Thursday, July 15, 2004


Justice is something very difficult to understand with precision, since it is situated along a continuum that becomes finite only when it reaches Divine Justice. On the other hand, injustices are much easier to identify and, in our countries, prisons themselves represent one of the greatest injustices. In terms of the use of scarce resources, as an economist I am convinced that justice would today be much better served by improving prisons than by investing in Supreme Courts.

I am not advocating, nor do I believe in, imported solutions. Moreover, if we were to respect individual rights defined as extravagantly as possible, for example, by guaranteeing in Venezuela access to justice similar to that O.J. Simpson had access to a few years ago in the United States, this would, because of the cost involved, be an affront to our human rights, collectively.

Nonetheless, I believe in good examples, and I am sure that if prison franchises could be established in our countries we would all reap the benefits, as we are shamed into reforms.

When we read that one factor making it particularly difficult for Schwarzenegger, the new Governor of California, to balance his state’s budget is the 28,500 dollars he has to spend each year on each of his 162,000 prisoners and that one of his options would be to use local private prison services, which would allow him to cut the cost to 17,000 dollars per prisoner per year, we see an opportunity.

If California wants to save even more, it could do so by letting our countries offer prison services for some of its prisoners. Companies could build and operate prisons and would have to apply ISO 9000-type quality certifications. This would probably generate a set of global good prison practices that would benefit everyone. Nowadays, rapid transport and facilities such as videoconferences should make such proposals much more feasible. All that’s lacking is the will to carry them out.

Since some people trace the origin of the violent maras (gangs) of Central America to Los Angeles, and since crime is to some degree attributed to the violence in films, perhaps California, its Governor, and even Hollywood all have a special motivation to welcome an initiative such as this one to help us help them.

Besides, Schwarzenegger’s experience in the movies alone, which ranges from subduing criminals by force to teaching kindergarten, would seem to fit the ideal resume for a real super prison keeper.

P.S. I just read in the press that Schwarzenegger refers to his experience in Kindergarten Cop as useful to handle the legislative branch in California… OK perhaps for that too.

Translated from El Universal, Venezuela, July 15, 2004

Saturday, July 3, 2004

Some notes on the securitization of remittances

Some financiers have come up with the idea of using the future growing flows of cash from workers remittances to create values that could be used as collateral to loans made to those foreign banks that are specializing in processing these transfers. Since these collateral accounts are located in the financial centers, the loans so backed carry a lower interest as they manage to avoid some of the country-risk margins.

There is nothing illegal with this securitization as clearly the transferring bank is in no obligation to deliver exactly the same physical funds received; in fact, he will normally be delivering local currency to the beneficiary. Also the bank is never released from its obligation to transfer the worker’s money to the family back home and all the bank’s general funds, including those received from the loans, should back up its commitment.

Nonetheless perhaps we should ask ourselves whether the fiduciary duty of the transfer agent is being fulfilled when this securitization occurs, especially since the foreign worker trying to send money home is in blissful ignorance of the arrangements.

Also when you walk into a bank and order a transfer of money to someone, you presume that the bank will execute the transfer as expeditiously as possible, and never would you imagine that it could be delayed by having to go through a collateral account or, God forbid, that the final beneficiary never receives your funds, because the collateral was seized and sold to satisfy the claims on the local bank.

Any problem that would occur with a securitized remittance, besides dramatically increasing the cost of that particular transfer, could lead to a worldwide scramble back to more “trustworthy” informal channels … and we do not need that.

Also, if one of these collaterals was executed, in what jurisdiction should a foreign worker and his beneficiary complain … are they also released from country risk?

Credit rating agencies and the securitization of remittances

It is to be expected that when the country or the bank through which the remittances are sent enters into problems, these will stop. Emigrants are far from stupid. As we also know that the collaterals built around these remittances cover basically only the current service of the loan, a minor part, some doubts remain as to why then the ratings by the credit-rating agencies improve so much. Are we not here facing exactly the type of systemic risk that I frequently observe could be present by using few opinions of credit-risk agencies as proxies for the real market?

The first time I heard about the securitization of remittances I thought “How creative, I have heard about securitizing accounts receivable but this is the first time I see it done with accounts payable”.

Keeping them stupid?

Based on the argument that workers do not have as much information and do not react as fast in a crisis, we can frequently hear the opinion that the securitization of worker remittances is better and more stable than that of general company remittances. This might very well be true for the time being, but it sure feels sad to get involved in programs that are based on keeping the workers in the dark.