August 31, 2012

How to protect EU’s economy against failed bank regulators

Sir, Wolfgang Schäuble’s “How to protect EU taxpayers against bank failures”, August 31, much provokes a “How to protect EU’s economy against failed bank regulators” 

If we are going to have “a truly effective banking supervisor to enforce a robust single rule book on the [banking] sector” then there are some minimum things that need to happen. 

First and foremost, the supervisor needs to be held accountable for what he does, and must always be willing to explain what he considers to be the purpose of the banks, and publicly answer any questions about how his regulations are intend to support the banks achieving it. 

I say this because if the earnings of EU taxpayers are decreased more by bank regulations, than the costs of paying for bank failures, the offered protection would seem somewhat lacking, to say the least. 

And though Schäuble admits that a “supervisor can only be as good as the rules it enforces, he, as most of his colleagues, still shies away from discussing their “light-touch” rules. 

Capital requirements for banks based on perceived risk, and which among others allowed banks to leverage their equity 62.5 to 1 when lending to Greece, but only 12 to 1 when lending to an unrated small business and entrepreneur… is that supposed to be “light-touch”? No, of course not, and it was really the regulators, playing risk-managers for the world, who, as I see it, caused the current crisis. 

Schäuble also writes “Four years and much regulatory work later, financial markets have become a safer place”… What? Is he running for any election? As far as I can see they have not even begun the needed reforms, to make the banks and the economy safer and more functional, as that requires first, of course, to understand and to acknowledge the mistakes they did. 

Amazingly it seems the regulators still believe it was all mostly the fault of lousy credit rating agencies and banker’s bonuses. And so sadly, their ingrained faulty risk-aversion, is still guaranteeing the dangerous overpopulation of any safe-haven, and that our banks will still keep away from lending to the “risky”, like to our small businesses and entrepreneurs.

How can bank regulators think we are going to be safer by overpopulating safe havens?

Sir, Sir Samuel Brittan, August 31, from his desk, urges, “Come on Bernanke, fire up the helicopter engines”, and drop some money on the economy, without it having to go through the banking system. 

What a lovely idea, but, unfortunately, that money would too soon get trapped in the banks, and where current regulations would only make it available, as carbs to those perceived as not risky to grow more obese on, and not to those considered “risky”, like our small businesses and entrepreneurs, as proteins for muscle growth. 

And so, No! Before you do anything, be it QEs, fiscal deficits, or helicopter droppings, make sure you get rid of that silly regulatory discrimination against “risk”, and which is present in the current capital requirements for banks. That discrimination is placed on top of all other discriminations based on risk, and those we know, are not that few, especially in these uncertain times. 

Come on Bernanke, and all you other regulators, we are not going to be safer by overpopulating the currently safe havens… and if there are to be any helicopter droppings, please, be enablers, and make sure these happen over what is perceived as risky land.


My 2019 letter to the Financial Stability Board


August 30, 2012

The “who gets tagged last by an ad” game

Sir, Matthew Garrahan gives a lovely description on how 5-Hour energy advertising has captured the imagination of his five year old son… but also how the possibilities of advertising seem to diminish with current technological advances, “A five-year old Don Draper speaks”, August 30. 

Mr. Garrahan might hope for that, but, in just few years, he will be able to play "who gets tag last by an ad" with his son. That game consists in each one of the players sending out simultaneously an email commenting to a friend about an esoteric product of his choice… and, as the name indicates, the one whose inbox is last to get tagged by an ad offering the mentioned product, wins. 

For your info, among true professionals, this game is played with all anti-spam-filters off.

The Fed (and ECB) should not fire more bullets until the gun pipes are cleaned

Jim Paulsen writes that “the Fed is out of bullets”, evidenced by “$1.5tn in excess US bank reserves” which hardly points to “a lack of liquidity”, “It´s time for the Fed to pass its easing baton to the ECB” August 30. 

Sir, I almost feel stupid repeating for the umpteenth time this to you, but the fact is that one of the reasons for the excess US bank reserves is that the banks do not have the capital that is required of them when lending to those officially and stupidly perceived as risky, namely small businesses and entrepreneurs. 

Of course the Fed should forget about firing off more bullets, at least before they have assured themselves that the gun tubes have been cleaned… and, by the way, ECB needs to do the same cleaning.

Tax heavens are always the best antidote to tax havens… and governments should earn our taxes

Sir, I commend you for in “Taxing wealth”, August 30, daring to recognize “there is a case for shifting burden from activity to asset”. And I would agree! 

I assume though that you suppose those taxes on wealth would act as a more transparent tax substituting for how financial repression, with its negative real returns on government debt, seems currently intend to tax wealth. True? Because, if you are thinking in terms of an additional tax, then I guess, many would start searching urgently for a tax-haven.

And, of course, governments should earn our taxes!

Ending bank regulatory stupidity in the US (and Europe), is a vital non-partisan issue

Sir, I refer to Conrad Black´s, “The Republicans can end 15 years of US stupidity” August 30. I would sure like to ask Mr. Black the following question: 

Suppose there was the potential of issuing trillions of dollars in “worthless real estate-backed paper certified as investment grade by the palsied lions of Wall Street”. 

What would the possibility be of that issue finding buyers if banks needed to hold 8 percent in capital against these, meaning being able to leverage their equity 12.5 to 1, instead of the 1.6 percent that was authorized by the bank regulators in Basel II, and which allowed banks to leverage 62.5 to 1? 

My answer to it would of course be: “That issue would have been almost totally unsubscribed!” That it was a tragic success, was only the result of sheer regulatory stupidity. 

If there is one thing that WMR and Mr. Ryan, or President Obama for that matter, or republicans and democrats alike, need urgently understand, is that capital requirements for banks based on perceived risk, does not only produce dangerous distortions in the markets, but is also something completely incompatible with a “Home of the Brave” (and with a Western world built with risk-taking).

Regulators´ occurrences often represent the most dangerous quicksand

I fully agree with John Gapper when he finds not “unreasonable” the proposal by Mary Chapiro, the SEC Chairman, that money market funds would have to, “either become more like investments funds by allowing their net asset value to float, or more like banks by raising a buffer capital”, “Don´t leave the financial system on quicksand” August 30. 

That said, with respect of that “buffer capital” I hope he, and Ms Chapiro, mean one same capital requirement for any type of assets. This because since most investors are currently convinced their buck is already broken, or will be broken, their main interest is it becoming broken as little as possible. 

And, as we should know by now, nothing guarantees a super-large breakage of the buck more, than when besserwisser regulators, full of hubris, believe themselves to be the risk managers of the world, and start interfering by mean of risk-weights, with the markets´ own risk assessments. 

And, so, when regulating the money market funds (and the banks) please never forget that regulatory occurrences can also often represent the most dangerous quicksand.

August 29, 2012

Don´t prime pumps, when unclogging the tubes is needed

Sir, John Plender, referring to the annual gathering of central bankers at Jackson Hole, writes “Policy makers agonize over how best to prime the pump”, August 29, 2012. How sad they will waste their time agonizing over the wrong problem. When the tubes are clogged, you need to unclog these before priming the pump. 

Current bank regulations, specifically the capital requirements for banks based on perceived risk, are hindering the flow of credit from reaching those we most need for it to reach, namely the job creating small businesses and entrepreneurs. 

If only the Fed had heeded its dual mandate

Sir, Bob Corker, in “Bernanke should show some humility at the Fed” August 29, writes “A big part of the problem is that the US Congress has given the Fed an overly broad “dual mandate” of price stability and full employment… this approach…undermines the free market system” 

Although I agree that the free market has been undermined, in this case it happens to be precisely because the Fed ignored its mandate on full employment. Had it not done so, it could never ever have approved bank regulations that so overly discriminate against job creators, like small businesses and entrepreneurs, only on account of these being perceived as “risky”… and all that, in “the Home of the bBave” 

August 28, 2012

How come bank regulators seem exempt from answering questions made by the public? (And FT from reporting these)

Sir, Brooke Masters rightfully gives utmost importance to both speed and contestability in “UK regulators must judge the right time to go public” August 28. 

After so many years raising some fundamental objections to current bank regulations, without obtaining any type of answer, I hope she does also support speed and accountability when the public challenge the regulators. 

And here is a link to one of those still uncontested challenges: 

August 27, 2012

Simpler and equitable across the board bank rules, are safer because these distort less… it is as easy as that!

Sir, Nicholas Brady is absolutely right in that “We need much simpler rules to rein in the banks”, August 27. In fact he is much more right about this than what he realizes. Most, perhaps all current discussions on bank regulations relate to their effectiveness or not, from the perspective of making our banks safer. Very few, almost none, absolutely not FT, analyses these regulations from the perspective of how these so fatally distort the real economy, primarily by making the banks oversensitive to how risks are officially perceived. 

For instance, small unrated businesses and entrepreneur are normally considered much riskier than an AAA rated client, and so they have naturally to pay higher interests and get smaller loans. But on top of that, small businesses and entrepreneurs are additionally slapped by the consequences of the regulatory discrimination which occurs when bank regulators force bank to hold more capital when lending to them than when lending to an AAA rated, and therefore end up having to pay even higher interest and getting even smaller loans. 

Simpler and equitable across the board rules, are safer because these distort less… it is as easy as that! 

FT, please don't be so thick-headed and take notice!

The center should transfer to the periphery their almost ill-gotten regulatory interest rate savings

Sir, Wolfgang Münchau in “The ECB must still do its bit to help solve the crisis” August 27, reminds us of that “There is a law against monetary financing of sovereign debt”. Should there not also be a law that prohibits doing so using the backdoor of banks and bank regulations? 

The fact that banks all over Europe could lend to Greece against only 1.6 percent in capital seems to me a very close relative of “monetary financing of sovereign debt”. These regulations, when something goes wrong, as it is almost doomed to go, because of the distortions these produce, create its own set of problems. 

When Münchau, with respect to any official explicit target for interest rate spread writes “The market would test any published target” we might therefore have to add, for precision, “market and regulators”, I explain: 

There are havens perceived as very safe, Germany, and those perceived as not so safe, Spain, and that would, without any regulatory intervention, reflect itself in the interest rates. But, the way current bank regulations are set up, with bank lending to the officially safe havens requiring much less capital than when lending to those “not-safe”, the natural market cleared interest rate differentials based on risk, become so much larger.

Anyone who is really sincere about solving the European problem, or even about not making it worse, must either eliminate the discriminatory effect of these regulations, or make sure that the safe-havens transfer some of their almost ill-gotten interest rate savings, to those less safe havens that have had to pay higher than natural free market rates.

August 26, 2012

Unfortunately the fight for the best gate-watching positions is a never-ending story

Sir, I can certainly identify with Dr. Thomas Snitch’s despair when, quoted by Gillian Tett, he cries out “These folks would rather turn down the offer of free help to save the rhinos than to be put in a position where their annual report states that fewer animals are being taken by poachers” … and thus undermine their ability to raise money, “Wild animals, poachers and the human jungle” August 25. 

And quite often it is much worse, since “these folks”, these think-tank’s without ideas but with a “concern” that defines their business model, often monopolize the public debate on “their” issue. Indeed some of “these folks” are really like powerful multinational corporations operating with much less of that transparency they often accused others to be lacking. 

But Dr. Snitch, thanks to another gate-keeper, Gillian Tett, at least here got himself a chance to describe what he was up to. And that is much more than what others who are being ignored by the media and the journalists who, also feeling threatened, take refuge in the hierarchy of their own little net-works or in their own officially approved little intellectual silos. 

Thankfully the world is changing, and insignificant persons like me now have, because of the web, better chances of bypassing the gate-watchers in order to voice any significant concerns of theirs… and perhaps even to be able to challenge one or two hierarchies. 

August 25, 2012

No! The real “masters of the universe”, those self-appointed, those full of hubris, are the bank regulators.

Sir, Jonathan Ford refers to the bosses of hedge funds who manage about 10 percent of investment funds worldwide as and that in reference to these “it is hard to avoid the impression that hubris is a factor”, “The master of the universe are playing a loser´s game", August 25. 

Forget it! If there are some who can be defined as masters of the universe full of hubris, that is the bank regulators who play risk managers for the world, and on their own, without consulting with anyone, dole out the risk-weights which determine the capital requirements for the banks. 

In doing so, the regulatory nannies have caused obese and dangerous bank exposures to whatever was considered officially as absolutely “not-risky”, and anorexic bank lending to whatever was considered officially as “risky” like unrated small businesses and entrepreneurs. 

If hedge fund bosses do wrong, their clients lose, but when bank regulators do wrong, massively, and on a massive global scale, as they have done, then everyone loses, starting with those who as a result will become unemployed and those who might never ever get an employment. 

PS. “The Challenge

August 24, 2012

FT, are you afraid of the Basel Committee on Banking Supervision curia excommunicating you?

Sir, you loudly preach from your very high pulpit, that the “non-partisan Congressional Budget Office’s updated [fiscal] forecast… should shock Congress out of its complacency…so as to put American’s wellbeing ahead of its differences…[though] even if they do find a solution; the outlook is hardly rosy”, “Vertigo atop the US fiscal cliff” August 24. 



And again I find myself wondering why you do not include in your sermon, some words on the fact that when bank regulations like the current are so much biased in favor of bank lending to those perceived as “not-risky”, and against those perceived as “risky”, this dooms the economy to dangerous obesity and simultaneous muscular dystrophy. Could it be that though you declare yourselves “without fear”, you are scared of what the high priests of the Basel Committee on Banking Supervision curia would have to say? FT excommunicated? 


Well, in the best protestant traditions, I at least am nailing up, wherever I can, my protest against that silly-nanny belief that economic prosperity can be reached, or even maintained, by avoiding, or even punishing, risk-taking and risk-takers, such as the small businesses and entrepreneurs. 

I also wonder what the US congress would have to say, if they understood that current regulations are making their bankers, in “the Home of the Brave”, to lend the umbrella when the sun is out much more than what Mark Twain ever thought possible, and to, similarly, take it away much faster than what Mark Twain could ever have imagined?

August 23, 2012

Sunshine rules might signify more darkness

Sir, those “Sunshine rules” you refer to August 23, namely the Sec ordering US-listed companies to disclose the payments they make to the host governments, are absolutely great news… for those countries where civil society is strong enough to matter... and governments have at least the intention of listening to it.

But, in those countries where civil society is truly weak, something which so often is the case of countries suffering the curse of abundant natural resources, those sunshine rules might only mean more darkness, as they would tend to exclude the sort of more reasonable or least unethical extractive industry corporations from participating, leaving the field open to the truly unreasonable and least ethical. 

Why not invest instead all these efforts in supporting the development of strong “independent” civil societies which can demand better results where it really matters, not in the corporate reports of companies listed in the stock-exchanges of developed countries, or in an annual report of a well intention NGO, but on their own oil-fields and mines? 

Now if the SEC would follow up this by approving a list of countries where a reasonable active participation of civil society existed, and in which therefore these sunshine rules would apply, and a list of those countries where they are impossible to apply, that could be more helpful, not only for us oil cursed citizens, but even for their own listed natural resource companies. 


PS. One of the main promoters of “sunshine”, which is good, is the Extractive Industries Transparency Initiative, and the Dodd-Frank Act even makes a direct reference to EITI. 

Nonetheless, EITI, as its second principle states: “We affirm that management of natural resource wealth for the benefit of a country’s citizens is in the domain of sovereign governments to be exercised in the interests of their national development.”, and that to me, as an oil-cursed citizen, is a totally unacceptable principle. 

I believe that the individual citizens will always, on average, make a better use of any natural resource blessings, than their government managing all of these… and using all of these so as to guarantee themselves some truly submissive citizens.

August 22, 2012

For the time being, in terms of grand Faustian bargains, the QEs are insignificant

Sir, Scott Minerd, referring to the quantitative easing programs warns: “Beware impact of central bank’s grand Faustian bargains” August 22. 

Frankly, as a grand Faustian bargains, the central banks QE’s do not even come close to when bank regulators, unbeknown to most, decreed, in Basel II, that even though banks had to hold 8 percent in capital when lending to citizens, like the small businesses, they needed to hold no capital at all, zero!, when lending to the emperor, even with a duration of 30 years, at least for as long as the credit rating agencies deemed the money printing press of the emperor to be infallible.

To create jobs, we should start by firing the current bank regulators!

Sir, Sebastian Mallaby in “The US labour market does not work” August 22, reduces the discussion about the increasing unemployment to an issue about the government incentives for the workers to work, which is important, but leaves out completely the much more important angle of creating the new generation of jobs that will provide its own incentives to work. 

Let me just hint at one possibility. If the capital requirements for our banks were partially based on the potential of job creating ratings, instead of as now on the perceived risks of default of which have already been considered by the bankers, our small businesses and entrepreneurs might stand a chance to deliver us the new jobs we need and want. 

Frankly, one of the best ways of getting jobs is putting the current generation of bank regulators who do not understand one iota about the need for risk-taking, out of a job.

August 21, 2012

Risk-adverseness is also the subject of fashion.

Sir, John Kay asked “Why do we need to pay billions of pounds for big projects” August 21 and I suddenly remembered an anecdote, from some decades ago, which might illustrate one of the causes. 

In Venezuela, after a devaluation of its currency, the Bolivar, I witnessed amazed a CFO of a big multinational covering his company’s Bolivar positions by buying a swap at an absolutely absurd high price, and which de facto guaranteed a much larger loss that anything that could happen leaving that position un-hedged. I asked him why, and this is what he answered: 

“Per I know this is utterly silly, but you have to understand me, if I spend millions of dollars covering this exposure, and that would result in a huge waste of resources, nothing will happen to me, but, if I lose one single dollar, because of a non-hedged FX position, I am out!” 

In a similar way, if a bureaucrat spends millions of dollars more in order to have a reputable name carry out the works nothing happens, but one dollar of loss suffered in the hands of an unknown, that can bring him down… and the “reputable” make it of course their business for this to be well known. 

So you see, not all same risks are equal, even when measured in dollars, or pounds. Risk-adverseness is also the subject of fashion. 

Look at bank regulators, if banks go down, they feel responsible, but, if the economy tanks because of how they try to avoid bank failures, that doesn’t seem to bother them.

August 20, 2012

Distorting bank regulations makes a mockery out of rational capital allocation.

Sir, John Authers quotes Andrew Smithers in that contemporary bonus culture has introduced a short-termism that is threatening the economy misallocating capital on the back of distorted profit statements, “Distorted profits make mockery of call for UStax cuts” August 20. 

Indeed that is serious, but how it really impacts a market that looks a lot to the growth potential of future earnings is hard to tell. That said, what is really misallocating capital in our economy are bank regulations which so much favor what is officially perceived as not-risky, prominently the “infallible” sovereigns and discriminates against what is officially perceived as “risky”, like the small businesses and entrepreneurs. 

Unfortunately from its refusal to address it, FT seemingly does not care about this issue.

America (and Europe) by discriminating small businesses and entrepreneurs is becoming the “Home of the risk avoiders”

Sir, in “The US state will expand no matter the election result”, August 20, Lawrence Summers displays a serious lack of understanding of current bank regulations. 

Summers writes “the complexity and hence the cost of everything [like] regulating banks rises faster than overall inflation… imply… that government spending as a share of the economy has to rise”. 

Absolutely not! It is not the cost of bank regulations that is expanding the role of the state, but the regulations itself. Capital requirements for banks based on perceived risks create an extremely preferential access to bank credit for those officially perceived as not-risky, and that can only expand the role of the most prominent officially not-risky, namely the “infallible” sovereign. 

In the “Home of the bBrave” small businesses and entrepreneurs are being discriminated against. Not only is this expanding the US state, but more worrying it is changing its nature… the “home of the risk avoiders”.

Lawrence Summers defends convincingly voucher programs in health and education

Sir, in “The US state will expand no matter the election result”, August 20, Lawrence Summers writes: 

“Increases in the price of what the federal government buys relative to what the private sector buys will inevitably increase the cost of state involvement in the economy. Since the early 1980s the price of hospital care and higher education has risen fivefold relative to the price of cars and clothing and more than 100-fold relative to the price of televisions.” 

Even when netting out of the technological advance’s impact on costs, it would seem that the above constitutes an extremely spirited defense of vouchers programs.

America and Europe are practicing bungee jumping... without a rope!

Sir, when by means of capital requirements for banks based on perceived risks, regulators gave such a preferential access to bank credit to those officially perceived as not-risky, then they basically excluded the officially perceived as "risky", like the small businesses and entrepreneurs, from helping out in the economy. 

And that is immensely more dangerous than what Gillian Tett refers to in “Fiscal bungee jumping is the real threat to America” August 20, because it goes to the very heart of the economy. 

In fact considering the medium term implications of such unwise regulations I would say that America, and Europe too for that matter, are practicing bungee jumping without a rope. (And from its refusal to address this issue FT seemingly does not even care)

August 18, 2012

Oops! Is this why Martin Wolf launches a visceral attack on Paul Ryan?

So now Martin Wolf has entered the American political debate, by basically calling Paul Ryan an impostor lacking of integrity, “Paul Ryan does not offer a credible plan for America” August 18. 

Why Wolf does it this way, I sincerely do not know nor understand. What purpose does it serve? Could it be because Wolf believes Ryan’s opponents are offering a more credible plan? If so, it would be really interesting to see him following up with an article on that. 

Personally, I feel that neither democrats nor republicans got it right, or even have a chance to get it right, before some fundamental changes in bank regulations occur. Currently the capital requirements for banks overly discriminate in favor of what is officially perceived as not-risky, prominently the State, the infallible sovereign, and against what is officially perceived as risky, prominently the citizens, like small businesses and entrepreneurs, and with that, there’s nothing to do… America, as a nation, as the “Home of the bBrave”, is going down! (Europe likewise) 

But those capital requirement with their discriminations based on officially perceived risks, managed by mean of risk-weights set by regulation bureaucrats, playing the risk-managers of the world, have never seem to bother Martin Wolf. He is perfectly comfortable with the fact that a Basel II, or a Basel III, allows the banks to give loans to “infallible sovereigns” against almost no capital at all. The only explanation for that must be Wolf fundamentally believes in the superior capability of government bureaucrats to wisely spend any funds advanced by future tax-payers. Oops! perhaps that is why he hits at Ryan?

PS. In reference to this comment someone wrote me: 

“Nobody who is serious about cutting huge deficits starts by slashing taxes on the wealthiest, very partially offset by slashing spending on health for the poorest. It is a fraud AND a reverse Robin Hood tax, on a spectacular scale.” 

And I answered: 

When if phrased that way, yes! But then someone, who by means of risk-weights which determine the capital requirements for banks, favors the officially not risky, most likely the rich, and thereby discriminates against the officially "risky", most likely the poor…should also qualify as most definitely a fraud and a reverse Robin Hood, on a quite spectacular scale.

August 17, 2012

Current bank regulations cause less new growth and more inequality

Sir, John Plender in “Corporate cash power is holding the state hostage”, August 17, discusses the excessive savings of corporation produced “by investing less than the sum of its retained profits… well into an upturn”… and which forces governments “to accommodate these surpluses by running large fiscal deficits”. 

As a possible explanation Plender cites Andrew Smithers of Smithers & Co., who advances that this “has been driven by the dramatic growth of the bonus culture” which creates a bias in favor of short term profits and which are maximized by refraining from investing. 

That plays a role but it is small when compared to that that utter nonsense of allowing, like it is done now, bank regulation bureaucrats to decide what should be considered “not-risky” and be favored, and what should be considered “risky” and be discriminated against, and all that without any consideration given to the purpose of banks. 

The perceived as “not-risky” are normally related to past successes and current wealth, and the “risky”, like small businesses and entrepreneurs, harbor more often the possible future successes and those in need of bank credit. Favor the “not-risky” and discriminate the “risky” and you will get less new economic growth and more inequality. It is as simple as that! 

Regulators have no problems when bankers and market understands... their role is not so much understanding what is happening but preparing for when no one understands. A regulator that accepts being dumb, is immensely better than a regulator who believes himself to be smart.

August 16, 2012

Bank regulators, allow America to be the Home of the Brave

Sir, Jeffrey Sachs in “The US has already lost the battle over government” August 16, writes “ Mr. Ryan’s budget is nothing short of heartless in the face of the dire crisis facing America’s poor”. 

Hold it there Professor Sachs! I get too nervous about the poor, when someone recurs to arguing considerations based on the heart in order to service their needs. What was much worse for them than any heartlessness was the senselessness of bank regulators, that which caused the current crisis. 

By allowing banks to hold minimal capital when lending or investing in what was officially perceived as not-risky, regulators effectively discriminated against those perceived as “risky”, like small businesses and entrepreneurs, and doomed the banks to useless and obese exposures to what was or is still officially perceived as not risky. 

If there is anything that Republicans and Democrats should offer, as Americans, that is to wipe away the regulatory discrimination against what is perceived as risky and allow the US to fully be “the Home of the Brave” again… and that by the way would also do Europe a lot of good. 

And, if your bank regulator absolutely must mess around with market signals, so that they feel they have earned their salary, then why do you not ask them to base their capital requirements for banks on job creation and environmental sustainability ratings instead? That way they would at least serve a purpose.

Greece should state it will use the euro whether the eurozone likes it or not

Sir, George Pagoulatos writes: “Of all Greece’s many problems, including austerity, the threat of leaving the eurozone is the most damaging”, “Greece should not be sacrificed for the euro” August 16. But, when asking “Would the eurozone be justified in ejecting Greece?” professor Pagoulatos seems to imply that staying with the euro is not in Greece’s hands, and that is wrong. 

The best thing that Greece could do is to announce that, if by any reason expelled from the eurozone, for instance because it has not been able to service its debt, that which was recently considered risk-free by European bank regulators, it will stick to the euro, and NOT pull a dirty quickie new drachma on anyone... something which by the way would cost Greece useless fortunes, because of its unfortunate current lack of sufficient credibility. If Montenegro can use the euro why can’t Greece?

August 15, 2012

Could bank regulators and FT´s finance sector journalists be suffering from damage in the ventromedial prefrontal cortex?

All major bank crises originate not from too much lending to what is perceived as risky, that never happens, but from too much lending to something perceived as absolutely not risky but that later becomes very risky, and this often because too much has been lent to it. This is a fact, and regulators, financial journalists and other experts know it. 

And yet, bank regulators set up capital requirements for banks that were much higher when the perceived risk were higher than when the perceived risk were lower, and thereby generated the incentives for too much lending to the latter… as a result of that since banks were allowed to leverage their equity more when doing so, banks could obtain a higher return on their equity when lending to what was officially deemed as absolutely not risky. 

And that not only caused the current crisis but it also keeps us from digging ourselves out of it, as it discriminates against all the “risky” small businesses and entrepreneurs we need to help us. 

And no matter how much I have written about it, the regulatory nannies don’t seem to get it, and keep on digging us, deeper and deeper, into what I have called “L’economia castrata”, that which so dangerously discriminates against what seems as “risky”. And one reason for it is that financial journalists, like those in FT, neither seem to get it. Why is this so? 

Well Malcolm Gladwell, in his book “Blink”, 2005, wrote that those who suffer from damage in the ventromedial prefrontal cortex, “can be highly intelligent and functional, but they lack judgment”, and that “causes a disconnect between what you know and what you do”. Could that be it?

“Radical uncertainty” indicates regulators should stay away from “Bayesian subjective probabilities”

Sir, John Kay in “The other multiplier effect, or Keynes’s view of probability”, August 15, writes that “the largest and most famous Dutch book… a set of choices such that a seemingly attractive selection from it is certain to lose money for the person who makes the selection… would be the collection of ingenious structures products RBS acquired when it bought ABN Amro”. 

Forget it! That book, as a Dutch book, does not even come close to Basel II regulations. Those regulations, which offered a world without bank crises, set the bank capital requirements lower when the perceived risk were lower, and thereby doomed the banks to overdose on perceived risks, and create extremely dangerous and obese exposures to what was, and is, officially deemed as “absolutely not risky”. 

Kay mentions the possibility that one has to use “Bayesian subjective probabilities… because if they did not, people would devise schemes that made money at their expense”. That might or might not be true, but, at least, when it comes to bank regulators, the best is for them not even to engage in any sort of risk arbitration. One single capital requirement for any bank asset is the only rational response to any “radical uncertainty”.

August 14, 2012

Should regulators be in charge of the wrist-slapping of regulators?

Sir, Tom Braithwaite makes a courageous point in “Thin-skinned London should let the sunshine in”, August 14, by holding that even though the head of New York state´s Department of Financial Services is “a publicity-seeking, showboating, impertinent arriviste, who should get back in his box and leave the wrist-slapping of bankers to the professionals… that doesn´t make him wrong”. 

I certainly hope that someone in FT would have the same courage of defending “a publicity-seeking, showboating, impertinent arriviste” like me, who refuses to get back in his box and leave the wrist-slapping of” regulators in the hands of the same professional regulators. 

August 13, 2012

Regulators must stop feeding banks bad cholesterols, and making these communist agents.

Sir, in “Waiting for growth” August 13, you write: “The sclerosis in UK’s balance sheets is clogging up the financial arteries through which central bank cash multiplies” yet again you refuse to even hint at the possibility that those truly dumb capital requirements for banks based on perceived risk, ex ante of course, represents the heavy doses of bad of cholesterol that regulators have been feeding the banking systems for quite some time now, UK’s included. To even discuss “direct monetisation of spending”, without cleaning up bank arteries , is just irresponsible. 

And just a few weeks ago, in “More bad news for banks and clients”, July 13, you also wrote “The industry must take its utility function seriously”, and also blithely ignored top mention the fact that the regulators have not defined the purpose of the banks, and are therefore actually with their regulations interfering with their utility function, as we believe that to be. At this moment no matter how lost banks might seem, they know more what they are there for than regulators do. If in doubt, just consider the extremely lenient capital requirements for banks when lending to “infallible sovereigns”. That cannot satisfy any reasonable capital allocation purposes, unless of course you are a communist state and you want your banks to be your agents.

August 11, 2012

To escape the no-growth trap, regulators must allow the “risky” to compete freely for access to bank credit

Sir, James Mackintosh, in “The world is halfway through a lost decade” August 11, writes: “The pressure is on for western governments to ease austerity plans, while the entire world seems ready for more aggressive monetary intervention. It is hard to see how this could lead to more than tepid growth, and there is an ever-present risk of a Spanish-style bond crisis.” 

I agree, the only way to escape the low-or no-growth trap is by eliminating the regulatory preferences for lending to the “not-risky” and thereby allow the “risky”, the small businesses and entrepreneurs, to compete freely for access to bank credit

What a great letter!

Sir, I am not at all sure I grasped the whole meaning of Simon Schama’s “A letter from America to beatific Olympic Britain”, August 11, but, intuitively, I know that I love it… and that is not only because I find the concept of “democracy has become the catspaw of plutocrats” to be so right on the dot.

Another very dark side of the technological revolution.

Sir, Gillian Tett in “Mobiles are ringing the global changes” August 11, refers to “dark side of this technological revolution”. 

Indeed, when I was a young boy, in a boarding school in Sweden I sent my parents, living in Venezuela, about one letter every six months. When receiving the letter, about one month later, they’ve read it, and concluded “Per is ok”, and then they were calm for the next six months, or more. Nowadays, if any of our three daughters do not message us within sort of hourly intervals, from around the corner, my wife and I go into a frenzy. And I truly fret the moment my 11 months grandchild gets her mobile device… what a stress!

August 10, 2012

If global bank regulations are as bad as the current, then a fragmented system is better.

Sir, John Plender concludes his “StanChart is a reminder of banking’s insatiable greed”, August 10, with “competition between financial centres is a trivial issue when compared with the wider global threat to jobs and growth. The stakes in this unfolding saga are uncomfortably high.” And he is absolutely right. 

But Plender also refers to the “growing risk that the regulatory response to scandals could, as a byproduct, lead to the fragmentation of the global financial system”, and there I must remind him that a global financial system subject to the wrong global financial regulations is worse than a fragmented system, where at least perhaps some places could do it better. 

For instance a system where a German bank was required to hold 8 percent in capital when lending to a German small business or entrepreneur, only on account of that being perceived as “risky”, while at the same time being able to lend to Greece holding only 1.6 percent in capital because Greece was officially perceived as “not risky”, are not the kind of regulations I would like to see applied globally.

FT, without fear and favoring, do not exclude bank regulators from being shamed

Sir, in “The limits of shame” august 10 you state “Shaming banks and bankers should only occur when evidence of wrongdoing has been found. Bankers have been guilty of excess but they should not be condemned as a class.” 

Absolutely! But why do you exclude in that same line bank regulators? They are the guiltiest of generating excesses in terms of the obese bank exposures to what was erroneously perceives as not risky. 

For many years now I have held they should all parade down 5th Avenue wearing cones of shame or whatever similar procedure is more familiar to you in Britain. 

Bank regulators, stop protecting the vested interest of the “not-risky”, which discriminates against the “risky”.

Sir, James Wilson and Giulia Segreti reports that “ECB calls for ‘courageous’ action to tackle‘vested interests’” and of “the need to bring down labour costs, boost productivity and improve the business climate”, August 10. 

Absolutely! But why does not ECB ask regulators to stop protecting the vested interest of those perceived as “not-risky” with their capital requirements for banks based on perceived risk. These regulations are precisely the main cause for why the report also states that “Coldiretti, the Italian agricultural association, estimates that 60 per cent of companies in the sector risk being starved of credit as they face interest rates that are 30 per cent higher than the average of other sectors” 

Really, bank regulators who allow banks to lend without any capital to supposedly infallible sovereigns and very little capital to what private is AAA rated while at the same time requires the banks to hold much more capital when lending to the “risky”, like small businesses and entrepreneurs, should be ashamed of themselves. They have no idea of what banking is all about. They are guilty of causing “L’economia castrata” and which threatens to bring theWestern world to its knees

August 09, 2012

If little I was president of the ECB

Sir, Jerome Booth in “Europe must seize the day now that Draghi has acted” writes that “However far away, if financial markets see light at the end of the tunnel in the form of a credible plan, hope can return.” Absolutely!

And that is why I fight so much for the real truth of this crisis to come out, so that market understands the why of it and sees it corrected… currently all stimulus efforts are being poured on basically the same economy as before, and that does not help the credibility of these. 

If I was the president of the ECB I would come out and explain how this crisis was caused, by excessive regulatory reliance on our capacity to measure risks, and consequently excessive incentives given to banks when engaging with what was officially perceived as not-risky, and consequently the discrimination that signified against the officially “risky” like small businesses and entrepreneurs. And then, I would immediately present a plan of how to correct the banking system for that monumental regulatory mistake. 

And I am sure markets would begin to understand how they were distorted and therefore begin to see that light which allows it, in the middle of all rubble and destruction, to sing that hopeful “Oh, what a wonderful morning!” 

But I am not the president of ECB, Mario Draghi is, one of the failed regulators.

What kind of parents are you?

Sir, Frank Partnoy more than suggests that lawyers might have been more of enablers and emboldeners of bank shenanigans and concludes: One lesson from recent scandals is that banks need reliably independent in-house counsel, with a strong moral backbone”, “Who are the true villains of the StanChart tragedy?” August 9. Does that not go for regulators too? 

I mean if your children’s nanny had allowed, even pushed, one of them to go bungee-jumping, on account of the child begging, and some safety rating agency deeming that safe, and then a fatal accident happened… what would you do with the nanny? Would you still retain her services? If so, what kind of parent would that make of you? 

Currently those same nannies who with Basel II authorized banks to lend to Greece holding only 1.6 percent in capital, only because credit rating agencies deemed it safe, and which signifies a mindboggling authorized 62.5 to 1 leverage, have been retained and put in charge of coming up with Basel III, if not, like Mario Draghi, kept busy as president of the European Central Bank. What kind of parents does that make you?

August 08, 2012

The Western world is being brought to its knees by mad bank regulators.

The Western world is the result of risk-taking in all shapes and forms… “God make us daring!”, ends one of the psalms sung in its churches. 

And so when regulators, with their capital requirements, decided to give the banks additional incentives to embrace what was perceived as “not-risky” and further avoid the “risky”, like small business and entrepreneurs, only so that banks would not fail, they stuck a dagger in the very soul of the Western world. 

And besides, they used a lousy dagger that could not stop banks from failing, because it is precisely when banks embrace too much something that is perceived as absolutely not risky, when they fail, en masse. 

And Mario Draghi is one of those Western-world-slayers regulators who do not yet even understand he is very much responsible for “L’economia castrata”. Therefore, Sebastian Mallaby’s heading “This will not be enough, Mr. Draghi”, August 8, would have been more precise stating “Nothing Mr. Draghi does, will be enough” 

Survival of Europe has to begin by rescuing the possibilities of its risk-takers to take risks, and that begins by firing the nannies in the Basel Committee and in the Financial Stability Board, and renaming the latter immediately the Financial Functionability Board.

The happiest bank story ever doomed the banks to the unhappiest ending ever.

Sir, I refer to John Kay’s, “When storytelling leads to an unhappy ending”, August 8. 

“The higher perceived risks, the more bank capital, the lower the perceived risk, the less capital.” 

With that so believable regulatory paradigm, bank regulators thought they had saved the world forever from bank crises, not realizing that with it they doomed the banks to the biggest crisis ever. 

That regulation only fed the monster, as risky assets have nothing to do with bank crisis, these all result from safe assets ending up as risky. 

If only bank regulators had drawn up their small including-excluding events probability circles, that could perhaps have stopped them from discriminating in favor of the “not-risky” and against the “risky”. But no! Even 5 years after the explosion, regulators still refuse to do so. 

John Kay, almost all believed in the regulator’s initial narrative, because that is what you do with experts, but please try to explain why do they now still allow utterly failed regulators to keep on regulating, using the same utterly failed narrative? 

And there is a lot of urgency in spreading the narrative about their failure, since that regulation is also castrating the economy at large, as it pushes bank credit toward the currently “safe” and away from the risky-risk-takers who the Western world needs in order to move forward and not stall.

August 07, 2012

Does Mario Draghi really have what it takes?

Sir, you hold that “risk managers of banks… failed to foresee the unsustainability of the US mortgage market – the cause of the crisis”, “The Euro still has a mountain to climb” August 7. Yes, they should have, but that is mainly because they should have distrusted their regulators. 

Bank regulators, among them FT´s hero, Mario Draghi, should have understood that you just do not allow banks to leverage their equity 62.5 times, when for instance investing in securities backed by mortgages to the subprime sector only because these were triple-A rated, or when lending to Greece. 

In fact, when bank regulators imposed on the banks their capital requirements, they basically told the banks that analyzing the mortgage market was none of their business, because for that purpose, they had appointed their official risk managers, namely the credit rating agencies. 

Does FT really think that European banks should have sent expensive and qualified analysts to the US to check up on the mortgage market, when even most US banks were not doing that? I really wonder when is FT going to behave “without fear and without favor” when it comes to sharing out the blame for this crisis among banks and regulators? 

As I see it, someone who has not yet understood the distortive implications of current capital requirements for banks and which caused “L’economia castrata”, does not have the qualifications to run an ECB in these very critical days.

August 06, 2012

Again, can we please have a Financial Functionability Board?

Sir, Gillian Tett writes, “After all a financial system in which transactions are secured on assets is likely to be a healthier system than one which is largely – or patchily – unsecured”, “Cyber finance takes its collateral thinking test”, August 6. Why is that so, how on earth does Ms. Tett know that? 

Ms. Tett, like most, is stuck in a Financial Stability Board mentality of let us castrate the banks so that they do no harm. She, like most, is seemingly incapable of understanding that giving the banks incentives to go for the officially not risky and avoid the risky, was a primary cause for this crisis. 

The healthiest banking system will always be the one helping to produce the healthiest economy. In this respect we urgently need a Financial Functionability Board, able and willing to understand also the risks of risk-avoidance, so as to stop the regulators from digging us further in this hole of “L’economia castrata” where we find ourselves.

August 03, 2012

The consequences of all banks managing their own risks and some few regulators managing the risks of all banks, are not the same.

Sir, Gillian Tett correctly holds that risk management is no exact science “Anthropologists join actuaries to teach us all about risk”, August 3. You would then assume she should object when regulators try to manage the risks of banking by setting the risk-weights which determine the capital requirements of banks… but it would seem she has no major problem with that. 

What she and so many other experts fail to understand is the world of difference that exists between the consequences of millions of market participants each one trying to manage their own risk and some few regulators trying to manage the risks for all, and this even if anthropologists and actuaries are in regulatory team. This crisis is the result of the latter, something which can be empirically confirmed, by running a regression between all current bank problem assets and the fact that when banks incorporated those assets on their books they needed to hold very little capital, only because those assets were officially deemed as safe.

August 02, 2012

How can you get growth when regulators order banks to dump small business and entrepreneurs?

Sir, David Rosenberg tries to get a grip on why the US economy, which given the extent of how the spending spigots have been turned on, should have delivered 8 percent grow, is barely coming up with more than 2 percent. “Credit bust scars will take years to heal in aftershock era”, August 2. 

Like most experts Rosenberg ignores as one of the explanations the fact that current capital requirements discriminate based on perceived risk. That leads not only to holding back natural risk-takers like small businesses and entrepreneurs, those whose actions are so necessary for growth, but, worse yet, that even forces the banks to dump more the “risky” than the “not risky”, as doing business with the first requires so much more of that everyday scarcer bank capital.

August 01, 2012

Sometimes, when the sunrays are dangerous, finance might be better off in the shadows.

Sir, Sebastian Mallaby in “Finance must escape the shadows” August 1, writes “the explosion in securitization was partly a response to a global craving for safe assets”. The question he needs to respond to though, before drawing any sort of conclusion, is how much of that was natural market craving, and how much the result of artificially induced appetite stimulation, such as allowing banks to hold these securities, if highly rated, against very little capital. 

With regulators who allowed banks to leverage their equity more than 60 to 1 when holding AAA securities or lending to Greece, we might all have been better off if all our banks had remained in the shadows, instead of exposing themselves to that kind of dangerous type of sunrays. The shadows, if not just fraudulent, would never ever have permitted such leverages. In fact Sebastian Mallaby’s own “More Money Than God” offers, in the case of the hedge funds, a great defense for finance to sometimes remain in the shadows. 

Now when Mallaby writes “Wherever you come down on these questions what is really striking is their absence from the public square”, there I cannot but agree wholeheartedly and express the same concern. Indeed you just need to see how FT have ignored or minimized this problem… and that cannot just be because it was little censored me who alerted FT about this in hundreds of letters.