Wednesday, August 22, 2007

But what are the non-professionals to do?

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

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

Monday, August 13, 2007

Let us set the historical records straight

Yes! … keep blaming the housing market and the mortgages and the over lending for the mess and you will not see what is happening in front of your eyes.

And the real culprits are:

The arrogant financial modelers that thought they could predict the future based on quite brief statistics and that lost or forgot all the inhibitions as time kept postponing calling their bluff.

Greedy fund managers whose profitable business model was based on charging commissions on profits derived from their own valuation models and that were so handy in lieu of the non existing markets for their own investment products.

The credit rating agencies that enthralled were so busy celebrating how good their own business was doing so that they completely forgot the bolts and nuts of credit analysis, like walking the streets to see how the mortgages were awarded.

The banking regulators that behaving like former central planners from soviet looked to drive banking risks out of banking, having these risk go underground; and that managed to impose on the market so much obedience to the credit rating agencies, that much of the market forgot or found no need to do its own due diligence.

Finally the spreading of the mantra that the financial risks have finally been conquered, when the real truth was that the risks had only gone into hiding, to gather forces.

Clearly we need to understand very well that at this moment that there are a lot of incentives for the experts to try to take shelter behind “a slowing economy” though in fact the reality is that the economy will now be slowing because of them.

It is up to the rest of us to set the historical records straight.

Thursday, August 2, 2007

We need to eliminate the financial fortune-telling franchise.

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

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

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