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

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

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

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

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

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

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

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

The taxes not yet paid might remain unpaid tomorrow

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

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

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

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

How many ounces of gold richer am I?

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

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

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

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

Financial Times, is not the City your home team?

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

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

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

It is a great plan but what about its implementation?

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

Ethics is also about not preventing financial crisis at any cost

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

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

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

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

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

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

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

Solipsism is an endemic condition in oil rich Venezuela

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

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

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

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

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

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

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

Please reprint this article once a month.

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

Social engineering

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

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

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

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

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

Sir Daniel Schäfer in “Keeping the lights on” November 11, writes “Bankers say that there is a time bomb ticking that could explode next year, when banks, already under pressure to deleverage, may be tempted to cut credit commitments on the back of companies presumably dire 2009 results”.

It is precisely because of that highly countercyclical “pressure to deleverage” that I am begging for the financial regulators to urgently decrease the capital requirements for all those BB+ or lower rated, or unrated, and that having in no way been the source of this crisis are now the most castigated by the need to rebuild the equity of the banks.

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

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

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

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

Recovery Inc.

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

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

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

Lord Daniel Brennan´s conference:

http://www.youtube.com/watch?v=XkY5lDMCmMQ

My article:

http://opinion.eluniversal.com/2009/10/22/opi_art_recuperadora-inc._22A2933411.shtml

Send Sigrid Rausing to speak to the Basel Committee

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

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

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

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

Note: Most recent background material
A YouTube on the taxing of risks in the land of the brave http://bit.ly/noQxT
An article in Martin Wolf’s Economist Forum http://bit.ly/10K4TI
My “conspiracy” site http://bit.ly/gNemy

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

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

The regulator should regulate not discriminate

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

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

It is indeed hard to find the right moment for sacrifices

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

Is this not really a case of this generation of baby-boomers against next generation of baby-boomers?

You can’t explode a bubble and have it too

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

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

Is there no cost in avoiding bubbles?

Sir though I agree with much of Martin Wolf’s “How mistaken ideas helped to bring the economy down” October 28, I have serious difficulties on understanding how one should be implementing the bubble-busting. Are the regulators now going to appoint bubble-measurers? Are we going to have these assets bubble-meters being showed off in Times Square?

Much the same way it sounded so utterly reasonable to have the credit rating agencies influence how much equity banks should have, and look where it led us, this reasoning assumes that a bubble is a bubble and that there are no risks derived from pre-announcing that a bubble will not happen. And what if the prime motor of development is the belief in the possibilities of the next bubble? If we eliminate ex-ante the possibility of a bubble will some then just stay in bed while other countries with no qualms about crisis go forward?

If there is something truly lacking in the current discussion on regulatory reform is the appreciation of the good things that come with risk-taking and now, the good things that come from bubbles.

Me, I would love the world to keep on taking risks- and blowing bubbles even at the cost of suffering huge setbacks as long as that takes us forward. Because of this, more than worrying about where the next precipice might be, I would try to make much more certain we are heading in the right direction. Others, on the contrary, seem to be satisfied with what they have achieved and settle for keeping it.

The regulators did indeed cause this crisis, with their faulty regulations

When in 2002 I arrived from Venezuela, where I had never been assaulted, to Washington DC, in less than 48 hours I was thrown to the floor at handgun point and robbed of my wallet. When I asked the police officer who had helped me to my feet “is this not supposed to be a safe area? he answered “yes, you are right, and that is why these bad figures need to come here to steal”.

If the police had told some neighbourhoods in London that just because they were safer they could lower the guard and leave the doors open and some disaster had ensued, it would surely have been blamed. But this is exactly what the bank regulators did when they authorized the banks to a 62.5 to 1 leverage as long as they were lending or investing in AAA safe areas.

So therefore when John Kay in “Too big to fail’ is too dumb to keep” argues that “the claim that regulators caused the crisis is a ludicrous as the crime due to the indolence of the police” he just shows he has no idea of what happened. 99 percent or more of those losses that detonated this crisis can be traced to this regulatory naïveté. Just for a starter the AAAs of AIG would not have the same value.

The problem we have is that so many are trying to use this crisis to push their particular agenda, which often requires a blatant disrespect for what really happened. Mr John Kay, a true baby-boomer, in the “Après mois le deluge” sense, wants us now to have narrow banks which refuse to underwrite risk-taking, as if society can prosper with non-risk taking banks.

And, by the way, since I am one of the very few who has spoken out loud and publicly against the “too big to fail” before the “too big” started to seem as failures, this is by no means a defence of them.

We must urgently, temporarily, lower the capital requirements for BB+ and below.

Sir John Dizard’s “The real reasons why banks are remaining reticent on lending” October 24 marks, from what I have seen and not withstanding my hundred of letters on the subject, the first time that anyone in the Financial Times gets involved with the real fundamental flaw of our current bank regulations, namely how it discriminates among different risk categories.

Welcome FT, better late than never!

Dizzard writes “The banks still want to lend but the desired business is now triple B or better [which in essence requires a capital of four percent]… Unfortunately, even using 2007 standards and data, perhaps half of their book was double B and below [which requires 8 percent in capital]”

And that is why, knowing for sure that those most able to create jobs and provide for fiscally sustainable growth are the entrepreneurs who usually live in the BB+ and below area, I have been on my knees begging for the temporarily lowering of the capital requirements on these loans to only 4 percent; while the banks are busy rebuilding their capitals in order to take care of all the perceived low-risks that turned into real high risks.

We would not want to crowd out our possibly savors in order to provide room in the lifeboat for those who got us in the mess, would we?

The FSA got to be kidding

Sir Brooke Masters reported in “UK regulator sees growth in banks capital having extra capital” October 23, reports on the recent Financial Services Authority Discussion Paper on the Turner Review Conference and I could not find where the FSA said such thing. Nonetheless it might very well be so, in the very long run, but the road there is extremely difficult, and even the FSA warns that “too rapid increases in capital requirements will harmfully constrain lending to the real economy which is likely to have negative implications for the capital position of firms”.

But what saddens me most is that the only consolation for the real economy the FSA identifies is when following the previous quote they say “Capital enhancement through restraining cash bonus payments and unnecessarily high dividends will not have this harmful effect. Capital enhancement achieved by these means will contribute to whole system stability and confidence by speeding the pace at which exceptional government and central bank support measures can be withdrawn”.

Do they really mean that the real economy is now in the hands of reduced banker bonuses and reduced bank dividends? They’ve got to be kidding.

If there is anything that the real economy really needs now is for an immediate reduction in the capital requirements for the banks when lending to BB+ or below rated clients, there where the real economy normally lives, at least while the banks are rebuilding their capitals to cover for all those AAA rated operations for which the regulators only required 1.6 percent in capital.

Come on FSA, understand it, the banks are not are not even supposed to be into AAA rated operations… that should be the exclusive territory of widows and orphans.

Temporarily, we need lower bank capital requirements for the old “high risk”

Sir in your “Testing times for bank regulators” October 22 you argue that “rather than having regulators carve up institution and police an arbitrary border between ‘safe’ and ‘unsafe’ activities, setting higher capital requirements allows the banks to find their own way through”. With that, may I say at long last, you are addressing the worst fault in the current Basel bank regulations, namely the fact that regulators have totally arbitrarily mingled with risk.

Now, on the way to higher capital requirements we must not forget that there are many borrowers that already pay the price of higher capital requirements and these, even though they might be the most important borrowers in terms of recovering from this crisis, will, as bank equity is scarce and expensive, now run a serious risk to be crowded out by all those other operations that previously enjoyed very low capital requirements.

Therefore, and even if it sounds a bit shocking, we need to temporarily lower the capital requirements for all which, perceived as riskier, already has higher capital requirements. In other words, while making adjustments for that “low risk” that turned out risky do not kill those high-risk who are not at fault and whose energy we now need more than ever.

Serious intentions or just a one night stand?

Sir Jonathan Wheatley and Alan Beattie in “Brazil taxes foreign portfolio flows in bid to stem exchange rate rise” October 21 make a reference to the Chilean capital controls, and it is important to understand that these were of quite different nature than Brazil’s tax.

Chile’s capital controls, intelligently, wanted to make certain that the foreign investments flows wanting to go in into Chile had, like a pretender, serious long term intentions, and was not just looking for any one night affair. It therefore was based primarily on freezing the use of funds for one year, so as to assure a proper courting.

Compared to that Brazil’s 2 percent tax, just raises the price of having an affair in Brazil. And what is 2 percent in these days of hedge-funds fees if the signorina is beautiful?

Il Cuckoo Supremo

Sir Martin Wolf in “How to manage the gigantic financial cuckoo in our nest” October 21 fails to mention the cuckoo-est cuckoo in our financial nest, the financial regulators, those caretakers who came up with the idea that the best therapy for calming down the patients was to have them play safe games, assigning these lower capital requirements, which altered the normal routine of the asylum and started that crazy and finally so devastating race in search of some AAAs.

Let the financial franchise owner charge the operators a percentage of their earnings.

Sir Martin Wolf in “How to manage the gigantic financial cuckoo in our nest” October 21 mentions “a ‘windfall tax’ or special curbs on bonuses” but perhaps the starting point should be a ‘windfall tax’ on bonuses. The current real owner of the financial sector franchise, the government, should have the right to extract a windfall fee from those operating individual franchises, if that helps to improve operations and strengthen the public image of the whole franchise. That said one needs to be careful the tax does by means of netting, does not castigate those investing in the franchises, especially when you want to attract more capital to them.

Is Jacques de Larosière befuddled or just lobbying?

Sir Jacques de Larosière´s “Financial regulators must take care over capital” October 16, is either a perfect example of how trapped the regulators are in their own groupthink, or a simple lobbying effort on behalf of some European banks.

Larosière starts by rightly declaring “History shows that economic recovery essentially depends on the existence of a strong and risk-taking financial system” but then speaks out in favour of higher capital requirements for banks the higher the risks as “it is the quality of the assets of a bank that matters more than its leverage”; and writes that “imposing a non-risk based leverage ratio could entail serious negative, albeit unintended consequences.”

Well the market already charges for risk though interest spreads and so any additional risk-adjustment, for instance by means of different capital requirements, amounts to an arbitrary intervention by the regulators in favour of what they might consider low risk and quality, but which might have absolutely nothing to do with what the economy really needs.

If we want an example of how “serious negative, albeit unintended consequences” that regulatory mingling with risks could have, it suffices to look at the current crisis with its low capital requirements for the huge exposures to “non-risk” AAA rated operations. And besides, the “quality” of a financial asset is not a function of risk, but a function of its risk-reward relation.

If we are to have banks capable of taking the risks the economy needs to recover, then the first thing we need is for the regulators to stop from arbitrarily interfering with the risk allocation mechanisms of the market. If this signifies special transition problems for the European banks, as Larosière indicates it could, let us solve that by other means than defending and conserving the worst element of our current financial regulations.

We´re stuck in an unsafe to be dollar safe-haven, most probably waiting for the Dollar II.

Sir Martin Wolf writes that “The rumours of the dollar´s death are much exaggerated” October 14, but the discussions have really been about who could take over some of the dollar´s job so that it would not die of a heart attack. And the dollar´s job is not an easy one, as it has the USA suffering from the curse of exporting safe-haven permits, which creates few jobs of that sort the world likes to qualify as “real sustainable” jobs, while importing products produced by real jobs abroad.

Will the dollar suffer the agony of a slow death or fade away like a soldier? Not likely, once the rumour of the safe-haven is having become dangerously overcrowded starts, death will be swift. Strangely though, as things currently stand, the most likely heir of the dollar would be the Dollar II.

The US suffers from the safe-haven curse

Though both Roger Altman “How to avoid greenback grief”, and Wolfgang Münchau “The case for a weaker dollar” October 12, are very right in their comments they are, for the time being, sorry to say, somewhat irrelevant.

The US is currently suffering from a safe-haven curse, which has the world buying dollars not really because of monetary parameters but more as parking permits to what they perceive is one of the few safe havens to whether out the storm. All of us who come from resource cursed nations, in my case Venezuela, know how difficult it is living with a curse, not least the fact that even though we know those resources are finite, and investors will wake up one morning suddenly thinking the dollar safe-haven to be unsafely overcrowded, there is little to be done until that happens. Just like no one stopped until they had chopped down the last tree on Easter Island.

But, having said that, let us not forget that, on the positive side, once the curse is lifted, a lot of new opportunities arise and so we do not necessarily have to be so pessimistic about the future of the US.

On a separate issue I would also recommend Mr. Altman that he performs a stress test on the willingness of the US tax payer to pay for the current public debt being contracted; he might find it even weaker than the current outlook for US consumer spending.

When in doubt just announce a Nobel Peace Price Objective

Sir personally I am convinced that Obama got the Nobel Prize for Peace by default since the committee could not really find someone else. That said I would not suggest for Obama to return the prize as Clive Crook does in “It is too early to land Obama – or to be disappointed” October 12, as that would be an unnecessary slap in the face of the Norwegians who must find themselves going through much pains anyhow trying to come up with a worthy winner each year. May I suggest to them the following alternative?

Those years when they do not find thee natural candidate why do they not declare an objective and that if accomplished would automatically give right to a Nobel Peace Prize sort of placing the carrot more explicitly before any possible candidates. As is it is not really sufficiently clear whether Obama got it for past or future achievements.

We need more responsible regulators too

Sir Paul Myners writes “Regulators can limit risky activities by making them less profitable, by requiring increased capital...” “We need more responsible corporate ownership” October 12.

A better way to phrase the above in view of our recent disastrous experiences would be “Regulators should not incentivize less risky activities, making them more profitable, by requiring less capital”. And so it is clear we need more responsible regulators too, those who know that tinkering with risks is a risky affair.

Slow the dance but do not impose the tune

Sir Chrystia Freeland ends “Investors had little choice but to keep dancing” October 9 asking for “a more powerful regulator to be established with the authority and courage to slow down the music for everyone” and this absolutely correct. But in doing so we need to avoid by all means that the regulator chooses the tune to which the markets should dance.

I say so because the current crisis resulted from the Basel bank regulator wanting the market to dance slower and, using capital requirements based on risk, induced it to take up some slow low risk waltzes instead of fast polkas or emotionally laden tangos and which led the markets into the arms of the dangerous AAAs.

By the way there are still two dance halls open and that many feel should be closed but which proves something impossible to do while the music plays. One is the dollar, where investors all know that one morning they will wake up find the safe-haven unsafely overcrowded, and a murderous panic for the exit will ensue, and the other is the public debt here and there and almost everywhere. Who is making the preparations for when these other two dance halls close down?

Most will not even wake up to the ‘silo curse’

Sir when Gillian Tett writes “Waking up to the ‘silo curse’ is far from the end of the problem” October 9 she is absolutely correct since the worse “silo curse” is the one we all carry in our own minds and which keeps channelling our minds towards the answers we feel comfortable with. For most the real problem is that they will never even wake up to it. And, among them, are many regulators.

Mme Christine Lagarde, the crisis demands we think things over more carefully, from scratch!

Sir who would disagree with Mme Christine Lagarde´s call that “The crisis demands we finish what we started” October 8, that is of course as long as it does not mean finishing us off completely.

Strangely enough, when Mme Lagarde rightly focuses on the issue of cutting unemployment, the first concrete results she points out is “150 tax information exchange agreements have been signed and the number of tax havens has been drastically reduced.” There is nothing wrong with fighting tax evasion but, what it has to do with job creation beats me, unless she is referring solely to the creation of jobs for public servants. The funds hanging around the tax-havens are not sipping cocktails on the beach but creating jobs somewhere.

Also in the same vein no one would disagree with her when she writes “we need to make sure that requiring banks to hold more and better capital does not hinder their ability to lend to individual and companies” but how can she then say in a congratulatory tone that “The Basel II framework for banking capital has now been accepted by all and the heads of states have committed to applying it to the most important financial centres by 2011.”? Is she totally unaware of that the Basel II framework sabotages the risk-taking needed to create jobs? And that many of us consider the Basel II framework as the main explanation for this crisis?

No Mme Christine Lagarde, the crisis, what it really demands, is that we think things over more much more carefully, from scratch and without being stuck in the past.

Risk avoidance is an extremely risky business

Sir surprised I read Mr. Stuart M Turnbull´s and Mr. Lee M. Wakeman’s whishing that “the rating agencies published and kept current, term structures of survival probabilities [so that] investors would be able to compare directly the risk of default for various maturities across corporate and municipal bond markets”, “Investors value accuracy ahead of stability” October 8.

Since presumably the whole market, and not only these two gentlemen would have access to this information, have they not given a thought to what this would do to the risk-weighted returns they would receive? I will tell them. They would be condemned to absolute mediocre return rates, as the intermediaries will previously have sucked out any arbitrage profits there are… that is until the day the credit ratings get it wrong again, as they, being humanly fallible are doomed to, and that day they lose it all unless, they are again bailed out by their grandchildren picking up the tax tab.

Yes, the investor values accuracy and stability, but they also value the possibility of some special returns, just for them. If these two gentlemen believe there is even a remote possibility of regulating a financial market so that it will be just and fait to everyone, when all the rest is not just and fair, then they clearly belong among all the other naïve and gullible financial regulators out there.

Bumpy roads indeed!

Sir Martin Wolf writes that “Big bumps lie ahead on the road to recovery and reform” October 7. Though I sort of agree, on most, for me the biggest real bump for recovery is that of not knowing yet what kind of growth is sustainable, given the two bottlenecks of oil and climate change. Some countries could resume growing as if these constraints do not exist, but that might very well not take us where we want to go. Yes, we want to stimulate the world, but we also want it to take off in the right direction.

Then of course we have the problem with the monetary system, most particularly for the US, the exporter of the currency the world most trusts in lieu of other alternatives, and that therefore has to live with the safe-haven curse. All of us who come from resource cursed nations know there are serious difficulties living with a curse, not the least the fact that those resources are finite, and though we know that one morning investors might wake up finding the safe-haven unsafely overcrowded, there is little to be done until that happens. Just like they could not stop until they had chopped down the last tree on Easter Island.

But where I might disagree completely with Wolf is when he quotes Andrew Smithers arguing to “force banks to raise the needed capital and if they cannot, let government provide it” if with this he implies he believes public bank capital is the same as private bank capital. What we most need in term of reforms is to eliminate any bureaucratic interference with the risk and capital-allocation mechanism of the market, like those of the minimum capital requirements for banks based on perceived risk of default. What is most needed, especially in the “comfy” countries, is for a banking sector willing to take risks on those few willing to take risks.

UK adopts a marker put down by Argentina

Last year Argentina´s Cristina Kirchner nationalized 10 private pension funds arguing it was “necessary to protect retirees in the global financial crisis” We know different, she needed the money to feed the government coffers.

And so today when Brooke Masters and Patrick Jenkins report on the UK regulator announcing rules that “could require UK banks to increase their holdings of high-quality government bonds” we cannot but reflect over how in this small world you never really know who influences who. “FSA puts down a global marker” October 6.

Timothy Geithner should start by increasing the capital requirements for banks when lending to the government.

Sir Krishna Guha in “Bankers´ pleas on rules rebuffed , October 5, reports that Timothy Geithner said of the banks “These are the institutions that told the world and told the shareholders and told their creditors and told their customers they knew how to manage risk and that they were better at this than their supervisors were ever going to be”.

Does Mr. Geithner really believe that the supervisors will ever be better at managing risks than the banks? Is he suffering from amnesia? Has he already forgotten that it was the minimal capital requirements which the regulators authorized the banks to have whenever the regulator´s own outsourced credit risk supervisors, the credit rating agencies, awarded their AAAs which detonated the crisis?

Of course regulatory overkill is a risk for a recovery which urgently needs risk-taking to awaken. Nonetheless if Mr. Geithner needs to show himself off as a real regulatory macho man why does he not increase the capital requirement for banks when lending to his own government?… it is currently zero!

Or does Mr Geithner also believe that public bureaucrats are better at taking investment decisions than their private counterparts?

AAAs proved more dangerous than “junk”

Of course real disasters are more prone to be found in sectors perceived as less risky than those thought as more risky, if only because when entering the latter we are all more careful.

Having said that though reading Michael Milken, who was known as the Junk Bond King, telling the world now that “investors will lose more money on AAA credits than on any other rating category”, is a wonderful reminder of how little we really know about risk and cosmic order, and it should hopefully help to humble some regulators.

As for me, in the title of his article “Prosperity rests on human and social capital”, October 5 I would have loved for Milken to also have included in the title “and the willingness to take risks”; so as to help make clear that we are running risks when allowing our bank regulators to impose special taxes on perceived risk.

More stars for a more stable triple A?

Sir when the president of Standard & Poor’s, Deven Sharma writes that the credit “ratings should not be used for purposes for which they were never designed”, like “hardwiring” prudential regulations around them, we can only ask… why did he wait so long to say that? Investors require consistency when it comes to credit ratings” October 2.

And when Sharma mentions the investment institutions want “credit ratings to be relatively stable” and that he intends to satisfy such demand by an “initial lower rating” of any security “more prone to a sharp downgrade in periods of economic stress”, we can only think of a chef developing some ratings a la carte, in order to earn more stars on some Michelin guide.

Should Snow White have known the apple was toxic?

Sir in “Shining a light on bank´s deep hole” October 1, you write about “bad bets on risky assets”. What risky assets do you refer to? To those AAA rated securities that carried so little risk that the regulators only required the banks to hold 1.6 percent equity against them?

When Snow White was offered the apple, was she supposed to have known Queen Regulator´s helpers, the credit rating agencies, had poisoned the apple?

Tame the tamers!

Sir John Plender’s “How to tame the animal spirit” September 30 leaves me utterly confused. What animal spirit does Plender refer to? That spirit which caused trillions to invest in AAA rated securities that offered a couple of basis points more or those who leveraged their investments in AAA rated securities because the regulator allowed them to do so by requiring ridicule small capital requirements on these?

As I see it those we really need to tame are the tamers, and in fact, looking at the global challenges the world needs to confront, perhaps we could benefit immensely from a little bit more of that old fashioned real animal spirit.

The wrong lessons learned.

Sir Martin Wolf ends his review of Carmen Reinhart’s and Kenneth Rogoff’s book “This time is different” with “Crisis will always be with us. But maybe this realization will reduce their frequency”, September 28.

Why is that Mr. Wolf? That seems to be the wrong lessons learned. I would hope this realization would lead us in a complete different direction of where the Basel Committee is taking us, and instead make us increase their frequency so as to try to reduce their magnitude.

On our own

Sir flooding can occur because excessive waters overflows the levee, which is what Wolfgang Münchau is most concerned about; or because the levee breaks down in a point and channels too much water to one single place, as occurred when the AAA ratings opened a whole and the subprime mortgages sector was drowned, and which is what I have been more concerned about.

Today Münchau, in “At last, recognition of the deep roots of the crisis”, September 28, sounds like an ignored child who finds great consolation in that his mother has at least noticed him. As one of the subjects of Münchau’s jealousy, one who received too much attention as the “world’s most powerful leaders [were] obsessed with the minutiae of banking regulations, let me inform him that the sad truth is that mother’s attention wavers from one to another of her sons, not because of love for both but because she has not the faintest idea of what to do, and prefers thinking of the crisis like a measles that will just go away on its own.

Meanwhile, Brother Wolfgang, the levee is still exposed to disasters, of both kinds, and we are still on our own.

There is a not so secret “low-risk” leverage-enrichment facility in Basel.

Sir excuse me if I insist on it but after some hundreds of letters to you, I am still looking for the words that could help FT understand what was really the origin of the current financial crisis and why we will not be able to get out of it without getting rid of a paradigm that has chained our financial regulators, that of having the capital requirements of our banks depend on risk-weights.

Henny Sender in “Washington is the cheerleader but sentiment remains fragile” September 26, quotes a private equity executive saying “CDO´s destroyed prudent lending in America. It was like a nuclear bomb to good lenders”. What does prudent lending mean? Shying away from risks? No! Prudent lending means investing according to your risk tolerance and getting the right reward for it. In this respect prudent lending should have its own financial returns and not returns derived from arbitrarily set lower capital requirements.

What is the worth of one dollar invested in an operation perceived as having a higher risk? One dollar! What is the worth of one dollar invested in an operation perceived as having a lower risk? Also one dollar! Then how on earth can anyone sustain that a dollar lent to a BBB+ to BB- rated corporation is worth one dollar, while a dollar lent to an AAA to AA- rated one only represent 20 cents? Well this is exactly what the regulators did with their capital requirements for banks based on default risks and as assessed by human fallible credit rating agencies.

When a bank invests $1.000bn dollars in anything related to an AAA then that is subject to an arbitrary risk-weight of 20% and so the “risk-weighted assets” are reported as only $200bn, leading to low reported bank leverages, and which after a short while fooled even the designers.

And this is what has been produced in the not so secret “low-risk” leverage-enrichment facility in Basel and that has been proven to be so explosive and that I have been describing in http://theaaa-bomb.blogspot.com/

Sir it is so unimaginably risky to fool around with risk. Please consider that even if all the credit ratings had been absolutely precise, the world could still go so very wrong, as nobody in his sane mind will hold that the world’s future lies so much in areas perceived as having low financial default risks, that the investment in these areas have to be given especial incentives.

Friends, we need to urgently rid ourselves of regulators that can only dream about a world without bank defaults and put in their place regulators that dream of a better world, and who know that in order to reach such a world you have to learn to embrace risk… in a prudent way.

The world has had more than enough with this imprudent prudence!

Cheers

Per

Why don´t Europeans agree first...they seem worlds apart!

Sir Peer SteinBrück, the German finance minister, in “A tax on trading to share the costs of the crisis”, September 25, proposes a tax on financial transactions of 0.05 percent that could “yield up to $690bn a year.

But, Bernard Kouchner, the French minister of foreign affairs in “A tax on finance to help the world´s poor” September 17, he spoke about a tax of 0.005 percent that would “raise €30bn”.

Why don’t the Europeans agree first among them what they want to propose to the world? Now, they seem worlds apart.

That said before any tax of this sort, the world´s poor, and most of the rest of the world, would benefit more from taking away that financial tax that the current capital regulations for banks represent in that, above of what the market already charges for risk differentials, it creates arbitrary costs, far from minuscule, that directly taxes those more prone to be considered as more risky, like the poor and the development countries. http://bit.ly/4yX7k1