesis of it all lies squarely with the original Basel Accord and its first implementation, Basel I. That is when our regulators decided to enforce a system of minimum capital requirements on the banks and to empower the bureaucrats of the credit rating agencies as their outsourced risk surveyors.

The whole Basel affair is just another example of the dictatorship of information and knowledge that places all the decision in hands of specialists whom in this case, with the usual arrogance of specialists, thought they could control risk and completely ignored that there is nothing as risky as the risk you believe you have under control.

What do we learn from this all? The same old lesson! Listen to the experts but do not, under any circumstances, give them power to control it all, as that will, by virtue of incestuous degeneration, put in force uncontrollable and very dangerous forces.

Should we freeze the ratings too?

Sir Aline van Duyn in “Stakes in the ratings game are being rapidly raised” February 2, describes very well the consequences of our financial regulators having empowered financial Frankensteins to tell the world about where the risks were. How do we now rein them in?

Perhaps having thought about interest rate freezing it could also behove us to take a closer look at the freezing of ratings? I mean what useful purpose could it serve getting all the bad news simultaneously when we can’t really digest them rationally? Especially since they are in fact really old news since they should never have gotten their good ratings to begin.

And US, get yourselves some more helpers too!

Sir Ricardo Hausmann tells the US “Stop behaving as whiner of first resort”, January 31; do not give “the US consumer more rope with which to hang himself”. Hear hear!

But as Hausmann says not only should the US not bet all on finding a dream-adjustment like reducing the over-consumption in the US “in a way that does not hurt longer term growth” by looking at what others (China) could do for it; it also needs “to keep on growing”.

The US has to be careful that the reduction of consumption does not diminish its size, since it is not only a matter of getting back into equilibrium; it is also about being able to take care of the outstanding stock of debt. And so “Stop behaving as a whiner and get yourself some 40 million more working immigrants to help you out!” could also be a valid message.

I ask why industrial China should be able to use rural China for their growth and not North America Central America.

Congratulations Basel?

Sir Ira Sohn in” Without Basel II it could have been so much worse”, January 31, says "thanks in part, to the Basel II regulations... a global systemic failure was averted". Come on! Be real.

Haven’t the authorities of Basel done enough of self-congratulation over the years to enlist what can only be explained as a spin doctor or a silly fan, and even managing to enlist FT in that?

Of course it is good that banks should take account of the pillar number 2 of Basel II that has to do with operational risks; especially since those rules should have been applied without any Basel regulation; and especially since more operational care might have even been retarded by the regulator not including it in Basel I and forcing banks to focus on other things.

But, what about the other 2 pillars? Pillar 1, the minimum capital requirements based solely on risk as measured by the credit rating agencies, drove the bank risks into no man land with doubtful guides. Pillar 3, market transparency, sounds now only as a bad joke when no one in the market seems to be in a position to understand what on earth is going on.

A tsunami is riskier when in a bathtub

Sir, Robert Wade is absolutely right saying “Speed bumps needed to slow down capital flows” January 30. The biggest risk for the small bathtubs that the financial systems of the small countries represent, is not the drying up because for lack of water, but the drowning as a consequence of the tsunamis that the global financial oceans repeatedly generate.

Once again going alone!

Sir Martin Wolf’s warning that “Bernanke’s big gamble on reflation may work to well” January 30, is right on the dot in that the US should have first made certain that the rest of the world would collaborate before wandering off in the wilderness like a macho-do-it-yourself-cowboy.

Also for the US after so many years of liquidity injections I would prefer watering their identifiable problem sectors, like housing, with individual applications, micro-jet, instead of using a big hose, since before working sufficiently the land with that confidence building that allows it to absorb the water, the risks of flooding are large.

Authorized trading could be even worse than not authorized trading

Sir Frank Partnoy does quite well to remind us that for a shareholder a dollar lost is a dollar lost independent on whether it comes from an authorized trade or not, “Kerviel is just a part of a global rogue’s gallery”, January 28. In fact one could make the case that the huge losses on duly authorized but never really comprehended investments are much more worrying.

Come on what about that stiff upper lip?

Sir your “How to deal with sovereign wealth” January 28 reads like you are being very nervous about the sovereign wealth funds; asking for a code of conduct that would put order and limits on what these monsters could do to you. Come on what about that stiff uper lip?

Suppose these funds do not behave? Do you really think there would not be a market response to that? Would a Saudi Citibank or a Chinese Microsoft be able to keep the value of these companies in your markets if they are seen as having bad intentions?

This is a moment when the world really needs these capitals to recycle and help out and, if there is really anyone who would like to see a code-of-conduct it might very well be the investors who could want an assurance that your nationals will give them the most favoured investors status. By the way your editorial might very well have reduced in some billions the price they would be willing to pay for those assets they are thinking of buying.

Long live the Balkanization of criteria!

Sir "Davos call for end to fragmented financial regulation" is a first page story on you January 26 issue since Malcolm Knight the chief executive of the Bank for International Settlements complained about "the Balkanisation of regulation". Mr Knight might have a point, but, long before that discussion, we need to fully deal with the issue that the detonator for the current crisis was his institution's empowerment of some few credit rating agencies and their methodologies; and which resulted in giving the subprime-mortgages backed securities the wings to fly all over. From this perspective, a Balkanisation of criteria is also urgently called for. 

Yes of course, put some order in the house, nothing wrong with that, but, please, not by trusting some governess ordering your children telling around. Haven't you seen what monsters you have contracted? "Put up a couple of billions before next week or I down-rate you!" (Where is Maria?...The children need her!)

PS. In a statement delivered as an Executive Director at the World Bank on April 3, 2003 I wrote: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

FT should not lend support to the sophisticaters!

Sir in “The start of the great unwinding” January 26 you say “Complexity also adds to the dangers that any part of the hyper-financial system can bring down the whole” and you are right. Nonetheless, you follow it up by saying “Monoline insurers exemplify this kind of reef under the water” and this is clearly wrong; since having some undercapitalized insurers selling coverage while their good fortune last has nothing to do with complexity.

Many of us warned repeatedly about the counter-party risks with agents such as the monoline insurers and the reason it was hard to get that message heard was that it was so easy for them to find in their sleeves the sophistications that confused the issues and killed the debates. FT should not help the market to hide within the complexity in order to hide the simplicity, and perhaps a non-Davos retreat to reflect on what are the simple and time-honoured truths that lie behind the current turmoil could be a good place for you to start.