Monday, September 17, 2007

There’s an uproar in the Global Finance Park

The visitors are upset, they were promised a nice day in the park enjoying some risk free investments and now they find themselves running around frightened not finding anyone to tell them clearly how much they lost and how much they have left... and they are looking for the culprits.

First we have the credit rating agencies that were appointed as the official tour guides in this global financial theme park and led the crowds to instruments securitized by something called subprime mortgages and that in the end turned out to be just a trap of sub-primely awarded subprime mortgages.

Then there are the financial engineers who concocted many sophisticated attractions that offered to capture higher returns for lesser risk but that while designing these never took enough time off to figure out who were to compensate it all by taking more risk for less return.

Then we have the managers, the Central Bankers, who are running around in the park, not fully knowing who is in charge, for what when and where, ever since the attractions were spread out crisscrossing the whole park.

And then, behind the scene the Basel intellectuals, and who obsessed with driving bank risks out of banking thought they could achieve this by imposing some minimum capital requirements and monitoring it all from afar, just because they never walked the streets or real life enough to realize that risks, unlike old soldiers, never fade away they just go into hiding.

And then of course the salesmen, those extraordinary salesmen that build up what now reads like a pyramid scheme for the Guinness books of records and made billions in non-refundable commissions, most of these calculated using the same models that now are shown to be so lacking.

And we should not forget the theme park’s shareholders either, one of which coinciding with some of the attractions breaking down is also seeing some real unstable weather formation that could threaten his real economy.

As always, the hyenas are moving in drooling thinking of the fees to be made from just asking on behalf of the visitors for the proofs of the losses since let’s face it when you lose money in the stock market you might not understand why you lost it but you at least know you lost it, but when you lose money on contracts that are virtual in nature you might not even know for sure you lost it, you are just being told so.

To conclude, things do not look good at the Global Finance Park and to help put things in order we need some hardened and battle experienced financial sergeants to substitute for those many starred generals hanging around and that were just too arrogant to admit they simply did not understand what was going on.

What would I humbly suggest as some immediate measures?

Lowering the minimum capital requirements of the banks! The damage has already been done so let us use whatever life vests there are and not force the banks into wasting their time having to do more life vest procurement for now, at least until this emergency is over.

Concentrate all efforts on the real economy. There is nothing to be gained by keeping house prices high so that they are not affordable under tightened rules to any new buyers, the same way there is nothing to be gained from evicting a house owner from a house because he cannot service his current mortgage but could do so if he was a buyer at a revised lower price.

Whatever, don’t procrastinate. Like pulling out a tooth without anaesthesia the trick is doing it fast.

Thursday, September 6, 2007

Factors in the Financial Storm

David Ignatius, in his Sept. 2 op-ed, "The Real Causes of the Financial Storm," failed to mention the two lead actors in the financial mess we find ourselves in: the credit rating agencies, whose AAA ratings turned what should have remained a local problem involving some subprime lenders into a global financial storm; and, of course, the bank regulators who against all wisdom enabled the credit rating agencies to foist what they consider to be only their First Amendment-enabled opinions upon the markets.

In May 2003, as one of the 24 executive directors of the World Bank, and probably only because of that, I was invited to make some comments during a workshop arranged by the World Bank for bank regulators on assessing, managing and supervising financial risk. Along with offering some suggestions, I told the regulators, "I simply cannot understand how a world that preaches the value of the invisible hand of millions of market agents can then go out and delegate so much regulatory power to a limited number of human and very fallible credit rating agencies. This sure must be setting us up for the mother of all systemic errors."

I never got invited to comment again.