But a share is still (mostly) a share… it’s attractive

Sir, John Plender in “There can be no return to ´normality´ of a freakish bubble” August 30, mentions that “in the midst of all this, many investors are baffled that equity markets have not been seriously damaged”. The explanation for this should be quite clear though, in this freakish market, at least for the time being, a share is still mostly a share, and you can see its value quoted daily, so when you compare it to all those fancy investments where your advisors is currently asking for more time to figure out what it could be worth, give and take 20%, no wonder a share looks attractive.

But we still need to be rescued from the central bank's regulating follies

Sir though I agree completely with Martin Wolf in that "Central banks should not rescue fools from their folly", August 29, we should not forget that at least we need someone to rescue us from central bank's regulating follies. It was because the regulators appointed, certified and in some ways even forced the market to heed the opinions of some special inspectors, the credit rating agencies, which allowed for instance some worse-than-subprime very local mortgages to be classified as non-lemons, enabling them to go global and spread their rot.

Barack Obama is looking in the wrong direction

Sir, Barack Obama in “Fine unscrupulous mortgage lenders” August 29, believes that “the implosion of the subprime lending industry . . . all started with a good idea – helping people buy homes who previously could not affor to”. He is seriously mistaken.

What catapulted some lousy awarded mortgages (forget about calling them subprime, they are much worse than that) into a global financial problem was that some credit rating agencies have been too much empowered by the banking regulators to do their oversight.

If we do not fix that, then next time around our problem might not be with mortgages but with something even much worse.

But the regulators should have known!

Sir, Charles Calomiris and Joseph Mason are exactly right when in “We need a better way to judge risks” August 24, they say that there is no “use blaming the rating agencies, which are simply responding to incentives inherent in the regulatory use of ratings” and recommend that we just have to avoid “settings standards for permissible investments by regulated institutions”.

Now it is most important that we understand that the real reason for abandoning the regulatory enforcement of the use of the credit rating agencies is not because the credit rating agencies have been bad at what they have been doing, the subprime mortgages is a big exception of course, but the simple fact that the better they get; and therefore the more we would tend to automatically follow their opinions and the harder it would be to express contrarian views, the higher the risks that the world will encounter some systemic risks of truly catastrophic proportions. And that the regulators should have known.

And why does not the US use the World Bank for their infrastructure needs.

Sir, Felix Rohatyn and Warren Rudman in their “Federal action is needed to rebuild America” August 23, come out in support of a proposal for a new bank to address “the critical needs of infrastructure”. This. at least in Rohatyn’s case, being from the private sector sounds a bit surprising. But, if they are right, why would the US need a new bank for that? … when there is International Bank for Reconstruction and Development, IBRD, better known as the World Bank.

Not only would the US by using the World Bank set a great example and help to scale that institution for some really big globalized action that might be needed but also, at least for a start, the World Bank would probably be quite covenant lite… sorry I mean conditionality lenient with the US.

Misleading advertisement

Sir, on FT’s front cover you announce Clive Crook’s “The next financial crisis starts here” August 23 with the phrase “Punishing the real culprits”, It turns out to be misleading because even though Crook mentions “stamped AAA by the credit-rating agencies” which of course was what catapulted some local bad lending policies into a global financial problem, nowhere does he mention those who empowered the credit-rating agencies to has such an influence, namely the bank regulators.

But what are the non-professionals to do?

Sir Krishna Guha in “IMF warns of risks to global growth” August 22 reports that John Lipsky, the number two official at the International Monetary Fund, seemingly quite unseemly washing his hands in relation to the issue whether the credit rating agencies have done their job well said “The basic issue is that in the end, professional investors bear ultimate responsibility for risk assessment and management in a securitised market. It is not realistic to expect third parties to take that responsibility.”

There is of course nothing to object to that statement, c´est la vie, but it clearly leaves a question or two about what to do with all those who are not professional investors or that just thought they were and who followed the advice of the credit rating agencies just as the bank regulatory authorities, and the IMF, told them to do. Is the IMF now arguing for two lender of last resort now? One booth for the professionals and one for the credit rating agency followers?

It is not about to little or too much but about the right or the wrong regulation

Sir, Barney Frank, the chairman of the House Financial Services Committee says in “A (sub)prime argument for more regulation” August 20, that “the subprime crisis demonstrates the serious negative economic and social consequences that result from too little regulation”. He is wrong. The question should not be about too little or too much regulation but about the right or the wrong regulation. At this moment there should be no doubt that what leveraged the very local subprime mortgages problem into what seems to be a global crisis, was having empowered the credit rating agencies to explicitly or implicitly impose so much of their criteria on the markets, and that was ordered by the regulators.

I am not against credit rating agencies. Of course I will use them. But please unshackle the markets from having to use them.

On calling the credit rating agencies poker hands.

Sir, Roger Blitz in a “Harvard professor flushes out answers to life’s hard calls: poker” August 18 reports that Charles Neeson, a Harvard law school professor will set up some “global poker strategic thinking societies” around the universities arguing that “poker teaches people to think for themselves.” What an extraordinary sense of good timing, I mean now when the credit rating agencies have been called out on some of their strongest AAA bluffs and investors have to start to think for themselves again.

Unshackle us from the credit rating agencies…please.

Sir, Gillian Tett in “Fears of crash unfounded – for now” August 18 describes very well the origins to the current market turmoil tracing it back to the American housing markets. Unfortunately she leaves out what is the most important fact we need to be aware of and consider, that is if we want to keep that “for now” where it is.

It was primarily an excessive confidence in the risk assessment done by the rating agencies that managed to catapult what should have remained a small local problem of badly awarded mortgages, into a global mass-confusion. And that excessive confidence sprang foremost out of the fact that our regulators, going against what all human wisdom should have taught them empowered the credit rating agencies to implicitly and explicitly to decide so much about where market should go.

The real truth we need to realize to face is that the better the credit rating agencies could get at what they are supposed to do truth is that the larger could be the build up of really dangerous systemic risks and therefore the bigger the ensuing explosion.

I am not against credit rating agencies. I will always use them. But please unshackle the markets from having to use them. Otherwise I guarantee you all that what will happen is that sooner or later 100% all our pension funds might end up in AAA illiquid junk.

Chávez is in fact out of control.

Sir, in your editorial “Chávez in control“ you seem to believe that the president who loves to be called “Commander” has with this recent proposals of some changes in the Venezuelan constitution and that among other would allow him to reign forever, has suddenly reached a point of inflexion where now his plans “would be to weaken democracy”. You also mention “a landslide victory” for Chávez in the elections in December last year.

Sir, you have been mightily misinformed. Last December the opposition managed to get 4.3 million votes, 37% of the electorate and this was counted by the electoral authorities who had all been appointed by Chávez and who did not include among them anyone who represented the opposition. And that 37% of the electorate, ever since December 2005, because of their more than reasonable distrust in the electoral system, have had to live with a Congress with 167 members in favour and very obedient to Hugo Chávez and none, zero, zilch of who differ with him.

Please, whatever, do not tell us it is only now this authoritarian is getting in control since truth is, if anything, what is happening is that he is now really getting out of control.

The regulator’s human folly

Sir, Sir Samuel Brittan clearly knows his way around the humans when in “The crooked path of capitalism”, August 17, he says “experts are never as likely to be wrong as when they speak with near unanimity”. I suppose he would agree then that it is has been a human folly of monumental proportions that regulators have forced the financial markets in so many ways or forms to have to heed the criteria of the credit rating agencies.

Credit rating agencies should be free to rate, but the markets should also be free of not having to follow them

Sir, you can give “Subprime ratings for rating agencies” August 17, and blame them for all but the original sin lies in having empowered them by ordering much of the markets to act in accordance to their ratings. The better the credit rating agencies gets at what they are doing and the more trustworthy they become, the worse the next explosion of a systemic risk… that is what risk is truly all about.. Tell that to the regulators.

Do not blame the messenger!

Sir, Avinash Persaud in “Hold tight: a bumpy credit ride is only just beginning” August 16, speaks nostalgically about those days “before securitization” and indeed he is right in so many ways especially on that part of the banks not any longer carrying and nurturing the credits on their own books. But he should not blame it on securitization as such, that is just a very valuable tool, if used correctly. He should blame instead those bank regulators that arrogantly thought they could drive banking risks out of banking without any consequences and that empowered a couple of credit rating agencies to do the impossible task of correctly rating credits without introducing systemic risks.

Credit rating agencies should be free to rate but the markets should also be free from not having to follow them.

Sir, every comment in Richard Beales and Saskia Scholtes´ extensive and detailed “Critical focus turns on rating agencies”, August 16, seems to underline the idea that credit rating agencies can do a better job, while the most important fact we need to realize is that to correctly rate credits is such an impossible thing to do that we should never adjudicate special powers to any agency to influence the market. The first thing we need to do is to start dismantling the system of using credit rating agencies. Of course they are free to rate, but the markets should also be free not to follow them.

Just do no harm

Sir, Jaques Diouf “Biofuels should benefit the poor, not the rich” August 15, prescribes such a complexity that our first and only reaction is… forget it! Much more reasonable seems to try to live up instead to that single three word rule that says “do no harm”,

We need to repair what fear brought us last time

Sir, Martin Wolf writes that “In a world of overconfidence fear makes a welcome return” August 15, as a response to the current unknown-knowns of the market as Rumsfeld would have phrased it. Although I cannot say that I disagree with his article it brought back to my memory the first piece I ever published, titled “Puritanism in Banking” Caracas, El Universal, back in 1997, where I warned against the costs of overreacting to a bank crisis. At that time I felt that the premature adoption of some of the banking regulations pushed by the authorities in Basel had made a recent bank crisis so much worse.

The role of the credit rating agencies and that came as response to previous crisis has caused much of the market to relax its due diligence processes and is therefore something directly responsible for the runaway financing of not just subprime but absolutely wrongly awarded mortgages. Now it is obvious that we need to dismantle a system that places so much decision power in the hands of some few credit rating agencies and which undoubtedly is setting us up to systemic risk Tsunamis.

Also, instead of injecting so much liquidity why do not the Central Banks try to loosen up those capital requirements that Basel created in reaction to previous banking frights. This would of course not fuel a renewal of a subprime mortgage boom or anything like it, but allow for the recognition of the disaster to be more digestible. Summing up, ironically, what we now need is also to repair what fear brought us last time.

Please unshackle the markets

Sir, in a “Shake-out could help the markets” August 14 you make it clear that Central Banks should offer liquidity but not rate cuts and I fully agree, as you, based on the evidence we have seen. Central Banks are there to be there when needed but always with ever more demanding conditions and rates.

What they could also do is to suspend, until further notice, hopefully forever, that so much of the market in its investment allocations, has to heed the criteria of the credit rating agencies. Now is the time to unshackle the market and allow it to better find its own way out of the mess.

I wonder if also the Central Banks should not give a second look at those minimum capital requirements that the Basel banking regulating community has imposed on the commercial banks. I mean from yesterday to today it is not like the banks have become more risky, it is more that they are discovering how risky they really were, and so the Central Banks should perhaps help to ease that tragic moment of realization.

Where the buck really needs to reach

Sir, David Hale in “The Credit crunch and the quandary of the Fed” August 14, is just another one in the long line of commenter on the current financial turmoil that refuse to apportion responsibilities where they should go. For instance when he says that “the rating agencies facilitated the boom by giving high credit scores to securities with loans of dubious quality” the facilitated is by all means an understatement since they in fact have a great responsibility for that boom. Mind you, not that the “buck” should stop with the credit rating agencies. In the first line of responsibility, without any doubt, are those regulators that instructed and even in some cases ordered the market participants to stop thinking for themselves and heed the expert opinion of the credit rating agencies.

If we don’t realize all this and furiously back-peddle from our current setup, if we survive this turmoil, we will not do so the next time around. There is just too much systemic risk fabrication going around.

This time though ignorance was mostly fabricated

Sir John Kay in “The same old folly starts a new spiral of risk” August 14 recounts a story from the files of Lloyd’s to make a case for how “people who knows a little of what they are doing pass risks to people who knows less” and so therefore risks tend not to spread but to concentrate setting us up for an explosion. I agree that we might or should have already learned our lessons from that but in the current turmoil there are in fact two new elements that give a fresh perspective on financial history. The first, the most ironic, seems to be that it was in fact those most knowledgeable participants that with their excessive arrogance fabricated with their sophisticated financial models their own ignorance and second, more tragic, that the market was not allowed to apply its own and perhaps even more wise ignorance, but was instructed, by the regulators, to follow the advice of the experts, the credit rating agencies. The concentration of risks under such circumstances could prove to be even much more explosive.

On eating green

Sir Fiona Harvey informs on August 13 that now there is “A chance for shoppers to start counting carbons” beside the carbs, and that a packet of Walkers potato crisps contains 75g of carbon dioxide a mango and passion fruit smoothie 294g.

Great, this is more information for an information starving world. But how do we best digest it? For a start and even when I run a blog on the environment, http://www.ourpiedaterre.blogspot.com/, I have not a faintest clue of what 75g of carbon dioxide means. ¿Could you give it to me in equivalent to litres of petrol? Eating those chips means driving how many miles? I could perhaps connect more easily to that sort of information; I mean having been told that to get rid of those potato chips I have to walk so many miles.

Don’t get me wrong, I am all for maximum disclosure, but if it is to be helpful and not produce more g of carbon dioxide in the gathering and printing of this information than what it saves in the consumption of those same g then we need to increase its transparency. Next time what I would like to see is how many g of carbon dioxide Walkers potato crisp contains by g of carb, calories and fat, saturated and non saturated of course. With this information I might then be able to be so much more effectively green in my dietary and culinary endeavours. By the way, could this be a way for children to make up for not eating their greens?

In the stupid/intelligent, coward/valiant chart where will history plot today’s investors?

Sir it is clear what Saskia Scholtes is driving at in “Fear rather that fundamentals is driving trading” August 11, but as she readily admits that it can become self-fulfilling, we should never forget that fear can easily morph into a fundamental. You can fear finding a bear in the woods but if it appears you’d better treat it as a real fundamental or you pay for it. Now how you handle that fundamental and avoid panicking well that is a totally different matter which brings us to a graph where on the axis we plot from stupid to intelligent and on the y axis from coward to valiant, and then sit back and wait for history to plot us…on a minute by minute basis.

Even in a nightmare you might find good things to do…while awakening

Sir I just read David Gardner’s hair-raising “Lost in Iraq: the illusion of an American strategy” August 10, and, if he is right, then what he is telling us is that Iraq does not any longer exist and that even if there was never a reason for the USA to enter Iraq now there seems to be plenty of reason for why the world cannot leave Iraq. In a globalized world where does it say that the remains of a failed nation should go to the neighbours?

Also reading about the nightmare I once again felt that the best thing the USA could do, while trying to get out, is to impose, by brute force if needed, a transparent revenue sharing system that spreads out the oil income directly to each of the Iraqi citizens. Around the concept of a monthly check, of probably more that 100 dollars per citizen, you could find the real incentive needed for some good nation building. The current oil revenue sharing being discussed has nothing to do with the people but seem more like agreements between all the power grabbers about how to share the oil loot.

Markets also abhors experts not behaving like experts

Sir, Frank Partnoy in “Markets abhor the vacuum left by derivatives” August 10 describes very well why the volatility has increased as a result of the investors finding out that their investments are in many cases not accurately or timely valued and that they might be up for some nasty surprises. Add to this the fact of having to see how good grades were awarded to mortgage collateralized debt obligations by the credit rating agencies without them even leaving their desk and do a little check-up on how those mortgages were issued and you might see the perfect volatility storm coming into sight.

We need to attach a warning message to the credit ratings.

Sir Andrew Ward reports August 10 that President George W. Bush has said there was a “proper role for government” in enhancing financial literacy as “we had a lot of really hardworking Americans sign up for loans and the truth of the matter is they probably didn’t fully understand what they were signing up for”.

Mr Bush might have a point but from what we currently see those most in need of a financial literacy course seem to be all the investors struggling to make head and tails out of credit rating grades or financial models that really do not mean what they say.

Of course it also cannot only be a question about the reading but also about the writing. For a starter, as a minimum role for the government, I would suggest they start by making obligatory, whenever credit ratings are disclosed the inclusion of a “Warning, following these ratings blindly is dangerous to the financial well being of your portfolio.”

Does procreation include the possibility of adoption?

Sir Clive Crook with “Let the rich go forth and multiply” has really fired up my interest in reading Gregory Clark’s upcoming “A farewell to Alms: A brief Economic History of the World”, August 10. Besides of course forcing me to look up the meaning of “alms” it also left me with the question of whether this generous procreation of the rich so that it spills over into the less fortunate development method does also extend to Angelina Jolie’s adoptions of poor children.

Liberty and security also requires consensus

Sir, although Willem Buiter might be fundamentally correct when he says “For the sake of liberty and security: legalise all drugs” August 8, he should also remember that for the sake of that same liberty and security he needs to frame his idea in such a way that it is acceptable for the majority. 

In this respect and making reference to Moisés Naim’s interesting book “Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy”, (2005) and that reminded us of how much of the illegal world was interconnected, perhaps a more consensus reaching approach could be to identify the whole world market of illicit and legalize it at a rate of 5 per cent a year starting with the more digestible. 

Otherwise they way the world is going its illicit part is soon going to be wealthier and stronger than the licit… and that is more dangerous than hundred al-Qaeda put together. Also while discussing these issues let us never forget that strict social sanctioning is normally a far more efficient route to go than the strictest of the law enforcements.

That is not the route!

Sir, Jeffrey Garten’s “We need rules for sovereign funds” August 8, includes a mind-boggling list of proposals “that many will see . . . as having a protectionist thrust.” No kidding? The only real conclusion I reached was to tell my daughter to watch up if she was thinking of studying international trade or finance at Yale.

Not only does Garten analyze the issue of sovereign funds as if trying to carve out for himself the role as The High Priest of financial nativism but also, even if he was absolutely right about his deepest misgivings, the type of solutions he proposes, like requiring from the government owned investment companies that they “publish internationally audited reports on their entire portfolios at least twice a year” could not serve any rational purpose and could in fact even serve as a dangerous valium.

What on earth is Garten up to? Trying to extend Sarbanes Oxley to the rest of the world governments? Asking the credit rating agencies to rate the sovereign funds? Allowing these funds only to buy government paper? Good luck! This type of approach would only have much of the current world imbalances try to go underground, making them so much harder to manage. Do I then mean that sovereign funds do not pose any threat? Of course not…some do, the same way that some non-sovereign funds could also be dangerous for any sovereignty.

Wrong answer!

Sir Malcolm Rifkind gives the wrong answer when saying that “Mugabe must not be allowed to go to Portugal” August 6, as the real question should obviously whether Mugabe, when in Portugal, should be allowed to return to Zimbabwe. Does not Portugal have a judge like Spain’s Baltasar Garzón? Mugabe with his dead wrong economic politics is knowingly decreeing the premature death of many Zimbabweans and if that is not a crime against humanity, what is?

Stop following Basel and the Fund into the land of the guaranteed systemic risks

Sir, Mohamed El-Erian and Michael Spence in “The Fund needs to refocus its agenda to be relevant” August 7 seems to suggest that the International Monetary Fund turns itself into a merchant bank type institution “facilitating the ongoing breakout phase in the economic development of emerging countries”. Before branching out into private sector terrain the Fund would do well not by refocusing but by focusing more on what is its current agenda.

For instance the IMF needs to be much more certain about what long terms effects there could be for the world of having promoted so much the idea of their buddies in the Bank of International Settlement in Basel with respect of ordering so much of the financial markets to follow the criteria of a few credit rating agencies. The developed world, with their current subprime mortgaged backed securities mess, is already getting some quite horrifying glimpses of what might lie ahead if it persists in following Basel and the Fund into the land of the guaranteed systemic risks.

And be careful with the regulator risk

Sir in your editorial “The dangers of bailing out banks” August 6, you timely remind that “if bailouts are the norm, an entire banking system may take on inefficiently high levels of risk” and illustrating clearly the case for this warning by stating that in the case of IKB Deutsche Industriebank “there was always an implicit promise of support from KfW – credit rating agencies such as Fitch counted on it”

At this moment of time after so many years without any major bank crisis around the world and when the Bank Regulators have spend a couple of years in a self congratulatory mode may I also warn against the possibility, no matter how remote, that some very expensive bailouts could be undertaken also in order to save the regulator’s reputation. I mean if you appointed a couple of Credit Rating Agencies and then went to sleep on the job, you could foreseeable have a vested interest in hiding some facts.

Matchmaking on the web is still a quite chancy affair

Sir, your editorial “the wrong crowd” August 4, about risks with advertising on places such as Facebook reminded me of when, mind you for research purposes only, I recently visited one of those fanatic leftist pure anti-Yankee web sites that also tries to make a living earning some capitalistic advertising dollars, and up popped a recruitment add for the US Army. This comes to show our savvy matchmakers on the web still have a long way to go as having probably used “sovereignty” as their key word they failed to realize that this word depends so much on what side of the border you find yourself on.

Now let us connect urgently the lessons learned with the what to do.

Sir, Desmond Lachman, in “America’s subprime blues have historical echoes” August 3, is absolutely right when he says “At the heart of today’s subprime crisis is the unfortunate interaction of financial innovation gone awry, inept market regulation [by which we might presume he also refers to inept regulators] and a failure of the rating agencies to exercise their fiduciary responsibility to protect the average investor.” By the way the credit rating agencies would probably argue that part about “fiduciary responsibility” since they way they describe it, they only give opinions in accordance with their freedom of expression rights.

Now what Desmond Lachman does not yet do, is to connect the lessons learned with the what to do. As I see it and following that old advice of when in a hole stop digging, the first thing we have to do is clearly to recall all the empowerment awarded to the financial fortune tellers, the credit rating agencies, to dictate so much about where the financial flows can or should not go. Let us pray that the current problems are just a minor tremor that serves us as a warning and that we still have time to runaway from construing a financial system on top of a systemic fault that if we do not amend will produce mind-boggling catastrophes.

PS. "minor tremor"? The 2008 Global financial crisis GFC

We need to eliminate the financial fortune-telling franchise.

Sir I have nothing against the credit rating agencies, in fact I would like to have hundreds of them instead of the current only three. What I do not like though is when investors are forced to act in accordance with what they opine since when someone is told that someone else does the thinking for them, they lose the motivation to think for themselves and they have been empowered with the perfect excuse to hide their own shortcomings.

When you tell a pension fund it is not allowed to invest in anything below a specified level of ratings you are sending two messages. The first, that pension funds should only invest in safe ventures sounds about right but goes against current financial theories that say that a perfect blend of uncorrelated potions could just as well be the safest bet in town. The second message, the truly dangerous one, is that you are implying that there are objectively safe investments in the world and that the credit rating agencies have the tools to spot them.

We have already gone much too far down the road to a systemic risk explosion and we can already smell the subprime gases that have been accumulated. Anyone who lives in an earthquake prone region knows to be grateful for the small tremors that release the build-up of tensions and keeps the big one away. In these days we pray that the current financial uncertainties are only a minor tremor but if we really want to avoid building up the tensions that will lead to a true catastrophe, one of the first things we must do is to dismantle the fortune-telling franchise awarded by regulators to the credit rating agencies.

Do not ignore that bank regulators have played the leading role in finance over the last fifteen years.

Sir John Gapper in “Now banks must relearn their craft” July 30, describe how the banks that fifteen years ago were financial institution that lent people money moved into the business of investment banks, but are now thrust back to their old business as they find their balance sheet stuffed with loans that could be there for a long time.

There is nothing wrong in Gapper’s recounting of the story but strangely and like most or perhaps even all of his colleagues in the Financial Times, he does not mention the crucial role played by the banking regulators from Basel, who started it all by quite arrogantly thinking they could drive banking risks out of banking.

Well, the bank risks did not disappear; they went into hiding, just like any overly regulated business normally goes underground; and let us now pray that in this hide and seek game the world has not accumulated too many bank losses that it has lost track off.

I mention all this because if we are going to be able to handle some potentially very dangerous circumstances that might loom around the corner, we cannot afford to leave out the analysis of were the regulators went wrong, even though they are among the most respected citizens of our society, because it might be precisely in that area that we need to do a lot of fast and swift backtracking. As an example one of the first things that need to be done is to strip the credit rating agencies from much of the immense powers allocated to them by the regulators… as that can foreseeable only lead the world into worse and worse scenarios.

Without fear and without favour we need to punish the regulators!

Sir, John Authers in “Home to roost” July 27 quotes William Poole, governor of the St Louis Fed in reference to the current subprime woes saying “The punishment has been meted out to those who have done misdeeds and made bad judgments”. Forget it, soon it is going to be time to punish the real brains behind this mess, namely the bank regulators that displaying an amazing lack of wisdom, empowered a couple of credit rating agencies with so much say over the markets. Had it no been for some haphazardly awarded credit ratings the not subprime but criminally irresponsible behaviour of some mortgage brokers would have been contained in a couple of banks and not leveraged into the problem it now represents.

On your front page the same day there is also a report by Francesco Guerrera and David Wighton on “US executives find favours to analyst can secure better ratings” and honestly anyone who could be surprised by this have not walked the streets enough to be a regulator. Sir look around you and you could find more courses on how to obtain a good rating than on how to manage your real business. This all is lunacy and we are being set up for even bigger disasters and it must end, before it ends us. We need urgently to punish the regulators, at least on the count of being very naive.

Have 100% guaranteed incomprehensive financial model…will travel!

This is a great and handy tool for hedge funds when valuating portfolios and that will produce maximum commissions; and for the large US banks that have recently been authorized by their regulators to apply Basel II rules and now need to catch up with European competitors in lowering their capital requirements.

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About Banana Republics and the moments of reckoning

Sir in March 1999 I published and article where I held that the effects of the global warming might be more severe than we thought as it seemed to even have shifted the parallel of the tropical Banana Republics northward, since how could we otherwise explain the current enormous fiscal and commercial deficits in the United States.

Now, eight years later, when Kenneth Rogoff in “Americans will eventually learn that deficits do matter”, July 18, mentions that “continuing inflows are probably holding down interest rates by at least 1.5 per cent and possibly more” I cannot help but to think of those investors that quite recently thought they were doing splendidly, when valued by a model, but that now have to face some crude realities when marked to a market that sometimes does not even seem to exist.

You should not give debt relief to “odious” debt.

Sir Alan Beattie in “Vultures unlikely allies in anti-graft cause” July 18 quotes Stephen Rand of the Jubilee Debt Campaign saying “Debt relief should never be used as a weapon of economic coercion by creditors” as implying that debt relief should be awarded even when governments are still corrupt.

What is this? As a citizen of a country with a government that I consider quite corrupt, I do not like anyone giving it loans, debt relief or anything whatsoever. Frankly, before corruption is ended most of any debt relief given would just end up allowing these countries and governments addicted to debt, to hit the bars again.

If the concept of odious debt is applicable in the sense that some debts should not have to be repaid if contracted in an illegitimate way, castigating the creditor, then the same concept should clearly also apply to the granting of any debt relief, punishing the debtor.

Yes we need a Peeping Tom free, free trade core

Sir, I could not be more in agreement with Mr Grant Aldonas’ suggestion for the first part of “A fresh free trade agenda for Doha”, July 13, namely that of a “plurilateral agreement among all WTO members willing to move directly to free trade on a global basis”. Just like in a nudist camp we need to separate the real nudists from the Peeping Toms, as only this would allow us to conform a true and honest free trade core

It is clear that many of those who profess a belief in free trade fake it, since how could you otherwise explain the sort of perverse satisfaction many show from entering into negotiating processes that hinders the free trade from really advancing. The true spirit of free trade does not stand a chance against these saboteurs and who are simply too scared of taking off their protections, but want to enjoy the view anyhow.

Some subprime heads need to roll.

Sir, The Lex Column of July 11, with respect to the subprime-mortgage-backed-securities and the rating agencies affaire duly says “Could the rating agencies have acted sooner? Possibly. True, it is not their job to simply react to market moves”. Nonetheless the column opens by citing John Maynard Keynes with “When the facts change, I change my mind. What do you do, Sir?” and this is highly inappropriate and exculpatory since the basic truth coming out is that there has been not one single factual change but only the discovery of some amazing sloppy job, not only by those issuing the subprime mortgages but also by those rating the resulting securities.

I have until now not heard a single word about one single credit rating employee fired because of such an obviously shoddy work and if there is no one made responsible at this stage the future will only set us up to even much worse result. I am not suggesting anything like the recent execution of a regulator in China for what there was a clear case of corruption but, figuratively speaking, some subprime heads got to roll too… and of course some wallets be emptied.

Go where the beef is

Sir, I really do not understand how, in “Latin Lessons”, July 10, you can even think about achieving a better US engagement in Latin America by entering the field of establishing comparison between the simple propagandas of “the $20m being spent on a four-month-long humanitarian health care mission, involving a visit by the Comfort hospital ship to 12 countries, to the scale of the health care plans launched by Mr chávez and his Cuban ally, President Fidel Castro”. That is like assessing the cultural efforts of Brittan in terms of how long the British Museum lends out their Tutankhamen collection to the world.

Of course the real dealings with Latin America have to occur in the real areas you mention such as energy, trade and of course migration, and there, if the US was to find a more constructive approach to Latin America, it needs primarily to start looking for a more constructive and consistent approach among themselves, in Washington at least.

The Inter-American Development Bank recently reported that the working migrants of Latin America remitted to their home countries $62.3bn in 2004 and if these represented 15% of what the workers earned, we are then talking about a yearly figure of around $415bn, of which the US contributes almost all, and clearly this beats anything that what Castro and chávez can come up using the money obtained by selling Venezuelan oil.

All we need is “outsourcing”

Sir, after reading John Gapper’s “A cleverer way to build a Boeing” extolling the virtues of almost full outsourcing with as opposed to chaining itself down an as close to 100% local component production as possible, I cannot but sadly reflect that in my country Venezuela, if offered to help produce a 2% of the A380 it would currently have rejected it on the grounds that I must be an effort by the Empire to penetrate it.

Outsourcing seems as a constructive road to world peace there is and in this sense we should perhaps promote a rule that states that no country shall be allowed to contribute more than 5% of the components of any weapon. I can almost hear John Lennon rewriting a song.

The world has no representation either

Sir, Wolfgang Münchau in “This gentlemen’s agreement fails Europe too”, July 9, makes a very clear case for why Europe by splitting up the European representation in international institutions such as the International Monetary Fund (he argues that it is to preserve many plum jobs) ends up in fact with having no real representation at all. I understand and agree with his point of view especially since it goes hand in hand with my opinion that since all the votes, and all the Executive Directors, and the Presidents, and so many of its staff are assigned on pure local considerations, it is the “international world”, the global order, or mother-earth itself, whatever you want to call it, that ends up being the most under represented party in these global institutions.

If we are going to be able to manage the global challenges it is urgent we look for means to break away from our parochial local chains. What about splitting at least 50% of the shares among varied constituencies such as migrant workers, multinationals, media, educators, environmentalists, NGO’s, accountants, farmers, manufacturers, service providers, and so on?

The only constituency that has currently a representation in IMF, a 100% one, is the constituency of central bankers and this need to be changed. Europe, if you must insist on naming the next managing director in the IMF then at least do the world the favour of appointing some finance knowledgeable person that has never worked for any central bank. That would provide us with much more needed diversity than just appointing another central banker based on the local consideration that he is from Asia, Africa or Latin America.

And this is no joke. Incest is about the most dangerous limiting factor when it comes to impede clear thinking and effective actions.

We need to slam Moody too!

Sir, “Moody’s slams private equity” is how Francesco Guerrera and James Politi title their report on July 9 about the strong criticism that this credit rating agency is making about the private equity industry; and I believe it is high time for us to slam Moody as clearly the powers they yield over the markets is getting to their heads. Who do they think they are? Is a neutral credit rating agency supposed to get involved into what business their clients do? If they do not like how the business is structured, and believe it will affect negatively the credit ratings, then they should say so, in their ratings. To come up with unsolicited a priori advices that could only bias their future outlooks is not what they are supposed to do. Next time they might just opine on the cars that GM should produce to get a rating.

Let’s face it, if we do not stand up to the credit rating agencies we will help to create and strengthen some real financial Frankenstein monsters, authorized to dictate their feelings about anything. And, do not get me wrong, there is not a world in Moody’s comment about the private equity industry that I would object to, I just object, totally, that they should be the messenger. The credit rating agencies have already far too much power for their and our own good.

Christopher Caldwell risks being sent to Speaker’s Corner.

Sir, Christopher Caldwell’s “Healthcare as horror movie”, July 7, where he discusses Michael Moore’s latest film Sicko dares to touch upon something that is clearly more sickening than what a truly horrific healthcare system could be, namely the big business present in feeding the insatiable and bias craving radical extreme misconceptions with even more bias so as to allow them to be even more extreme and hungry.

This reinforcement of beliefs business which has created and promoted stories such as the 9-11 incidents having being carried out by the US government itself; or the migrants workers plotting to assassin, rape and take over countries; and so many other lunacies, are slowly leading us into neo dark ages characterized not by the lack of information but by a massive overload of it, and that has us all screening in terms of what best tickles our preconceptions. Now, why do I qualify Caldwell’s comments as daring?

In 1872, the British Parliament decreed Speaker’s Corner in Hyde Park of London as a place reserved for free expression, and initially it attracted all those extremists who, although qualifying as nuts, still had the right to vent their opinions. Lately though, we have all witnessed how the original Speaker’s Corner speakers moved into Speaker’s Studios and now radicalism, anarchy, or fundamentalism is voiced on prime-time television. All of us others, modest low-key analyzers or rational in-betweens, have to settle gratefully for slots in after-midnight cable television, dubiously sponsored by the most traditional professional services.

As rationality could soon be viewed as symptomatic of a modern nut, we might all have to line up at Speaker’s Corner… and so we’ll see you there Christopher Caldwell.

A not so transparent someone else’s life

Sir in “A transparent life” July 7 you mention that “privacy is so last century” and comment about how the new internet technologies risk us losing our privacy. That may well be so but simultaneously you just need to go to any of the millions of web based discussion forums to notice that very few speak in their own name but hide out behind strange pseudonyms and avatars. I myself have opted for always using my own name, as the best way to assure I will never forget who I am and start talking in someone else’s name. And so, while we definitely must help to assure the right to privacy for the right private person we also need to simultaneously deal with the multi-personality disorders created on the web.

Gazprom in a public-private partnership?

Sir, in your “Putin’s piste”, July 7, you sort of allude that there might be a public-private partnership between Russia and Gazprom. Nonsense. That is just a public-public partnership that uses private sector flexibility to avoid the constraints that reason imposes on public spending. If Gazprom is anywhere like the Venezuelan PDVSA that I know, then whatever it does beyond their basic oil and gas exploration, production and refining business, is just a way to non-transparently lose or distribute some of their oil and gas profits previuosly made.

Private or informal?

Sir when looking to analyze “Private equity’s risks and rewards” July 7, it might be useful to always differentiate between what could happen when someone goes into private practice from what could be the results from hiding out, going informal. The freedom to be private must always be defended, just as the forces that drive the growth of the informal sector must always be opposed.

My timely warning about Jo!

Sir, as the final book of the Harry Potter is about o be released, just in case anything dark happens, let me remind you all that at least I did my civic duty by including the following warning in my book Voice and Noise in 2006.

“As the books about Harry Potter have meant so much for the upcoming generation and sometimes they even represent the only books it has read, there can be no doubt that the last Potter instalment can actually seal this world’s fate for a long time to come. J. K. Rowlings, or Jo as we are instructed to call her in her Web page, is someone to watch, very closely. Not that I distrust her, but we should perhaps think about censoring her (discreetly). What will be the lessons she will imprint on her young and not so young and even quite old (like me) readers’ minds with her final book? What if she goes haywire? I guess I’ll manage it, I hope, but will the young ones?”

Are the Scots entrepreneurial or gullible?

Sir Stefan Stern’s “Billions made so far from home” July 7, where he comments on so many “of the UK’s richest . . . are Scottish born – though most have found it necessary to leave the land of their birth to make their fortunes”, led me to think about Richard Llewellyn's “How green was my valley” and John Ford’s Oscar winning movie adaptation of it, even though that particular green valley was welsh.

I once used the “green valley” allegory in a speech to extol the development virtues of blissful ignorance, which allowed Venezuelans go to the USA, Americans to Europe and Italians to Venezuela; and everyone daring to do business just because they lacked information about how difficult the local circumstances were; and since nationals knowing about the hardships too well would never dream of doing anything.

And so the question that now goes around in my head after reading Stern is whether the Scottish born have an especial entrepreneurial sense… or are just an especially gullible lot.

Do we really know how currencies behave when nude?

Sir, the concerted and concerned called for “We must act when currencies become misaligned” July 6, by four US senators, seems timely and reasonable even though it is hard to detect much real urgency as the unemployment levels in the US are low. In the dark ages, less than forty years ago, these currency imbalances would take care of themselves once the gold had moved over from the strong currency country to the weaker vault, and which made a reshuffle of the exchange rates required in order for the game to go on. Not any longer, now the currencies have no specific backing, they are all naked, which makes the issue much more confusing.

One of the attractions of asking someone else to revalue their currency is that somehow, because of some magic that would make the Hogwarts curricula proud, you seem to avoid having to communicate that you are devaluing yours, or that in essence you are declaring a big domestic salary decrease when measured in international purchase power terms.

The senators rightly say that there is no one single answer to America’s international economic and of course they are right, even though I fail to fully understand how “responsible healthcare” is an instrument of this particular toolbox. Sir, the world has never really been in this territory of major currency misalignments while in a nudist camp, so let us pray that everyone tinkers very carefully with them, while we learn, and at least while it all seems to be working not too bad.

Global leadership should be global

Sir, when in “A chance to exert global leadership” July 5, you argue against the fact that Belgium has more votes in the International Monetary Fund than India “despite the fact that it does not even have its own currency” you really get it wrong. Belgium does indeed have their own currency, the Euro, and the fact that they are willing to share it with others could perhaps even argue in favour of them having more votes.

But what really bugs me is the déjà vu feelings I get reading the article, as I am sure that exactly the same things were said when Rodrigo Rato was appointed and, worse yet, that the day when voting rights finally get reshuffled using a new geo-economical realities, we will discover it really did not mean that much. In order to take the IMF and the World Bank to the next level of multilateralism in a globalized world what is needed is a formula more helpful to break those geographical ties that keeps them so chained to sometimes very parochial issues. Besides, if whom you are going to appoint to the IMF’s Executive Board are just central bankers you will never get any real diversity, no matter what country they come from and which just implies of course the slowly build up of another systemic risk.

What we first need is an insurance that covers the risks of the discoveries.

Sir, Stephen Cechetti argues in “A future of public healthcare for all” July 3 that the advances in genetics and that will be able to provide for better individualized projections of expected health costs will translate into a market failure that will force the private health insurance system into the arms of the public sector. Actually it is not a market failure that will do so since in fact the market could only benefit from knowing more about the risks, it is the market results that will be unacceptable, or at least let us hope so, since if those prognosed as much healthier sneak out from sharing the risks, society could turn much much nastier. For instance, there is nothing to stop a good health prognosis to also influence such variables as the admittance to universities.

Before we put any new safeguard system in place, which will certainly only happen when it is much too late for many, what we most need is an insurance that covers the risks of whatever extra costs we could suffer because of what they discover in our genes, and have everyone subscribe such an insurance, before they are allowed to take any genetic samples

On the fashion of titles

Sir, John Dizard’s “Where money is lost there are winnings to be made” July 2, is a valuable reflection on the yen carry trade, though I must say the title sounds quite démodé. From what we have been reading lately about mark to markets through models of markets, the titles in vogue are more in the nature of “Where winnings have been made, losses wait to be recorded”.

A myth or a plain vanilla fraud?

Sir Tony Jackson in “Myth that could undermine credit derivatives”, July 2, describes the possibility that the traders on both ends of a deal could, by using their own models, show themselves to be making a profit for years and collect bonuses on these. Jackson describes these mark to market mechanisms in terms of myths, though I would read them slightly more like frauds. Anyhow it all makes me think that the hedge-fund-derivative traders could in a near future be facing the same type of difficulties a tourist has when he needs to talk himself out of a serious problem in a language no one understands... well until now they have all at least gained a lot in the translation.

100% organic pure corporate vanilla bonds.

Sir in your “Global credit woes” June 29 you mention that “subprime problems need not cause a wider market slump and this agrees well with what Tim Bond of Barclays Capital says in “View of the Day” of the problems being more the excess leverage of the lenders, not of the borrowers. As I see it any corporation that in the future wants to issue a wholesome 100% organic and all the fibres included and no risk return deriveated away pure vanilla bond, might find a market much willing to give up some on some returns just in order to lay their hands on something they can understand better.

I can’t stand the suspense.

Sir, I once saw a balance sheet of a hotel corporation where they had registered on their balance sheet among their fixed assets the cost of building the hotel rooms but since they had also issued user rights valid over a very long period of time for each of those rooms, and were selling these out as timeshares, they also registered as current assets the inventory of unsold timeshares, valued at the price they were selling them at, and all this duly audited by a recognized name. As you can understand, this have your cake and eat it too balance sheet looked extremely solid and paid bonuses to the executives, while it lasted.

This memory came to my mind when reading Richard Beales’ and Gillian Tett’s “Real risks emerge when Pandora’s investment box is opened” June 29. If what I recounted above could happen with open and transparent audited statements (albeit in a developing country) then what limits could there be to what you could hide in black-box algorithmic proprietary trading models. I pity those judges that tomorrow will have to try to understand the issues, as I pity those that though perhaps totally innocent will be sentenced to jail just because they can’t get anyone to understand their models.

Having said that it is clear that we must face the real possibility that all of our economic numbers could be fictitious since we could already have incurred in real big losses but that are mercifully covered by a lot of untested hot air. When those boxes are opened up who will appear? A beautiful girl or someone with a machine-gun… I can’t stand the suspense, though I must admit that the bliss of ignorance has also its attractions.

But the Venezuelans will not get their gasoline.

Sir, in your editorial “Chávez gets his oil” June 28 you mention that with current oil prices “it scarcely matter that the amount of oil produced has declined in Venezuela” and I would suggest you read Najmeh Bozorgmehr’s report in FT the same day on how “Fuel crisis increases pressure on Tehran” where Iran’s fuel rationing crisis is described.

For your information, according to projections based on the current sales of vehicles, Venezuela a country with only 26 million inhabitants and a GNI per capita of less than US$ 5.0000, will in the years of 2006 and 2007 have placed a total of 750.000 new gas guzzlers on its roads, partly thanks to the craziness of a domestic gasoline price of under 3 US cents per liter. Can you imagine what will happen when you have to start to adjust gasoline prices? One of the first symptoms of the existence of a purely populist government is that all planning gets thrown out the window and you live day by day.

Whistling in the dark

Sir, Gillian Tett wrote in “Collateral values thrust to the fore by woes at Bear Stearns” June 21, about the problem of discovering hidden losses in assets that are rarely traded and that are valued through financial models when they have to be sold and most especially if in the case of a fire sale. In the respect I would like to make two innocent questions? First, how much value do these assets that are rarely traded and only valued by models represent? Through the answer we might get a better appreciation of what could happen if real life came around and forced upon us its usually brutal mark to market.

Second, are these gaps not what used to be registered as losses? With all the derivatives and hedge funds flying around is not really our problem that the financial crises, while already been happening have not been noticed as they have gone underground or informal.

If it could be said that Italy based only on its formal growth rate would have long since disappeared but that they are alive and well thanks to the informal sector, could not the opposite be held; that the formal sector that looks to be doing well could in fact have disappeared because of what is going on underground? Thinks are indeed quite scary, and so we better keep on whistling in the dark!

It is we that have to learn the lesson from the rating agencies handling of Enron.

Sir, Dr Len Rosenthal in his letter “Ratings need to learn lessons from Enron”, June 27, gives many good recommendations for how the rating agencies could perform better their jobs and avoid the risks of being “hoodwinked”, but he makes the fundamental mistake to presume that the Enron’s of this world are detectable and avoidable.

This could be since as he belongs to a Department of Finance of a college he might have a vested interest in selling the gospel that all risks can be derivated away. I on the contrary find it not so hard to accept having to live with the risks of the Enron’s since as individual risks they could all be digestible but what I really find unacceptable is the systemic accumulation and or hiding of the risks that is embedded in having to follow the advice from some very few credit rating agencies, and this no matter how many courses they take with Dr Rosenthal.

Consumers...hedge your energy bets

Sir in “Potential Energy” June 27, you state as a fact that Europe’s citizens would best be served by full liberalisation. I agree, but although you bring up two minor caveats, I must warn you that the final results has a lot to do with how that liberalisation is implemented and how later all the market imperfections are managed. In case you are not that certain of the final results, you could also suggest all the European consumers that they hedge their bets and take a position in the resulting energy companies, with the caveat to make certain that all the potential benefits are not captured by the financial intermediaries. Capicce?

There’s just been a change of shackles.

Sir, Martin Wolf writes so intelligently about the “Risks and rewards of today’s unshackled global finance”, June 27, that I almost feel ashamed about raising the question of whether the global finance really has been unshackled, as I believe that it has only had a change of shackles.

We have shackled much of the market to the opinions of some few credit rating agencies; we have shackled the market into the belief that risks can actually be derivated away and will not reappear elsewhere; and we have shackled the financial reward structure to something more akin to the time-share industry, rewarding those that are in fact restructuring the long term realities of our portfolios with success fees paid out immediately, based on the vendors own valuation models, and which most certainly do not bear much relation to our true long term results; and finally, the mother of all the shackles, the mind-boggling financial positions that have been built up around the world without really knowing how to get out of them, in an orderly way.

The champions of gluttony

Sir I read Jamie Whyte’s “Spread the word about the benefits of advertising”, June 27, and since I presume that he is in the advertising industry, and though he references himself to be the author of a “Guide to Clear Thinking” I conclude that he must be even more confused than what I normally am, when he basically washes his hands and places the full burden for responsible behaviour squarely on his own clients shoulders, for instance in the case of the increased consumption of junk food.

He is also exquisitely politically incorrect when he argues the defence of his industry in such terms as motivating you to drink more in order to save you from the risk of not knowing the fun of being drunk although in this as a “desire for more” inspirer he has a clear point, since we should ask ourselves what would happen to our economies if our regulators convinced us all that we have had enough, of everything.

Cutting out short term data will not fix it, more important is sending out the right long term signals.

Sir, of course that US economic long term competitiveness could be harmed by the companies and markets excessive short term focus but to believe that US economic long term competitiveness could somehow be helped along by cutting quarterly guidance is to be completely out of focus. Do not get me wrong, I am all for scrapping the quarterly guidance, although there are people making a living out of them, but what I mean is that for the US to be able to link more responsibly with the future, much more important is to start out sending the right long term signals. For instance, may I suggest a gasoline tax that prices gas at the pump at US$ 7 a gallon?

One for the short list

Sir, I do not know if you favor a competition between your columnists for the best article of the year, as some of those who predicate competition now and again show signs of apprehension when competition gets too close but, if you do, allow me then to nominate Gideon Rachman’s “Europe ditches clarity and embraces obfuscation”, June 25 for the short list. What a great article! Seems that few things beats a bar at 2 am for inspiration.

Laziness and arrogance

Sir, In “Lots of unknowns”, June 25 you write that now the Bank for International Settlements, the central banker’s central bank, says that “our understanding of economic processes may even be less today that it was in the past”

That is something they should have discovered long time ago had they not been so busy taking credits for the counter inflation benefits brought about by globalization; and driving banking risks out of banking to such an extent that so many of the risks were forced to hideout in the more informal world of the hedge-funds and in the algorithms of some derivatives. In order for them to be able to monitor the world’s financial flows, from their desks, they reduced the relations between borrowers and creditors to digital data, and they chained much of the world’s financial flows to the opinion of some hired credit rating agencies.

Now, when crisis is breeding around the corner, the most important thing to ascertain is that when the fire breaks out we do not send out the firemen who installed the sprinkler system and that are more interested in covering their shoddy piece of work.

Boy, were they arrogant. Even a World Bank was ordered to shut up and harmonize with the International Monetary Fund, one of the most famous clubhouses of the central bank’s bankers.

FT, keep cool!

Sir, I understand perfectly well the sentiments that you express in “Europe abandons the sanity clause” June 25, where you complain about the EU is dropping the principle of “free and undistorted competition”. Having said that I believe that you should be very careful sounding too principled on this issue, not only because most facets of competition will one way or another always be present in life, no matter the wording of any Treaty, but also because so much of the free competition preaching has lately gone hand in hand with the very strong intellectual property rights assertion trend, and that in many cases has signified a much more serious obstacle to” free and undistorted competition”. Therefore, may I suggest you take it easy and keep cool, as we truly need FT to be very clearheaded on this issue.

The growth of global finance is not that free or muscular.

Sir, all you say in “Why finance will not be unfettered” June 25, might be indeed be right but nevertheless you say it wrong. Yes the market has grown tremendously but if you truly believe that this has more to do with “seeking out pockets of undervaluation” than the exploitation of new instruments for temporary overvaluation, you are a true optimist. Unfortunately when the marking to the market of today’s almost incestually benign models and conditions need to be marked to the markets of the future, and we begin discovering where the risks have been hiding out, will probably find a lot of fat and very little muscular tissue in the growth. And to talk about “liberation of finance” and “unchained financial capitalism” when you have forcibly chained so much of the market to the opinions of some very few credit rating agencies reminds me of when Arthur Koestler describes how he as a young and utterly illusioned student, was able to see freedom in the communist Soviet.

About the low cost of equity and the need of Chinese “sovereign” walls

Sir, John Plender in “An unseen risk in sovereign wealth funds” (from China) June 22, mention that they might lead us “from unusually low interest rates to the conundrum of an artificially low cost of equity capital”. It sounds correct but then when later reading, that same day and just four pages away, “One door opens…” by Francesco Guerrera and James Politi that describes Blackstone’s core business as “buying companies and assets, loading them up with debt and selling them for a profit; and Ben White’s “A banking flotilla offers safe passage” that indicates a proposed Blackstone valuation of “about 26 times last year’s pro-forma economic net income, Plender’s risk prediction becomes more a reporting of facts. Also, given that China’s willingness to keep on continuing financing the market will have an impact on interest rates one cannot help but to think of how to adapt the corporate concept such as a “Chinese wall” which separates traders with conflicts of interest to a sovereign environment.

Whistling in the dark

Sir, Gillian Tett wrote in “Collateral values thrust to the fore by woes at Bear Stearns” June 21, about the problem of discovering hidden losses in assets that are rarely traded and that are valued through financial models when they have to be sold and most especially if in the case of a fire sale. In the respect I would like to make two innocent questions? First, how much value do these assets that are rarely traded and only valued by models represent? Through the answer we might get a better appreciation of what could happen if real life came around and forced upon us its usually brutal mark to market.

Second, are these gaps not what used to be registered as losses? With all the derivatives and hedge funds flying around is not really our problem that the financial crises, while already been happening have not been noticed as they have gone underground or informal.

If it could be said that Italy based only on its formal growth rate would have long since disappeared but that they are alive and well thanks to the informal sector, could not the opposite be held; that the formal sector that looks to be doing well could in fact have disappeared because of what is going on underground? Thinks are indeed quite scary, and so we better keep on whistling in the dark!

Caveat emptor rules in derivatives too

Sir, Mr Harvey L. Pitt in “Subprime confusion that leads to a lack of confidence” June 18, (graciously?) agrees with “loan modifications” in individual mortgages that allow subprime debtors a better chance to service their mortgages, but lashes out at “market manipulation” that artificially alters the underlying cash flow to credit protection buyers, which could happen either by supplementing or replacing these flows. Mr L. Pitt sounds very much like someone who has just discovered a small print clause that shows there is risk in risk coverage too, and I guess he is just a trailer for the avalanche of surprised investors we will soon see as a consequence of the boom in the hide-and-seek-risks game provided by hedge funds, primarily through derivatives. Since Mr L. Pitt mentions he was a Chairman of the Securities and Exchange Commission (2002-2003) he should be quite familiar with the term Caveat emptor. Next time he takes a position in these derivatives he might choose one that does not allow for these specific set of “market manipulations” but he could then also discover that any risk coverage this way comes with a quite different price tag attached.

Do you know of any reputable Judiciary Independence Index?

Sir, you publish June 18 a long letter that signed by the Director of the Department of Information, Press Division, Ministry of Foreign Affairs, Bangkok, Thailand, purports that “Thai judiciary is independent” and I must confess I have no idea of how much credibility I should assign to it. Would you know about any reputable Judiciary Independence Index that I could use? I mean if I where able to get a grasp on where Thailand stands on this issue when compared for instance to my homeland Venezuela it would indeed be quite helpful.

Aren’t we always in the intersection of autonomous and accommodating flows?

Sir, Tony Thirlwall in “US consumers are the global gluttons” June 15, makes a reference to Nobel Prize winning James Meade’s differentiation between “autonomous” and “accommodating” flows while trying to sort out the “savings glut” or “money glut” discussions initiated by Martin Wolf’s “Who are the villains and the victims of global capital flows?” June 13. I am not sure how much this really helps, as we are always in the intersection of the autonomous and the accommodating flows, without being much wiser for that.

Please let us learn instead and not believe more in the pure blessings of using credit rating agencies

Sir, Gillian Tett ends her “Confidence in CDO rating system showing signs of strain”, June 15, with “Let us hope that the rating agencies and regulators can find a way to make us true believers again” though what we really should be learning is not to believe more in the possibility of a system whereby through the use of some few designated rating agencies we think we can help to direct the world’s financial flows without setting it up to some dramatic systemic risks. Would not using credit rating agencies to more bank crisis and other problems? Perhaps, but that way we would at least vent the system and not allow for the systemic accumulation of risks that can only build up to a truly horrendous explosion. By the way since in these discussions there is mostly a mention of the credit rating agencies when they miss by giving a too high rating, let me also remind you of their equally intrinsic and real cost when they give a too low rating. Any credit not given because of a bad rating, could in, sys fact be the best opportunity missed the world has ever seen.

But what about a bachelor degree in being happily unemployed?

Sir, as you say June 14 happiness lessons might not be a subject to add to the national curriculum, but perhaps some core course in how to be an unemployed with socially acceptable behaviour could be useful in times of so much outsourcing and migration.

What is at risk is our freedom to do what needs to be done.

Sir, Vaclav Klaus in “What is at risk is not the climate but freedom” June 14, is both wrong and right. Wrong in the sense that the fact that people could be ordered by governments to build levees and do things do protect themselves and their children for the future has nothing to do with “replacing the free and spontaneous evolution of mankind by a sort of central planning” and sublimely right in that an abusive exploitation of our environmental emergencies by an often hypocritical green clergy could definitely infringe on our freedom to do what needs to be done.

In immigration, more than barriers new riverbeds are needed

Sir Clive Crook in “How to untie the immigration knot” June 14 gives a glimpse of what is needed by arguing that instead of working on how to solve the 12 million stock of illegal immigrants the US would be better served by first working at the flow control valves. Doing that it is important to remember that the best way to control a flow is not always by building a barrier but sometimes by finding new riverbeds where it could run more orderly. It is in this respect that I believe FT’s readers could be interested in hearing about an initiative of trying to have private insurance companies stepping up to the plate and offer to guarantee the payment of a substantial indemnity to the US government for each worker who being favored by a temporary visa program does not return home in a timely fashion.

In search of answers on search engines

Sir, the discussion around Google issues as in Denise Kingsmill’s “Google’s market power warrants an inquiry” June 13 and Maija Palmer’s FT front page report that same date with respect to the “European fight over storage of personal data” naturally befuddles many of us.

Clearly a search engine should mostly be valued in terms of the services it offers to the searchers but in this case it is actually the searchers that become the searched and this leads to some very strange signalling effects. In fact I would not mind if Google was allotted, by the system, to perform a maximum of free searches, let us say 20 per cent of all the searches on the web during the last 24 hours, and thereafter, in order for a Google search to be allowed, a searcher would have to demonstrate Google’s search worth, by being willing to pay a substantial amount to Google for their service.

Also, with respect to privacy issues, we suddenly read about a possible compromise that would have Google cookies expire after only 18 months instead of 30 years, as if privacy had anything to do with time. On the contrary, if privacy was indeed the case, then one would perhaps be able argue that it is only after 30 years that Google could be allowed to use any personal data.

PS. We might need a Global Web Constitution

Why do you not sit down and talk instead?

Sir, Mr Vito Stagliano argues that “Opec’s threats prove sense of promoting alternatives to oil” June 12. There might be a thousand reasons for developing alternatives to oil but the only thing that the Opec threats really prove, is the need to sit down with them and talk about the whole issue. For instance if in 1998, when the price of a barrel of oil was $11 and according to some pundits like the Economist heading for $5, someone would have offered to buy the barrel of oil in a long term take up contract centred around $30 with some flexibility on the up and downside, then perhaps we would not be going through the current circumstances. Someone must have a vested interest in the oil issues not being solved by talking.

Immigration policies should not be a Noah’s Ark.

Sir, you are absolutely right when in “Small steps needed on US immigration”, June 12, you insist on the need to build credibility, which is exactly what some of us are trying to do by for instance developing a private insurance programs destined to guarantee that workers with visas issued under temporary programs will return in a timely way, or else paying some very substantial indemnities. What is not that clear though is why you think that creating bureaucratic biases in favour of high skilled workers is a naturally good thing to do instead of allowing the market to signal its own and very dynamic relative worker shortages. One thing is a Noah’s Ark in times of flooding and quite a different thing when it remains in the same spot, on dry land.

The explanation lies also in the absence of the normal “shavings”

Sir, I would absolutely side with Martin Wolf when he favours the “saving glut” (the US as a helpful consumer bumper) over the “money glut” (the US as an abusive imperial money printer) in “Who are the villains and the victims of global capital flows” June 12, as the main explaining factor for the compression of risk spreads and financing of the robust growth of US consumption. 

Having said that I would like to remind that there are many more characters to this story. Over the last decade, much the result of the Basel regulators’ efforts to drive out banking risks from banking, many of the financial risks have gone into hiding, frequently with the help of derivatives and credit rating agencies, and the world has therefore not suffered as many of the financial shavings that crisis and bankruptcies traditionally produce. 

You might mention Enron and the likes but the fact is they add up to almost nothing when compared to the tsunami dimensions of the flows. At the end of the day we will perhaps find much of the global capital flows evaporate into hot air when risks begin to show their face again and as perhaps has already started with the subprime mortgages in the US.

PS. Martin Wolf's http://blogs.ft.com/wolfforum/2007/06/villains_and_vi.html#comments does not any longer appear. I wonder why.

Spanish sayings and subprime woes

Sir, there is a Spanish saying that goes “we were many and then granny gave birth”. It came to my mind when reading Michael Waldorf’s letter “What Paulson and others are concerned about is manipulation of the market” June 11, in reply to some articles in FT that put forward the unkind possibility that some hedge funds could be against “loan modifications” that help mortgage payers, since they have a vested interest in the defaults (a short position). I say this because the market manipulation here denounced by Waldorf, namely that some credit coverage sellers (a long position) are buying up defaulted mortgages at par in order to keep up the value of their portfolio, only indicates another factor to be added to the current messy confusion that surrounds the subprime-affair. Seems that while some do not mind increasing the number of homeless, others are more concerned that we would notice it. The much rumbling and mumbling we hear also reminds of another Spanish saying that says “when the river sounds it is because it brings stones”.

Odious debt revisited

Sir, I must confess I was blown away when reading your editorial “Young, gifted, poor”, June 9, in which Junior, with reference “to the old saying that rather than inheriting the planet from our ancestors, each generation borrows it from the children” now wants to see “some collateral on the loan”. I mean, it sort of puts the whole issue of “odious debt” in a totally new and frightful light.

Honestly, the more I see what we are up to, the more certain I become that sooner or later our whole generation of baby-boomers could be kindly invited to take a field trip to an “ättestupa”, meaning those steep cliffs where supposedly elderly Scandinavians ages ago threw themselves from when they became useless to society.

I repeat again my argument for an urgent revision of our governmental system so as to align them with the true shareholder’s interest. If the average life is eighty years a new born should have 80 votes (exercised by his mother or older brother) someone like me would have 23 votes left, and someone over eighty should count his blessings and be glad if he is allowed to keep one as a memento. I do not want to owe the world too my children, I want to assure their rights as stakeholders and make it all a joint venture.

Sir Samuel Brittan’s blackout

Sir, Sir Samuel Brittan in “Towards a true price for energy” June 8, speaks up for the UK climate change levy and ends by saying “And if Opec made disapproving noises we would know that we were really on to something”.

He must be suffering from memory loss. In late 1998 early 1999 when oil was around $11 per barrel and according to some pundits (The Economist) heading for $5, then the distribution at the pump was 85 per cent for the UK taxman, 5 per cent for distribution and only 10 per cent for the producer who gave up for ever the non renewable resource that we should remember oil is. And sure did Opec produce noise, among others oil at $70 and Chavez.

If only at that time, Sir Brittan would have suggested fair long term take up contracts at $30 dollars per barrel, I can almost swear we would not be living the current extreme market tightness, and so reading him now suggest that the “proper reply to threats from Opec against the development of biofuels is to tell them to take a running jump” is just sad.

By the way, on biofuels, for the sake of our children, please let us not take a running jump, just to run our cars a couple of miles more.

Let us keep it as much as possible above the board

Sir, years ago, when the Venezuelan state owned oil company PDVSA was a thousand fold more transparent about its activities than it is now under the Chavez regime, I still had to go to their official filings in the US, produced as their debt were publicly listed there, in order to get the best possible information. I must confess that ever since, I am totally biased for public listings. I needed to alert to that fact before commenting on the letter of Javier Echarri the Secretary General of the European Private Equity and Venture Capital Association and where based on their own compilation of research reports he categorically states that “Private equity is fully regulated and benefits the pension funds of millions of ordinary people” June 7.

It might very well be that Echarri is right, but since the reason for taking companies private sometimes sound so similar to why some big chunks of our economies in many countries go underground into informality, should we not at least mention that it surely reflects badly on our society as a whole if we make darkness more valuable than sunlight.

By the way, one thing confuses me with respect to all those investments by pension funds in private equity funds that Echarri mention. As I have understood it pension funds are frequently restricted to the use of investment graded instruments, and so in this case that would signify that private equity companies can be investment grade, for public purposes. Is that not something of an oxymoron? Or do the credit rating agencies have access to some internal information we don’t?

A hidden tax is neither acceptable nor efficient

Kyoto with its system of selling indulgences for undefined carbon-sins and invest the proceeds in equally undefined carbon-good-deeds, while capping carbon emissions at a globally unsustainable level, is something like building a labyrinth in order to make the search for the exit door for our environmental emergency more interesting.

Sir, Clive Crook in his “Bush may be on to something…” June 7, presents the alternative of another labyrinth, in this case a national one, that would make it possible to “simulate a carbon tax . . . avoiding the word tax”. Forget it! If we are to find our way out of the very difficult environmental hardships transparency is a must and we have to be able to call a spade a spade. If what we need is a direct carbon tax let us work on that and shame governments into action.

Crook also mentions that the sale of “perpetual permits” would create a constituency with a vested interest in enforcement of carbon caps as that would make the value of the permissions go up. Forget it! If we are to find our way out of our global and public predicaments we cannot afford having the income to ex ante deviate into private rents when so much investment is needed, just as we also must be extremely wary of any signalling risk. Place these “perpetual permits” investors in front of a forest and ask yourselves whether their profit motives would induce them to reach for water to put out a fire… or for the matches.

Why not deregulate the banks instead?

Ian Morley from the Alternative Investment Management Association in “Hedge funds and regulators can work together” May 6, tells us that hedge funds are a positive force in markets by providing liquidity while at the same time on the opposite page Roger Merrit, from Fitch Ratings, in “Hedge fund behaviour in credit markets is untested” poses some serious questions about just that, and of course they are both right, for good and for bad.

Having said that when reading Morley’s spirited defence of voluntary regulations and of the fact that regulators should instead help to enforce these instead of coming up with their own I just want to ask where was he when the banking regulators decided for instance to force down the throat of the market, the opinions of a couple of few credit rating agencies. As one could argue that it is the excessive regulation of the banks that has been the main driving force for the hedge fund industry and that banks should in fact be more important than hedge-funds, perhaps what Morley should ask for is some deregulation of banks, but of course that is not what the alternative association is paying him to do.

For a starter defend the right to be unhappy

Sir, Martin Wolf did not seem to be too happy, and rightfully so, when trying in “Why progressive taxation is not the route to happiness” June 6 to review a “new doctrine” on happiness proposed by Richard Layard of the London School of Economics. 

Perhaps this was because in his response he might have focused too much on the outliers of a normal distributed happiness curve, instead of going for that huge middle area where tranquil conformity plays a much bigger role, as there is nothing that attempts so much against happiness than being forced to be happy. 

Wolf is absolutely right saying that happiness is something that should be pursued individually and that governments cannot make us happy but, having said that, I suspect that I am more convinced that he is about that a society where the use of some progressive taxation is deemed as natural, must be a more fertile environment for the individual pursuit of happiness, than an everyone for themselves society. 

Next time you complain about having to pay progressive taxes think of those who have not reached your marginal rate and count your blessings... and think of it as a status symbol. Finally let us not forget that if you never have cried you have never really laughed either and so the first stone on our road to true happiness might in fact be to guarantee the possibility for the broken hearts in our life.

Where is everyone?

Sir, Roger Merritt the Managing Director of Credit Policy of Fitch Ratings, one of the three and only credit rating agencies, now tells us that “Hedge fund behaviour in credit markets is untested” June 6, even though he knows that when you for instance rate the adequacy and safety of a boat you must do that in reference to the waters where it is suppose to navigate. Merritt, in response to a report in FT, now mumbles about some new paradigms in the global credit markets and then goes on to explain some century old facts that we all know and that he should have known. Where are the regulators willing to regulate when we need them?

What is new though, perhaps only because it is so shocking we did not even want to think about it, is that this diversify-your-risk driven market and that I prefer to call the hide-the-risk market has now developed some financial products, formally traded among formal participants, that create a vested interest (which means they profit) in the default of mortgages. What is this? A financial coliseum? Although I do no profess to understand it all (who can) I am no stranger to the fact that this type of derivatives could help people to get easier access to mortgages but now try to explain to someone being evicted that you cannot help him because someone has a legitimate profit motive that stops you from doing so. Where are our leaders when we need them?

The Venezuelan TV station’s closure is an infringement on your human rights too

Sir, the Universal Declaration of Human Rights in its Article 19 states that “Everyone has the right to freedom of opinion and expression; this right includes freedom to . . . seek, receive and impart information and ideas through any media and regardless of frontiers. This makes it clear that the arbitrary closure of a TV station in Venezuela although it affects directly the Venezuelan peoples right to expression, it also impairs any other citizen of the world’s equal human right to access information. This is made especially clear by the fact that the most reasonable proxy for true information that the world knows, is the free and diversified creation of opinions.

In this respect I need to ask whether you could ever be satisfied with a rainforest with only eucalyptuses and red parrots. Of course not! Therefore we need your help to conserve the info-diversity in Venezuela. As the indigenous to this small planet earth that you all are, this is your problem too. You do not need Venezuela to join the list of countries with absence of information, such as North Korea.

Investing in people losing their homes?

Sir, June 1 Saskia Scholtes reported of hedge funds' "Fear over a helping hand for home loan defaulters¨ and June 5 Richard Beales says that Fitch ratings could downgrade bonds backed by subprime mortgages if the loan's terms are changed to help borrowers keep their homes. It takes some time for the implications of such news to set in but when it does it really knocks you down. Do they mean that in all the risk diversification (or risk hiding) that has been occurring through derivatives we have now actually created a group of investors with a vested interest in people losing their homes? Sorry, something sounds wrong and this surely must be something more than your regular moral hazard. Can I go long on a nuclear missile index?

The sale of healthcare should follow stricter standards than the sale of timeshares

Sir, Brad DeLong in “Obama can remedy an ailing healthcare system” (why only Obama?), June 4, says that “the US spends twice as much as Western Europe for little benefit” but then continues writing only about the need of increasing the health-insurance coverage and which presumably could only increase health-spending.

I am a foreigner and no expert in the area of health assistance in the US (probably thankfully) but, from the little I have seen the number of uninsured is large, but so are also the costs they are charged.

Whatever you do there should be no place for timeshare selling procedures in healthcare and there should be a rule that clearly states that you are not allowed to charge someone without coverage, more for medicine or any health service than what you would charge a covered patient.

By the way, and before you lose all sense of social solidarity, please develop an insurance that covers any additional costs because of what could be discovered in your DNA when gene tested.

De-regulation Italian style

Sir, Wolfgang Münchau, who I do not take for an Italian begs “Italian politics needs to get over the rainbow” June 4, because, if not “over a period of 10, perhaps 15 years, Italy’s economic decline will become unbearable”. Unbearable to whom? Since I cannot under any circumstances profess to being an expert on Italy and I must instead confess always having the need of seeing what Italy could offer the world in terms of tips for better living, I would be more inclined to find in the observation that “many public sector employees never turn up for work” a description of effective de-regulation Italian style, and in the “yet are fully protected against dismissal” a slightly too Germanic observance of the taking care of the losers rule so admonished by the World Bank and others. Capicci?

Forget the biofuels and go for a real oil price floor instead

Sir, what do you really mean with your editorial “Biofuels need not leave us hungry”, June 2. You start by mentioning that the US corn based is ethanol grown in Iowa is “eye-watering wasteful”, and there is no one to discuss you on that, but then, though you spell out the arguments of ethanol being only marginal less polluting than oil and that the marginal new production areas of sugar-cane based ethanol lies in the rainforests, you still conclude that EU should drop its tariffs on ethanol…with a dramatic “now before it is too late”

Days ago, May 23, you suggested (for the US) “A price floor for oil” but, since you proposed achieving that by imposing green taxes on gasoline, you were there actually suggesting a price floor for anything but oil. May I instead take you on the word and suggest you try a real price floor for oil, whereby Europe guarantees a take up of oil based on a minimum negotiated price? That would help to bring some real new oil production to the market and, if you then would want to impose some other green taxes on gasoline to finance the cost of that real price floor guarantee or just to further reduce its consumption, well be my guest.

Sir, why does Europe willingly to enter into long term take-up agreements for gas but not for oil?

Send China’s surplus to Africa!

Sir, somehow I felt that a question mark was missing in the title of Martin Wolf’s “The Right way to respond to China’s exploding surpluses” May 30, since after reading it I must confess I did not feel much wiser. Yes, agreed, China is accumulating much capital now, but that perhaps this is only so because we are using very short yardsticks to measure, like years instead of decades or even centuries. Yes, it seems that China should be able to spend more on such praiseworthy items as health and education, but we also know that it is not possible to spend in a contained way without having it slip over into other demands, like for instance more cars for teachers and doctors which then will require more oil. The real answer to China’s surpluses must be helping them to come up with a long term investment plan that makes sense. For instance, in a world where the energy/carbon-emission factor is clearly going to impose constraints on growth, there might be many preparatory investments that China could do. But if we start looking at it from that angle let us not forget that the US could also be better of doing some of these investments instead of using Chinas savings in dollars for consumption, or for postponing fundamental health and education reforms.

In a global world there will come a moment when we need to start analyzing the global marginal return of projects (GMR), and, from this perspective, perhaps Glenn Denning and Jeffrey Sachs’ article “How the rich world can help Africa help itself” and that coincidentally appears next to Wolf’s might be faulty titled too and should read “How China should reallocate their savings and help Africa help itself.”