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

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

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

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

Eerily peculiar recommendations

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

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

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

Give the banks time instead of bailouts!

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

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

Too much ‘Group think’ C’est la vie!

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

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

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

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

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

To insulate us from realities? Thanks but no thanks!

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

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

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

Wake up Mr. Wolf!

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

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

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

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

PS. Credit ratings as a systemic risk

The truth as always lies somewhere in the middle!

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

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

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

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

We do not need FT to be a Besserwisser

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

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

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

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

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

What we need is trusting doubters

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

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

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

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

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

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

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

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

And no one called Mr Sharma’s bluff!

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

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

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

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

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

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

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

Spend your limited ammo on the real world!

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

Better confused than wrong!

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

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

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

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

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

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

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

The born again financiers

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

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

We need the regulators to backtrack on their own ideas

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

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

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

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

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

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

A Nobel prize-winner should not make such a statement

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

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

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

A flat tax is what a flat world needs!

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

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

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

A crash capital replenishment is bad for the banks

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

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

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

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

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

Nothing but BIG!

Sir February 29 David Wright0n reports that AIG announced “almost $15bn of writedowns and losses related to subprime mortgage exposures” but that according to Martin Sullivan, the chief executive, “AIG had the ability to absorb the current volatility while committing the resources to grow and take advantage of the opportunities”.

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

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

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

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

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

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

Sovereign funds are not really that sovereign

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

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

The bank regulatory system risks turning itself into a Polish cavalry

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

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

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

They have not even imagined how right they are

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

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

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

Help the subprime´s go prime

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

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

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

Sorry music industry, the ball is completely in your park

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

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

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

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

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

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

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

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

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

Sounds like a lot of butterfly wing flapping!

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

The credit rating agencies are private public servants.

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

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

Careful with the systemic risks of supremacy

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

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

A proposal for a reasonable regulatory forbearance

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

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

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

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

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

How the Financial Times got duped

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

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

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

FT should take care not to become a pink pamphlet

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

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

Assign to the diasporas a chair at the World Bank

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

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

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

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

Does FT have a conflict of interest?

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

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

An explanation yes, but not an excuse for the cowards

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

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

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

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

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

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

Stripe the credit rating agencies´ powers

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

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

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

Would shorting England be acceptable?

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

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

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

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

Installing fire detectors at the insurers against fire

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

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

Narrow banks just reflect narrow minds

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

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

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

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

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

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

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

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

Basel II just keeps digging the hole of Basel I

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

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

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

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

But why should we keep the financial sector caged?

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

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

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

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

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

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

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

Harmonizing also carries its risk

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

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

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

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

Clarity about what?

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

FT Sustainable Banking Awards

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

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

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

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

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

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

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

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

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

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

Should we freeze the ratings too?

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

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

And US, get yourselves some more helpers too!

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

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

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

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

Congratulations Basel?

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

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

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

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

A tsunami is riskier when in a bathtub

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

Once again going alone!

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

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

Authorized trading could be even worse than not authorized trading

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

Come on what about that stiff upper lip?

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

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

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

Long live the Balkanization of criteria!

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

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

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

FT should not lend support to the sophisticaters!

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

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

Any explanation?

Sir Sheila McNulty reports in “Profit at Conoco mask oil industry’s problems” January 24 why even with high oil prices international oil companies find themselves with limited access to resources and an unclear path for investment, and which obviously must impact the availability of oil around the world.

In reference to this may I ask why on earth have not the consumers and the oil producers been able to agree on long term supply/take up contracts based on a reasonable initial price; and slowly adjusted to the real markets by means of a running twenty-year average moving price? The governments could help out, acting as buffers, for instance by charging gasoline taxes also in accordance with the price stabilization scheme.

I truly do not understand why no government from an oil consuming country has not empowered some agents to go out in the market and negotiate on their behalf some decent terms on oil for its constituency; exactly the same way I cannot understand why the government from a producing country has not gone out there to negotiate some of the stability that their economy and constituency need.

Clearly the incentives of having long term contracts at reasonable and stable prices would help the much needed investments in oil exploration to take off.

Do not dig us deeper in the hole we’re in!

Sir, Ieke van den Burg when writing “We must have strengthened oversight of bank sector” January 23, seems to propose we dig ourselves deeper in the hole where in, when asking for the creation of “holistic” public oversight. That, just as the empowerment of the credit rating agencies meant will just increase the systemic risks of global failure.

As I see it the best way to go is to follow the tradition of not putting all your eggs in the same basket and therefore creating a progressive tax on the size of the banks. The larger the bank, the more it will hurt if it fails, so the more it should pay in insurance premiums.

Marx prophesied “a progressive diminution in the number of the capitalist magnates” and the best way I know of fighting Marxism is to stop this prophecy from becoming a reality.

At least let us guarantee some cyclicality in the bonuses!

Sir Prof Avinash D. Persaud in his letter “Bumper bank bonuses and banditry in the boom” suggests new regulatory capital requirements for the banks so as to get rid of a system that “adds to pro-cyclicality”. I could not agree more, especially since that would also help to reduce the “pro-cyclicality” produced by the credit rating agencies which is something I have been arguing since the Basel Accord started to be applied globally.

Though I also agree that the above is a much better way to take care of the salaries and bonuses of bankers than having regulators act directly on it, I would like to remind about the importance of fully restoring the powers of shareholders, in banking and in all other activities because as long as management have so much influence over their own bonuses there is not even cyclicality.

Who suckered who is the wrong debate

Sir George Soros writing about “The worst market crisis in 60 years” January 23, is right to say that resulting political tensions…may disrupt the global economy and plunge the world into recession or worse. Unfortunately he then adds coal to that fire when he speaks with venom about how “Globalization allowed the US to suck up the savings of the rest of the world”, knowing perfectly well this was mostly because of the immense reserve accumulations of dollars voluntarily made by governments, mostly to keep exchange rates artificially low in order to, in Soros phraseology, suck up jobs. Who suckered who is not the debate the world now needs.

That the US should have ignored the financing offers they received from the world and behaved with more discipline not one doubts, but neither would then other countries have been able to strengthen so much so that they now can perhaps take over some of the pulling responsibilities of a bit tired US economic locomotive. How that can best be done is what we should be debating.

If knowledge suffices then wisdom is worthless

If knowledge suffices then wisdom is worthless and sure enough our bank regulators placed more value on knowledge than on wisdom; which is the only way how you can explain such foolish behaviour as empowering the credit rating agencies with so much power over the financial flows of the world.

See where this has gotten us. All the very sub-prime awarded mortgages to borrowers that classified as subprime would have not been able to go anywhere had they not been blessed as prime collaterals for other securities.

One reason that stops the world from realizing the foolishness of it all is that the credit rating agencies are private, and we have all been pavloved into establishing a connection between private and free efficient markets. The truth though is that the private credit rating professionals are only outsourced bureaucrats working for some pompous Ministry of Financial Risk Elimination.

Cooperatives hit Wall Street?

Sir on the front page of your weekend issue January 19, the lead title says “Merrill to reform bonus system” and we read that they plan to “change the bank’s pay system so that it was ‛based more’ on how the whole company did; then on how the individual business did; then [on] how the individual did”

Will we perhaps soon hear Merrill suggesting all the companies they invest in to follow their cooperativistic movement lead; and also create a specialized hedge fund?

Could our economic weapons be slightly passé?

Sir Samuel Brittan’s “We have defences against a slump” January 18 reads like a brilliant general discussing what to do in the current war, with the weapons from the last war. Our problem now is that we have not yet been able to really identify the exact strain of the current economic hardship’s virus so as to know what could best work.

For instance, nothing of those reckless borrowing and reckless lending in the subprime mortgage sector would have gone anywhere had it not been for the credit rating agencies having been appointed as financial commissars by our bank regulators. Does this now mean we have to start by radically extirpating these agents from our system or do treatments suffice?

How do the French national hypocrisy reserves measure up nowadays?

Sir Philip Stephen in “Lovestruck Sarkozy gamble on reaching a happy ending” January 18, gets into the theme of “throwing overboard this ‛deplorable tradition of hypocrisy’ was refreshing”.

Given that national reserves of hypocrisy frequently are of immense values to solve problems or at least keep a lid on them to prevent them from exploding, it would be interesting to hear Stephens opinion on how these reserves of France stand up when compared to those of other nations.

It is not that I believe that hypocrisies have to be included on the balance sheet of a nation, but a special footnote on it, among contingent assets and liabilities, could be helpful in furthering our understanding of it.

Banks should not be allowed to turn into automated credit machines

Sir if the credit rating agencies were gubernatorial offices with bureaucrats instead of private companies I am certain many would be looking at them from a quite different perspective but the truth is they are their function is a regulatory one, to inform the markets where they can go and at what price.

John Dizard in “Time to see is established credit rating agencies make the grade January 15 tell us that we should count out the possibilities of going “back to a system where credit is dispensed by bank credit committees” as they “aren’t the people structures of capital available in the banking system to do that”. Well how sad, our banking system is the now only an automatic credit machine that follows what the piper says? Of course we have to get out of the current system…it is crazy… the horrendously badly awarded mortgages would not have gone anywhere had it not been for the prime ratings.

I am in no way predicating against the credit rating agencies, they have a role to fulfil and they should be able to compete favourably in the market of credit opinions, but what I am totally set against is bestowing them with so much power. Get rid of the system of calculating the minimum capital requirements for the banks based on risks as calculated by the agencies and you will immediately stimulate some of that credit analysis capacity that we would like to see in our banks.

Dizard and others spend time analyzing whether by changing the compensation structures of the credit rating agencies one could correct their current weaknesses. Of course that is always a good thing to do, but to think this would stop us from being led into even worse systemic risks, when thereby trusting even more those few empowered to tell us what to do, is just to blithely ignore all the lessons learned by mankind.

Martin Wolf did right opening the cage!

Sir who could have thought a year ago that we would read Martin Wolf say “Why regulators should intervene in bankers pay”, in the Financial Times, January 15, and agree that he has a valid point; that the system cannot stand to see many franchises of public confidence so savagely exploited by so few. Mind you, on a much different scale, that is exactly how we ended up turning over Venezuela into the hands of an instigator of hate.

Perhaps what we now need is a new layer of progressive taxes specially designed for those who earn more than 100 times the income per capita of the country. The argument seems also applicable to the area of intellectual property rights. When we the society agreed to award patents and invest money defending these so that new inventions would follow, we never did it in order to help the general managers of those patents to earn salaries like hedge funds managers or bankers.

But also what could be most needed, in this case for all, instead of new regulations, is to restore the power of the shareholders since as long as management can decide their own salaries, the market constraints have really not a chance to operate. There’s a fiction making its rounds in the world that the big salary checks are all well deserved and well earned. Who do you think put a spin on that theory?

Regulatory malpractice is not the same as laissez-faire

Sir Barney Frank the Democratic chairman of the House financial services committee argues “Why America needs a little less laissez-faire” January 14, and though he might be right on many points he would do well to also remember that our current financial turmoil-with-the-potential-of-chaos is in fact primarily the result of regulatory malpractice.

First, the minimum capital requirements based on differentiation of risks that were imposed on the banks by the regulators was the incentive for the banks to go from the originate and keep it on your balance to the current originate and distribute it to where it can’t be readily see mode.

Second, to believe that you could give some few credit rating agencies so much power without this sooner or later turning into the mother of all the systemic risks creation machine can only be explained with one word… naivety.Whether there were predatory subprime lenders or predatory subprime borrowers none of them would have gone anywhere had it no been for the credit rating agencies reinforcing the belief that risks are measurable and controllable.

And so, before we tackle and solve the above, the financial tsunamis will hit upon us time and time again.

Speaker’s Corner revisited

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, 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 considered as boring in-betweens, have now to settle gratefully for slots in after-midnight cable television, or Speaker’s Corner, (or FT when they published us).

Sir Cass Sunstein discusses the fundamental issue of “How the rise of the Daily Me threatens democracy” January 11, and he should be commended for it since indeed the most dangerous weapon for mass-self destruction in any society is divisiveness; as a columnist in Venezuela I should know; there I write in green but my readers can only read me in yellow or in blue.

The current sheer overload of information forces many to use a very simple though also very dangerous initial classification system that uses some basic common denominators. The one of these most recently used is of course Bush, and which has otherwise clear-minded people thinking: “Hugo Chavez speaks against Bush? Then he must be good!”

How do you fight it? The only way I know is by always pointing out the many shameful similarities of the extremes and trying to make life in the middle seem interesting, fun and chic. But, it still takes guts to swim in the middle of the river and not crawl up on an extreme safe shore!

Gold is but an insurance

Sir in “Gold is the new global currency”, January 8, you express hope that gold’s most bullish fans are proved wrong… but really, so do most of them. We all know that gold is one of those worthless things that can become extremely valuable just because other valuables become extremely worthless, and so we regard the increase of the gold price with the same enthusiasm we can have about someone collecting on our life insurance policy.

Just agents or champions of change?

Sir Gideon Rachman writing about “Obama´s message to the world” January 8, refers to John McCain’s support of the Iraq war and though this is indeed an important fact on its own, I believe that much more important is that this support is given knowing that it is not a popular stance; and the same could be said about his full support of the recent legislation package on immigration. Therefore, and not that I do not like Obama, I do, but McCain seems also to be a valid candidate for “change”.

Why do not those both these candidates team up and propose what the American economy could need the most, namely a hefty tax on gasoline/petrol consumption? That would propel them from being merely agents of change into real champions of change.

Don’t go overboard blaming the investment bankers

Sir, Prof Eric De Keuleneer sounds more than upset in his “Investment bankers have behaved like pyromaniac firemen” January 8. Of course many of them did wrong but, before he spits out more venom, and most especially before he suggests new and tighter regulations, he would do well to study how much the investment bankers have in fact only been responding to the current regulations. As I see it, in history of mankind, there have never been as stringent financial regulations as now, when everyone has basically been ordered by the regulator to follow the tune of the piper, the few credit rating agencies.

Take away some of the incentives for consumer lending

Sir, January 8, Stephen Roach argues that “America’s inflated asset price must fall” in order “to shift the mix of savings away from asset appreciation back to that supported by income generation” and which sounds desperately drastic when there are other means to do that.

Anyone who lives in the US and receives ten pre-approved credit card offers each week and still, six months into a crisis, has to answer five phone calls a day offering mortgages, must know that some other forces than asset prices must be driving debt creation.

Since so many seem capable to so easily switch from praising the US for being the locomotive of world growth to “being the main culprit behind the destabilizing global imbalances” let me at least point out what I think is also responsible for the current sad state of affairs.

The securitization of consumer debt which allowed the creation of low risk financial instruments, plus the introduction of the minimum capital requirements for the banks and which are exclusively based on risks, as perceived by the credit rating agencies, constituted a massive dose of incentives for the financial system to go after the consumers, in the US and everywhere. Taking away some of the incentives to offer unreasonable consumer credits might long term be a much wiser thing to do for a nation than having the price of their assets fall from the skies.

In the long term the credit revolution points to other problems too

Sir Wolfgang Münchau in “The credit revolution looks to the long term” January 7 looks for the bright side of our modern credit markets, which is something good. Doing so he brings forward the “subprime mortgage, a product that allows poor families without a credit record to finance a home”. Unfortunately even this might not be such a clear cut and run proposition.

It used to be that depending on his income, a potential home buyer could classify for more or less of borrowings, but the interest rate to be paid on the loan did not differ much between a “good” borrower and a “not so good” one. Not any longer. The current knowledge economy classifies the market in many more different types of credit risks, which of course causes more financial discrimination, for good and for bad.

A thousand dollars paid each month servicing a mortgage during 15 years, when discounted at 11 percent per year, because the borrower is deemed “risky”, is worth 88.000 dollars today. Exactly the same payments, discounted at only 6 percent because the borrower is deemed creditworthy, are worth 118.500…35 percent more! And here lies one of the real problems of the subprime debtors… not only do they have less money but the little money they have is also worth less.

Now add to the above that the credit ratings might not reflect correctly the repayment capacity of the borrowers and we can see how as a society could be drawn into an unsustainable structure.

There are carbon border taxes that do no sound that bad

Sir in the greening of globalization, January 4, you correctly speak out against carbon border taxes since these could be sheltering a new dangerous breed of protectionism. But, given that Europe and the world has to pay so much more for oil and has to see its environment so much more contaminated, just because the US does not want to restrain its consumption of gasoline/petrol perhaps a carbon border tax on US products that considers this would not be such a bad idea after all.

That business growth should not be an end in itself is a worthy end in itself

Sir Sir Samuel Brittan is of course right when he reminds us that “Business growth is not an end in itself” January 4. What more pleasant for all of us to be able to retire in a sort of economic production equilibrium to enjoy the “other” offerings of life? But, for that to happen, there are at least two things we must do.

First we have to work real hard on our current distribution machinery since before the needs of all your citizens are satisfied, which might include even those of the other poor in the world, you would not be able to relax enough if you always had to be looking over your shoulder to see if someone is taking advantage of your bliss to grow away from you.

Second you need to send much better economic signals on where you find yourself, as I at least would not want to get stuck on a level that requires me accompany my wife when she goes out shopping at 5 am in the morning in one of those strange sales that the US economy seems to require. For a start I have often suggested that instead of only adding to the economic indicators we need to start resting some of its costs. For instance every time someone has to leave whatever he is doing in order to answer an uninvited call, offering you something he could do without, then you should automatically rest a couple of quid from your GDP.

Let us pray that immediate financial adjustment is not too expensive

Sir Gillian Tett analysis some linkages between the bank crisis in Japan and the current difficulties encountered by the western financial system in a great article “Financial faith found wanting” January 2. Of course the title is a little bit insulting since what has been really been found wanting is the financial knowledge that was supposed to correspond all the investor’s faith deposited.

But what I really would like to comment on is that there is a very substantial difference between the management of the both crisis and we really do not know how this will plays out. Tett quotes Tadashi Nakamae with “Japan’s… banker’s stubborn refusal to recognise bad debts and authorities´secretive attitude amplifies the problem in the long run” and this is although true might also be a very low price for buying the necessary time to work it all out in a more orderly way. The current system with its minimum capital requirement rules bindingly agreed upon in the Basel Accord and the mark to market accounting rules; and that forces upon the banks rapid adjustments with no delays allowed might indeed result in less rain, in the long term, but could lead to a monsoon that though brief could destroy much more value. We will just have to see… and pray.

Finally let me also acknowledge the fact that at least one former regulator, Mr Timothy Ryan is starting to recognize their responsibilities in this whole mess saying “Former US bank regulators like me feel a bit responsible because we used risk-adjusted capital rules to put riskier assets of balance.” As I said, it is but a start. The part of appointing the credit rating agencies as the financial watchdogs of the world is still pending.

The US does not have to ride away in the sunset

Sir we certainly hope that anyone getting back to work on this January 2, 2007 reads the articles about America in the order you seem to suggest, first Niall Ferguson's scary "An Ottoman warning for America" and then the slightly more soothing "Prepare for a global economic downturn but not a disaster" by Wolfgang Münchau. Even so he must become extremely concerned.

I do not see things in America that bad since as life-long consultant with much workout experience I am used to immediately look for the reserve of important things that seems feasible to correct and that could generate a turn around. This particular reserve seems quite large in the US, and I am not just referring to the Iraq war.

If the US would though taxes raise their gasoline prices to European levels; put some corrections in their runaway health-sector costs; reform their bankrupting tort system; not keep over two million of their citizens in jails or prisons; accept that when the check arrives is not the best moment to sent away those who might help you pay it, like the immigrants, then we would have to conclude that the US has still a long way to go as the empire. Of course if the US can't find it in them to correct those things, it would indeed be riding away in the sunset in a The End, but then this would also not really be because of economic problems but because of something totally different.

Not even new jobs are needed, just a little income support would do

Sir Prof Jacob Borne makes a well argued case for to "Give the tree choppers more profitable jobs than logging" December 31 but I would add that since chopping logs is really not that profitable we should just give some income support to all those who live in the tropical rainforests and engage in traditional and environmentally sustainable non-logging activities.

We actually do not need to produce new high tech manufacturing jobs in the Amazon; a couple of hundred dollars per family a month, for them to improve their living conditions, while they keep an eye on their forest for all of us would do wonders.

The problem is that though we quite easily find ways to support our local parks and national forest reserves this seems so much harder when it comes to maintaining the health of our global common goods like our lungs in the Amazon.

Where has financial liberalization taking FT?

Sir your editorial on "Where the financial liberalisation got us" December 29 contains a doubtful statement, some declarations of faith and a big dose of understandable financial sector partisanship.

First can we really speak about liberalisation while a fundamental part of the financial system, namely risk evaluation, is chained by the regulators to the limited criteria of a few credit rating agencies? Before, in banking, there was more of a "you banks you do as you like but only indoors" while now it is more of a "you banks can go out but remember always to do as your nannies the credit rating agencies say" and we could spend years discussing which is the most liberal of those two systems.

Second, among the credos you recite is that of "but before the first Basel agreement on capital adequacy reserves often bore little relation to a bank's risk", and this is something that we all hope is true, but not necessarily so when we see so many banks scrambling around for more capital. Also when you say that "capital [has] been allocated more efficiently" we have to wonder on what basis you are sure of that since most of us would only be able to come up with a "and let us so pray".

Finally, on partisanship, your "Whereas 40 years ago many millions of young people may have wanted to borrow against their future income, in order to go to university…" contains a whereas that might be a little too sweet for our taste when we now read about so many students struggling to repay their loans.

The government needs to help turn subprime dollars into prime

Sir Saskia Scholtes writes that the "Helping hand could prolong subprime pain", December 22, and though she argues it well it really does not have to be that way, if the helping hand knows how to help.

Let us suppose that a subprime borrower has a set amount of dollars that he could pay to service his mortgage. In the financial markets, because of discounting of risks, the worth of that dollar cash flow is much lower if it is classified as a subprime lending operation than whether it is viewed as coming from a prime operation. And here is where the government could help turning his subprime dollars into real prime dollars. Could it really be so hard? I mean they are still exactly the same dollars.

A thousand dollars paid monthly during 15 years discounted at 11 percent is worth 88.000 dollars today while the same payments discounted at 6 percent is worth 118.500…35 percent more!

If the government is willing to guarantee, up to a specified amount, the mortgage payments of those who currently own and live in a subprime mortgage financed house then this would empower the borrower to renegotiate with the lender some much better terms, for each of them. This is a win-win strategy for them. Freezing the rates but keeping them subprime is, at best, just a win-lose proposition.

Could this cost the taxpayer some dollars? You bet! But then again someone has to pay for the bank regulators having appointed the credit rating agencies as their financial overseers and with that allowed some small sub-primely awarded mortgage virus to spread globally.

Why do you not make the real problem part of the solution?

Sir in your editorial "Subprime shake-up" December 22, you comment on the Federal Reserve's new proposals for some new mortgage lending practices in exchange for those "that led to this year's subprime debacle" You also recommend that regulators enforce their rules better, for instance by inspecting loans at random… but were not the credit rating agencies supposed to do that?

You must be fully aware that even with much worse lending standards there would have been no subprime debacle at all had the credit rating agencies not blessed the securities backed with these mortgages with their prime credit ratings, and so I must ask why you do not make the real problem part of the solution?

You also mention the risk of over-regulation, but Sir, is not in fact the appointment of the credit rating agencies as the supreme risk overseers in the financial markets the mother of all over-regulations? I believe mortgage bankers are quite capable at handling their job so why not let them get back at it again and get rid of those who fouled it all up?

A bailout in the dark?

Sir Mark Fish and Benn Steil in "Root out bad debt or more pain will follow" December 21 make clear the problem that the government has in helping out the subprime mortgage mess namely that the whole securitization process with its slicing and dicing has made it difficult to see where the final losses really lie, and therefore, while reaching out in the dark to help you might mess it up even more. Fish and Steil recommend the purchase of the underlying mortgages at deep discounts while I would prefer buying the houses where a real bona-fide debtor lives at a discount and arranging for a lease and sale back contract that makes sense for the taxpayer and the current owner. Anyhow whatever route is taken one needs at least to be sure that the underlying problem is cleared once and for all since experience says that there is nothing more expensive that keeping a problem pending in the sole expectation of losing less

A necessary though not so welcomed reminder

Sir Martin Wolf’s “The dangers of living in a zero-sum world economy” December 19 is a splendid, necessary but of course quite unwelcome aide-memoir for all of us that feel that we have been somewhat unworthily blessed with peace and prosperity during our life time and worry that we will not be able to guarantee the same for our children.

I fully agree that we will have to count on human ingenuity to save our descendants from the dark ages that already lurk close (hugo chávez), but to that end we also need to keep on believing that goodness and badness does not add to a zero-sum human condition

Beware of bank regulators acting like gods

Sir John Plender asks what is the right level of capital for today´s financial world, “Investors pray for acts of God but even they come at a cost” December 19. His question contains its own answer. Since it is in fact impossible to calculate the right capital then the best thing would be to be humble about it and require one single capital requirement for all assets, instead of arrogantly trying to outwit the market as the regulators did when they created their current minimum capital requirements that differentiates based on how risks are perceived, primarily by the credit rating agencies.

It is when the bank regulators themselves start acting like God that they really set us up for the big systemic disasters.

We need to stop this financial hocus-pocus!

Sir Arturo Cifuentes writes “Weak Basel II may not be enough to calm credit fears” December 18. Of course not! Basel II is just digging us deeper in the hole where the regulators placed us when they so unwisely thought that risks could be determined; and came up with their minimum capital requirements for banks based exclusively on risk, as determined in Basel I by the credit rating agencies and in Basel II by the models of the banks themselves. Those arbitrary regulations were the main cause for all the financial hocus-pocus we are now suffering.

If there is anything rational for the regulators to do now it would be to swallow their pride and require the same percentage of capital for all credits; give the banks some time to orderly adjust to this; and let the markets price the risk of the banks, for instance by forcing the banks to issue subordinated debt as was suggested by the Shadow Financial Regulatory Committee back in 2000.

To top it up, based “the bigger they are the harder they fall” I would also add some additional progressive capital requirements or insurance payment based on size.

A leap into the darkness defines 2007

Sir Gideon Rachman in “Five events that have defined 2007” December 18 unable to identify one single event gives us a list of them and argues that all are loosely linked together by the strain they put on the US. I do not agree with him. Among Rachman’s candidates is the “August: the credit crunch” and since even now, at the end of 2007, the supposedly most sophisticated financial machine that our knowledge economy has ever known does still not have a clue about where they find themselves, no one could have doubts that this event, almost a leap back into the dark ages, must by far be the most defining event of 2007.

Transparency is not completely without value

Sir I am not sure I get or even want to get the full drift of John Dizard’s “Time to admit that the models don’t work”, December 18. As I read it states that through the inter-central bank swap the lines Fed might provide liquidity to the non-US central banks so that these having less restrictions than the Fed can help out taking on their books some of the collateralized debt obligation initially owned by the US banks but swapped into the European banks.

If do this is of course a major operation that gives a totally new meaning to central-bank cooperation though I am not really sure I would like to be on the European side of the bargain. That said if risk adverse central bankers think that the conditions are serious enough to warrant this, why on earth do they not recommend their respective governments to proceed with much more targeted fiscal support measures that can perhaps be better explained to the taxpayer?

I for one would always prefer my government helping directly the mortgage holders who I can at least identify as the beneficiary, than having it give support through the purchase of some debt collateralized with mortgages, where I won’t have a clue whom they are truly benefiting, and the authorities will have to plead blissful ignorance.

No Santa comes Christmas?

Sir Kenneth Rogoff with his “The Fed must not play Santa to the markets” December 18 tells us to be careful since besides recession inflation might be lurking around in the woods. Okay that sounds like a reasonable warning from a reasonable man; problem is what are we to do with it? Given that our current problems might very well be derived from the fact that the Fed dressed as Santa during the rest of the year does Rogoff mean that comes Christmas they should now dress in academic robes?