January 14, 2013
Sir, I refer to Richard Milne’s interview of Pär Boman, the chief executive officer of Handelsbanken titled “The back-to-the-future banker” January 14.
In it Mr. Boman recounts that having been offered some triple-A rated mortgage backed securities by some US investments banks, Handelsbanken executives, led by him, visited the bankers in New York and asked to see the underlying documentation of the mortgages. And when that proved not to be possible, he went to the west coast and visited some of the houses used in the bonds, and from which he reached the conclusion of “it was very clearly nothing for us”.
Yes clearly that was a great job by Mr. Boman and he should be commended for having doubted. But that said it would be very interesting hearing his opinions on the following:
When presented with operations which involve triple-A ratings, at what size of potential exposure and to what extent of additional not recoverable research costs, is a banker supposed to doubt the validity of the credit ratings?
If it is possible to doubt the quality of the ratings what does that say about the quality of the regulators who with Basel II allowed banks to hold those same securities Boman so wisely rejected, against only 1.6 percent in capital, and thereby allowing bank equity to leverage 62.5 times to 1.
And if a bank discovers great reasons to doubt a credit rating, what is their responsibility in terms of communicating their doubts to the market and to the regulators?
And what is a bank to do if the doubting also extends to the supposedly infallible sovereigns... the paymasters of its regulator?