Arrogance

Sir, With respect to Company X’s pension woes you inform that the company recorded a return of 5 per cent in the first half of the year, putting it on track for its assumed annual return of 9%, but, that if X’s pension funds produced the same poor returns as equity and bond markets this would of course have a dramatic negative impact. What is thereby implied makes a case for developing a formula that calculates how much arrogance a X and so many others must need in order to put forward an assurance of being able to earn 9% on funds over a lifespan, and/or that it will continuously be able to beat the market.

A de-facto USA enlargement

When we read that in the greater Washington metropolitan area alone, there already are 550.000 persons who come from El Salvador, there can be no doubt whatsoever that the Central American countries are already a de-facto part of an extended USA Commonwealth. Put another way, the USA—surreptitiously perhaps—has gone through its own European-style enlargement. This demographic fact shows that the current debate in the USA on immigration reform could benefit by being split into two parts: immigration reform as such; and a debate about some laws and regulations affecting cohabitation in a commonwealth. Doing so would allow urgent reforms to proceed more constructively and keep the debates from being taken hostage by extreme proposals like building new Maginot Lines or Berlin Walls.

Not long ago, some enemies of the recently negotiated CAFTA agreement started spreading rumors that, through it, the United States had accepted conditions that in effect bypassed current immigration laws. This is not true, far from it. However, perhaps the CAFTA negotiations were indeed the perfect opportunity to start open and transparent discussions about what I call the de-facto enlargement of the USA. As it is, trying to look for solutions to some huge but still quite particular problems through a general immigration law is really picking the wrong instrument of change.

By the way, if I were a truly desperate builder of a wall to surround the United States, looking at the map, I would perhaps have to settle with some water barriers such as the Bering Strait and the Panama Canal.

Sent to Washington Post, April 2005, destiny unknown

migration Cafta border

Today, unfortunately, I am truly disappointed with FT

Sir, I am absolutely flabbergasted with Andy Webb-Vidal’s report “Chávez puts chocolate factories back on map” and that praises a “cocoa revolution” and concludes that for a “small chocolate factory in the tropics, life has never been sweeter.” I cannot understand how a sophisticated paper like FT would fail to identify that this is but another perfect example of how haphazardly leaders of developing countries, especially when their egos are insufflated by a well endowed checking account fed by the oil, can come to consider themselves as visionary economic planners and perfect substitutes for the decision making process of the private sector. You’d be surprised by how many exact replicas of this chocolate project you could find over the last five decades in Venezuela and, in fact, when we read about “reopen a derelict chocolate factory”, it could very well be referring to a project that might initially have been advanced in exactly the same way, by for instance a Carlos Andres Perez government, 1974 - 1978. It is so sad that you fell for the anecdotal Willy Wonka cuteness of the story, instead of writing it from the perspective of a country in desperate need of some rational economic behavior. The need for a strong and effective government that helps to create a climate propitious for investments cannot be satisfied by a government making the investment themselves.

Sent to FT, September 27, 2005

Europe, you need electrical, not financial engineers (like me)

A couple of years ago when the hundred-year-old private electric utility company that served my hometown (a South American city) was taken over by an international player, it became within a short time leveraged up to its hilt in debt, and I suspect also with poison pills and golden parachutes, and I knew we were heading into the wrong direction. 

When I now read about all the consolidations in Europe, which can only distance consumers from their day-to-day local electrical engineers and place their needs in some distant foreign trading rooms, 

I feel the same, although clearly, if Europe is now an all-of-the-same Europe, I could be wrong. What I do know, though, is that all those high valuations paid by financial wizards purchasing utilities will, sooner or later, need to be repaid by all those European electricity consumers who are currently living in blissful ignorance.

Sent to FT, September 8, 2005

It’s an oil boom stupid!

Sent to The Economist, August 30, 2005, destiny unknown

Sir, In March 1999, in “The next shock?” The Economist wrote that “in today’s conditions the price [of oil] would head down towards $5 [per barrel]” Now again, for the umpteenth time, The Economist, so serious and clearheaded in most issues, loses it all when it comes to oil. In “Counting the Cost” of August 27 and even while assisted by a clear chart of the real prices of oil in 1980 terms, your editorial staff insist on labeling an oil crisis when the index is getting close to 100 and not when that index in 1998 dropped to only 20. That was the real oil crisis, and that is what the world is paying for today!

To top it up, The Economist seems also to be preparing the terrain to blame oil for the collapse of the high property prices that they duly classify as a “boom”, instead of looking at much more plausible culprits. Come on, we expect more from you.

Take note, the Cold War might be back in town!

Sir, On July 13th the House Armed Services Committee in Washington held a hearing on the potential national-security implications in the possible merger of the China National Offshore Oil Corporation with Unocal Corporation. It is not our role to qualify what was discussed but hearing so many arguments about energy survival, rumors of cadres of spies and of bad and conspiratorial intentions all so eagerly and emotionally juggled around, we wish to advance the possibility that, as of this date, the Cold War is back in town. Take due note!

Sent to FT, July 13, 2005

What is lacking in the Sarbanes-Oxley Act

Sir, Requiring all senior management and board members of companies to disclose publicly what they understand and what they do not understand of the business they are in charge of would do wonders for corporate governance, especially when we start hearing so many cries of ‘I did not know’. For instance, when using sophisticated financial instruments such as derivatives, we could suddenly realize that no one upstairs has a clue of what they, the experts downstairs, are up to, and this could be a quite instructive for the market and the credit-rating agencies when they assess the risks of a corporation.

By having clues I do of course not refer to any specific know-how needed to take apart and put back a carburettor, as very few would be able to do that, and in fact I am not even sure carburettors any longer exist. No, what I refer to is whether they to have a good working knowledge of some basics, like how a car drives, how it brakes, how much petrol it consumes, and what to do if a tyre explodes or an airbag suddenly inflates.

To oblige recognition and acceptance of where the buck really stops both in theory and practice and before mishaps occur could also be useful for shedding light on some systemic risks that, like lava in a volcano, might be building up dangerous pressures underneath the world of finance. It could also provide immediate relief to all those executives living out there, burdened with the constant stress of having to feign that they are in the know.

Sarbanes Oxley SOX corporate governance accounting

Migration is much more important and transfer fees much less so!

Sir, in today’s editorial, June 10, The Global Workforce when mentioning that it refers to 3 percent of world population you are really underestimating the importance of current migration since, in some countries, more than 40% of their able workforce has migrated. Also you fall into the trap of making a big fuss about financial institutions “creaming” off large commissions on the remittances sent home by migrant workers. Honestly, in the life of a poor migrant these commission are just the smallest of their problems and had many developing agencies not spent fortunes navel-gazing this particular issue, they would have been able to advance much more in solving real problems and in helping to develop know-how about workable temporary legal migration programs. The expensive transfer fees that do not only affect migrants will be taken cared of in time by the time-honored tools of competition and technology.

migration
remittances

Come on Europe, wave away gloom

Published in FT, June 8, 2005

Sir, For those who believe that the world needs Europe more than ever, the latest events are very disconcerting, not so much because of the No votes themselves but more so because of the ensuing reactions.

 

What a gloom! After the incredible advancements of a Europe over past decades it is unbelievable how this little setback could create so much fuss. 

The votes on a messy, too voluminous, uninspiring and basically unreadable document, was an as- good-as-it-gets opportunity to grunt a bit about bureaucracy, but now they allow the same bureaucrats to deflect this perfect valid criticism by equating the votes with a rejection of Europe. 

Europe, pick yourself up! Just wrest whatever Delacroix’s flags are waived from the current bearers, and keep moving on. We will be cheering.

We need a more win-win CAFTA

Sir, You rightly lend your support to the Central American free trade agreement, CAFTA, especially since not doing so would make it seem like you are joining the ranks of those opposed to free trade and also because in today’s world any relations are always better than none. Nevertheless, you need to reflect more closely on the reasons why it is so difficult for CAFTA to gain general acceptance and why, if finally approved, it might not be able to deliver on its promises.

CAFTA, as all trade negotiations in vogue, concentrates basically on how to split the ever shrinking cake of manufacturing and agriculture; how to impose a stricter respect for the intellectual property rights of the developed nations; and how to be able to enforce it, but, as often happens, it shies away from treating the issues that really seem to matter for the future. When currently 40% of Central America’s workforce works abroad, mostly in the US, mostly in services, it should be clear that it is really in the area of services and immigrations that these two partners need better and more generous free trade pacts. For instance instead of exchanging a few textile jobs that could soon anyhow be lost to other places of the world, why do not the partners look for economic growth and jobs in areas such as health and attending the needs of the rapidly aging population. That seems much more like a win-win CAFTA to me.

CAFTA services

Market risks and counter-party risks, they all live in the same world.

Sir Mr. Greenspan recently reminded the participants in the derivatives markets that the counter-party risks are still linked to the market risks, one way or another, which is true, whether you wish to ignore it or not. As we all operating more and more in one single world market it behoove us to remember that if you insure your office property against fire with an insurance company that happens to own the building where your office is located, then, if fire breaks out, your insurer might be in much worse shape than you.

A sensible country would raise tax on petrol, so what is US waiting for?

Published in FT, April 2, 2005

Sir, it is hard to understand the United States of America!

It has a huge fiscal deficit; it has a huge current-account deficit; it is by far the world’s biggest oil consumers both in absolute and in relative terms; now willing to explore for oil and gas in Alaska, it shows itself to be aware of the difficult energy outlook the world faces; it seems aware and resolute about the environmental problems (ignore the Alaska part) as it imposes other expensive environmental regulations, such as recycling—which, as no one likes to do it, requires the hiring of Salvadoreans; it speaks all over the place about having to reduce the vulnerabilities of its oil supplies. 

As any other sensible country would, in similar circumstances, increase the taxes on petrol consumption and substantially help to solve all the above-mentioned problems; and as the US has always shown willingness to pull together as a nation, recently even to the extent of going to war on shaky grounds, the big question remains: why is it that the leaders of the US do not even want to talk about a substantial tax on petrol?

Give us a dam index!

Most of the recent discussions around the proposed Nam Theun 2 hydroelectric project in Laos have been centered on the income it might generate and how it is to be distributed. These are indeed important issues but we should also to consider whether the project could have a positive environmental impact in as far as it replaces other more contaminating energy sources… regionally. I am no expert in dams but having had the luck of being able to visit and fly over this particular site, I must say it seemed a good site for a dam, when compared to other places. Let my be clear, I am absolutely not an expert on these issues, not even an engineer, but sometimes I trust more my layman eyes than those experts who are looking through glasses colored by interest.

That said and as an ordinary citizen who just wants to be able to understand, I surely miss the fact that the experts have not been able to develop an index that classifies prospective and existing dams in terms of the harm they can do to environment. With such an index it would be easier for all us to know when we should not waste time fighting against a new project and when we, in compensation, should instead ask for the decommissioning of an old dam. Behaving like green bullies or environment chasers, hindering developing countries from accessing hydro power, just because we can, is not how the world is going to solve its extremely urgent environmental problems.

Nam Theun 2 environment hydroelectricity

So that Argentina will not have to cry, again

Sir, If Argentina, in a sovereign way, would just offer to include in the current restructure a little clause that states that if they were ever to take on new foreign public sector debt, all of it’s outstanding foreign debt would come due, then the future of that great country would truly shine bright.

As is, the recipients of any new exchange bonds will worry that the debt alleviation given will again tempt foreign investment banks to build up new short term exposure; as is, the argentine citizens will only have to brace themselves for history to repeat itself. Today more important for Argentina (and many other) than to solve its current debt overhang is to make sure it does not happen again. Doing so will open up investment flows to the private sector, Basel [Committee] willing, the only sector where these flows should always have gone to.

Sent to FT on November 24, 2004

Basel is just a mutual admiration club of firefighters seeking to avoid crisis

Published in FT November 18, 2004 The link is gone! You will find the copy below.

Sir, If a citizen from a developed country wishes to obtain finance from his local bank to buy a pricey retirement home in his local overheated market, then Basel poses no problem.

But should he want to buy a much more affordable home in a developing country and have his bank finance him, then Basel slaps such capital reserve requirements on the bank as to make it an impossibly onerous proposition.

This is just one way by which our bank supervisors in Basel are unwittingly controlling the capital flows in the world.

We also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.

Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters trying to avoid bank crisis at any cost - even at the cost of growth.

PS. Another letter in FT 2006: “IMF cannot be the independent central bankers’ clubhouse.” 

PS. Just before the fall of the Berlin Wall, statist/socialist/communist regulators, decided banks need to hold zero capital when lending to the governments in their domestic currency but must hold 8% when lending to their unrated citizens.

PS. To top it up: It is what’s perceived as safe which is most dangerous to our bank systems.

PS. Here my 2019 letter to the Financial Stability Board

PS. Here my 2019 letter to IMF: Risk weights are to access to credit what protectionist tariffs are to trade, only more pernicious.

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

PS. 2025 AI: The Western Civilization, does it align with the risk aversion expressed in the Basel Committee’s risk weighted bank capital/equity requirements?

PS. Here are my dialogues #AI ChatGPT – Grok, about Basel's risk weighted bank capital requirements.

Towards a countercyclical Basel?

Sir, the financial system is there to safeguard savings, to generate economic growth by channeling investments, and to promote equality by providing full and free access to capital and opportunities.

Currently, our bank regulators headquartered in Basel are primarily concerned with the first goal, that of avoiding bank collapses, and how could it be otherwise, if you have only firemen on the board that regulates building permits.

Now, one of these days, the financial system, neatly combed and dressed in a tuxedo, but lying more than seven feet under in the coffin of financial de-intermediation, is going to wake up to the fact that it needs the presence of others in Basel. At that moment, perhaps we might start hearing about flexible capital requirements, moving up to 8.2 % or down to 7.8% by region, in response to countercyclical needs.

Meanwhile it’s a shame that even their first goal might turn out to be elusive, since although the individual risks have fallen with Basel regulations, the stakes have increased, as those same regulations accelerate the tendency towards fewer and fewer banks. 

PS. This letter that, while being an Executive Director of the World Bank I sent to the Financial Times. It was not published. But, because of its importance, I included it in my book Voice and Noise of February 2006

Big Responsibilities

Published in FT May 29, 2004

Sir, The Big Four accounting firms became that big by marketing the value of their size. Now they want to have their cake and eat it too, asking to be sheltered from ruinous lawsuits. If accountability is to mean anything in accounting, we cannot afford to turn the concept of professional responsibility into a risk model of affordability.

Individual professionals and small firms lay their names on the line, day after day. If the Big Four cannot handle it, they had better let go. Then we might all be better off. At least the systemic risks will be smaller.

Hurrah for the Queen!

Sir, facing the need of a career move, it was interesting to read in The Economist, two weeks ago, an announcement, by the Buckingham Palace, requesting an Assistant Private Secretary to H.M. the Queen. I finally did not send my c.v. to www.royal.gov.uk., not because it was not tempting, but because I thought that although I could offer good global perspective on many issues, the Queen might really be looking for someone with more local know-how (cricket) than what I (baseball) could provide for.

That said, Buckingham’s announcement is noteworthy as it evidences that, even in the Monarchy, good governance issues are deemed so important that they include the statement “The Royal Household is committed to equality of opportunity”. And so, in terms of transparency and equal opportunity in hiring, how does the IMF currently stand up in its search for a Managing Director when compared to the British Monarchy? Perhaps, even though born republicans, should not refrain from a “Hip Hip, Hurrah” for the Queen.

Sent to FT, April 17, 2004

The search for transparency in an oil-consuming world

Published in Financial Times, December 24, 2003

Sir, There has been a lot of talk lately about a curse that, through corruption and other distortions, is stopping oil-rich countries from turning income into development. The Extractive Industries Transparency Initiative, championed by the UK and endorsed by the World Bank, has been named an exorcist and is starting the rites by applying a much-welcomed transparency to projects such as the Chad-Cameroon pipeline.

In the name of that same transparency, let us also remember that for every $1 received by any oil producing country (which forever sacrifices a non-renewable asset), the public treasury of many oil consuming countries receives, net, at least $4 and is therefore a likely victim of the same curse, albeit stricken by different symptoms. For instance, in many oil-consuming developed countries, the curse has now created such an addiction to petrol taxes that their whole fiscal structures would be completely unsustainable without them.

Transparency would also, perhaps, not be a bad rite to use to exorcise this tax man’s curse, since most of the petrol consumers in these countries are not remotely aware of the real extent of the taxes and much less of how the proceeds are used.

For instance, having been told that these taxes were environmental, they would be surprised to learn that probably less than 0.5 per cent of the $100 bn collected yearly in Europe, just in taxes on lead-free petrol, goes to the environment; and, worse, that much of it goes in subsidies to the even less environmentally friendly coal.

Also, today, as the possibilities of satisfying the world’s demands of energy seem quite uncertain and the world becomes more aware that the final cost of cutting, or not cutting, the trees of the Amazon will be paid by all, whether they like it or not, it is clear that the world needs to become much more penny-wise when developing alternative energies; and we all know that the best and only companion of the penny-wisest is transparency.

So, after the pipelines, when do we start with the Exchequer’s bag?

PS. I don't find any longer the letter on FT's web so I will scan a copy of it when I find it. It was reproduced by OGEL too

Credit ratings for developing nations are just a new breed of systemic error

Published in Financial Times, January 11, 2003

Sir, Except for regulations relative to money-laundering, the developing countries have been told to keep their capital markets open and to give free access to all investors, no matter what their intentions are and no matter for how long they intend to stay. Simultaneously, the developed countries have, through the use of credit-rating agencies, imposed restrictions as to which developing countries are allowed to be visited.

This Janus syndrome – “you must trust the market while we must distrust it” – has created serious problems, not the least by leveraging the rate differentials between those liked and those rejected by our modern-day financial censors. Today, whenever a country loses its investment grade rating, many investors are prohibited from investing in its debt, effectively curtailing the demand for it just when that country might need it the most.

Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is. 

PS. At the World Bank, April 2003, I made a similar point: "Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"

PS. Also included in my 2006 "Voice and Noise"

PS. In 2008 the GFC detonated with AAA rated MBS and assets covered by AAA rated AIG’s default insurance, because at that moment European banks and American investment banks needed to hold only 1.6% in capital/equity against these assets… a mindboggling leverage of 62.5 to 1.