March 07, 2013
Sir, Sharon Bowles, the Chair of the Economic and Monetary Affairs Committee of the European Parliament writes: “We know from bitter experience that the size of bonuses induced overly risky behavior and the peddling of poorly understood products contributed significantly to the financial crisis”, “Bureaucrats are not behind bonus cap proposal”, March 7.
Wrong! Being able to extract some investor value, like an AAA rating, from something not at all that valuable, is a normal financial operation, which often provides benefits to all parties involved.
The problem this time was that the appetite for what detonated the crisis, the securities collateralized with mortgages to the subprime sector in the US, just went crazy, when suddenly banks were allowed, by their regulators, to hold these securities against only 1.6 percent in capital, only because they had an AAA credit rating, issued by some human fallible credit raters. An authorized mindboggling leverage of 62.5 to 1!
No one, except those receiving them of course, likes runaway or not merited bonuses. And perhaps governments should cap the tax-deductibility of bankers’ annual pay. But, to read, five years after the crisis detonated, bureaucrats believing that fixing banker´s bonuses problem should have a high priority that is truly saddening.
The EP should concentrate instead on eliminating how regulations favor so much bank lending to “The Infallible” and thereby discriminates against “The Risky”, and thereby creating huge distortions in the real economy, because that is what is really taking Europe down… and fast.
The EP should also ask itself whether is wise to keep on consulting with bank regulators which by any accounts should have been fired long ago. Hollywood would never be so dumb to allow someone who produced a Basel II flop, to go out and try Basel III, with the same scriptwriters
PS. To help EP better connect the dots let me remind it that when banks lent to Greece, they were also allowed to leverage 62.5 times to 1; and also that nothing perceived as “risky” has ever created a major banking problem, only Potemkin Infallible do that. Capisce?