October 31, 2013

With regulators like Mark Carney there is no future in finance for the City, or for the rest of the economy for that matter

Sir, John Gapper writes that Mark Carney, the new “Bank of England governor, has arrived from Canada with a dose of can-do spirit”, “Carney is wise to nurture the City´s future in finance” October 31.

“Can-do spirit”? Ha! There is nothing as far from a can-do spirit than capital requirements for banks which are higher for what is perceived as safe, than for what is perceived as risky. These not only guarantee that banks will not finance the future but mostly refinance the past, but also guarantee the kind of distortions that will make it impossible for the banks which are not in the shadows, to survive.

How can we have reached a point where we can write about “a knowledge industry that has been vital to growth and trade since the 19th century” blithely ignoring there is no way that 19th century banks could have done what they did, with current regulations.

Let me try to explain the regulatory lunacy again, in terms of knowledge. If banks know (or believe they know) the risks, and adjust for these in interest rates, size of exposures and other terms, what business have regulators adjusting for exactly the same “know” in the bank capital?

The role of a banker is to stop his bank from failing”, while the role of a regulator is to see how to stop bankers from failing to stop their banks from failing, and, if banks fail, to see that the hurt will be contained as much as possible. In other words: Though a banker might very well look at credit ratings, a regulator must not look at these, but at how bankers look at credit ratings. Why is it so hard for Mark Carney and his colleagues (and John Gapper and his colleagues) to understand that?

PS. From Edward Dolnick’s “The Forger’s Spell” I extract that the psychologist Leon Festinger once marveled: “A man with conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point”. Does this apply to me, or to the bank regulators and Financial Times journalists, or to all of us?

October 30, 2013

Mark Carney. Risk-weighted bank capital requirements, is extremely improper regulatory behavior.

Sir, I refer to Martin Wolf’s “Carney’s risky bet on big finance” October 30.

According to Basel II, if a bank expected a risk adjusted margin of 1% on a loan to Greece, or on a AAA rated security then, since that was risk weighted 20%, it would be required to hold only 1.6% in capital, and so it would be able to earn an expected risk adjusted return of 62.5% on its equity.

But, also according to Basel II, if a bank expects a risk adjusted margin of 1% on a loan to medium and small unrated businesses then, since that is risk weighted 100%, it would be required to hold 8% in capital, and so it would be able to earn an expected risk adjusted return of only 12.5% on its equity.

Sir, what would you expect the banks to do in such circumstances? Is this the “organized properly, a vibrant financial sector bring substantial benefit” that Mark Carney was referring? If so, Carney has no idea of what “properly” means.

And the ex ante perceived risks-weighting of capital requirements remains the pillar of Basel III, even though, with its leverage ratio, a floor of 3% capital (equity), and a roof of 33.3 to 1 leverage, has been set as an AVERAGE for the banks.

Martin Wolf feels that “Far more equity is required”. I agree, though it has to be something achievable and not a pie in the sky request of 30%, but, before that, risk-weighting needs to disappear. With more basic capital required, unless of course it becomes close to 100%, the more distortions could the risk-weights produce.

Mark Carney states “our job is to ensure that [the financial sector] is safe” He is so completely wrong! His job is to help to ensure that the real economy is safe, and, for that, the health of the financial sector is only one part of the puzzle.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

October 29, 2013

Europe, who should define what the non-core assets of your banks are? Regulators, or the needs of your real economy?

Sir, Sam Fleming reports that Richard Thompson, a partner of PwC, estimates that “European banks were sitting on €2.4tn of non-core loans that they plan to wind down or sell off.” “Troubled loans at Europe’s banks double in value”, October 29.

I tell you Sir, that should scare the shit out of Europe… because you can bet that the loans to be wind-downed or sold off, are just those for which bank regulators require the banks to have more capital; and which is something that has nothing to do whatsoever with how much the real European economy needs those loans.

ECB’s asset quality review will take place but, unfortunately, it will not even try to identify all the good opportunities for job creation for the European youth that should have had appear on European bank’s balances, but do not. And this only because regulators allow banks to earn much higher expected risk adjusted returns on equity when lending to “The Infallible” sovereigns, housing and AAAristocracy, than when lending to “The Risky” medium and small businesses, entrepreneurs and start-ups.

October 27, 2013

Why should banks’ willing spirits but weak flesh be able to resist extreme regulatory temptations?

Sir, I refer to Kara Scannell, Tom Braithwaite and Gina Chon’s report on how government is now, seemingly for political reasons, trying to make up for lost time, by laying it hard on those guilty of producing and packaging lousy mortgages into AAA rated securities, “The paper tiger roars”, October 26.

I am a firm believer that those guilty of it should have been fully prosecuted, from day one, but, what most angers me, is how no blame has been placed on those regulators who, by tempting willing spirits but weak flesh too much, caused the whole problem.

Basel II bank regulations, those which the US also signed up on in June 2004, stated that banks, against loans to unrated businesses, were required to hold 8 percent in capital (equity), but, that against AAA rated securities, 1.6 percent sufficed. And that meant that banks were allowed to leverage their equity 50 times more when holding AAA rated securities, than when holding loans to unrated businesses.

How could regulators have expected the banks to resist such extraordinary temptations? Prosecute, as dumb, and have them parade down avenues wearing dunce caps, those regulators who so tempted our banks.

Classic economics, models and free markets, stand no chance against arrogant intellectually sloppy regulators


In it Tett writes that “There is a profound irony here. In some senses, Greenspan remains an orthodox pillar of ultraconservative American thought… And yet he, like his left-wing critics, now seems utterly disenchanted with Wall Street and the extremities of free-market finance – never mind that he championed them for so many years.”

What free market finance is Tett referring to? That which requires banks to hold reasonable amounts of capital (equity) when lending to medium and small businesses and entrepreneurs but allowed banks to hold basically no capital when lending to those considered absolutely safe like sovereigns housing and the AAAristocracy? Is that “free-market finance”? She´s got to be joking! 

And Tett also writes “Greenspan has had a change of heart: he no longer thinks that classic orthodox economics and mathematical models can explain everything… he thought – or hoped – that Homo economicus was a rational being and that algorithms could forecast behavior”

No Tett! And no Greenspan! The problems had nothing to do with faults in classic orthodox economics or of mathematical models per se, or with “The ratings agency failed completely”, the problem is to be found entirely in the sloppiness with which these were applied.

Simple common sense should have forecasted what was going to happen, namely too much easy bank credit to what was considered as “absolutely safe”, and too little to what was ex ante perceived as “risky”. Or, what would Tett, or Greenspan, think that I could be referring to, when in the Financial Times in January 2003 I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.”?

If banks used “perceived risks”, which includes of course the perception of rating agencies, then why should the regulators reuse the same perceptions for the capital requirements? What the regulators had and need to do, is of course to base the capital requirements for banks on the possibilities and implications of those ex ante risk perceptions being wrong. And in that case, since what ex post turns out riskier than the ex ante perception was, is always riskier than what turns out safer, if anything, the capital requirements should be higher the safer the ex ante perception are.

It is sad to hear Greenspan admitting: “When I was sitting there at the Fed, I would say, ‘Does anyone know what is going on? ... I couldn’t tell what was really happening”.

But, that more than five years after the crisis began, Greenspan and the Fed (and Tett of course) seemingly do still not know what happened, and is happening, well that is truly scary stuff… especially for all those unemployed young who are going to pay for it.

October 26, 2013

Americans who sing about their “Home of the brave”, are clueless about what their bank regulators are up to

Sir in “A superpower at risk of slippage” October 26 you so correctly write “History is littered with solid objects – and risk-less assets – that have melted into thin air.” And yet, you keep mum about the fact that your own banks are allowed to hold exposures against minimal capital, sometimes even zero, only because these assets are perceived, by fallible humans, as “risk-less assets”.

But, if anything puts a superpower at the risk of slippage, that is when a superpower starts fretting more about what it has than about what it can get. And that happens when for instance it accepts regulations that basically instruct their banks to stop financing the “risky” future and concentrate on refinancing the “safer” past. Like what is done by means of the Basel Committee’s and the Financial Stability Board silly capital requirements based on ex ante perceived risk.

God make us daring!

October 25, 2013

Now is not the right time for European banks to make payouts to their shareholders.

Sir, Richard Milne reports “Shareholders press Swedish banks for payouts”, October 25.

According to recent indications from the Basel Committee, banks will have to publish their leverage ratios in January 2015, which means that their un-weighted assets to capital ratios will be seen.

If European bank shareholders only knew how important, for the competitive strength of their banks, it will be to then be able show up strong ratios, in the midst of that market panic that could result from unveiling the scary truths, they would not be asking for any payouts now.

Bank of England must allow its banks to finance UK´s future and not just make these refinance its seemingly safer past.

Sir, Martin Wolf writes “The job of policy…is to shift the economy on to the better path. This means taking risks.” “Why the Bank of England must gamble on growth” October 25.

For me, more important than that is for the Bank of England to get out of the way of avoiding private risk-taking, like it does when subscribing to Basel’s silly capital requirements for banks based on ex ante perceived risk, more risk more capital (equity) less risk less capital (equity).

That allows the banks to earn much much higher expected risk adjusted returns on equity when lending to sovereigns, housing and the AAAristocracy, than when lending to medium and small businesses, entrepreneurs and start-ups. And that has of course caused havoc in the allocation of bank credit to the real economy… which of course hinders the chances of sturdy growth.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks… or it just might be that he does only want the public sector to have the right to risk it.

October 24, 2013

Will the ECB correctly review the disaster in the banks’ balances and assets that Mario Draghi helped to cause?

Sir you write that “a great deal hangs on the drily named ‘asset quality review’ that the European Central Bank is undertaking of the banks it will soon supervise.” “ECB review must have sharp teeth” October 24. We already know what they will find:

First, very dangerous excessive exposures to what banks are allowed to hold against very little capital, because the assets are perceived as absolutely safe, “The Infallible”;

Second, dangerous remnants of exposures to what was ex ante were perceived as very safe and could therefore be held against very little capital, but that ex post turned out to be very risky, among others because of an excessive access to bank credit, “The Ex-Infallible”

And third, they will find an almost total absence of assets of those which require banks to hold more capital, like loans to “The Risky”, medium and small businesses, entrepreneurs and start-ups, something which is extremely dangerous to the real economy.

But will the review state so? You write: “The ECB needs to be conservative. Mario Draghi, a central banker renowned for his political nous, will be all too aware that this exercise is a test not just of bank balance sheets, but also of his own institution’s credentials.”

But Mario Draghi was also for many years the chair of the Financial Stability Board, and is therefore much to blame for the very wrong incentives given to the banks, namely that these could earn much much higher risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky. 

So do you really think the review will state the truth? Which would of course imply that the ECB’s boss credentials are not that good? Or will the ECB try to leave us in our blissful ignorance.

PS. By the way, in your opinion, is a European bank that has 50% of its assets in US Treasury and 50% in German public debt, a good bank?

October 23, 2013

We need more trigger happy bank regulators

Sir, I refer to John Kay’s “To secure stability, treat finance and fast food alike” in which he writes “Perhaps the most fundamental confusion in the evolution of financial services regulation is the equation of financial stability with the survival of established institutions.”

He is absolutely correct. In May 2003, days when Basel II was being discussed, as an Executive Director of the World Bank, addressing a workshop with some hundred bank regulators, I told those present:

“If the path to development is littered with bankruptcies, losses, tears, and tragedies, all framed within the human seesaw of one little step forward, and 0.99 steps back, why do we insist so much on excluding banking systems from capitalizing on the Darwinian benefits to be expected?

There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

And knowing that “the larger they are, the harder they fall” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

But they were too much in love in their own risk-management capabilities to listen to someone who was not even a PhD.

Would US Treasuries been safer, had there been no debt-roof discussions, just business as usual?

Sir, John Plender holds that as a consequence of the “debt-ceiling imbroglio”, and the recent partial closure of US government, “that anyone who can diversify out of US Treasuries will now feel impelled do so as far as possible.” “Treasuries have turned anything but risk-free”, October 23.

If Plender implies that had only the US just gone on lifting the debt-roof of which it has to jump off, sooner or later, and kept on spending as usual, while there is no tapering of the QE, and all without even a discussion, that then the US treasuries would be safer, I do not agree. That is not what “a responsible custodian for more than 60 per cent of the world’s official reserves” should do.

But that there are reasons to diversify, on that there is little doubt. The doubts are with respect to, diversify into what? Though Plender mentions China’s rising to challenge US hegemony, I do not think he is seriously thinking about putting his savings in Chinese banks. Could Plender have gold in mind?

October 22, 2013

Some disagreements with Professor Persaud´s excellent comments on bank bail-ins and contingent convertible notes, Cocos.

Sir, Avinash Persaud deserves much praise for the clarity of his “Bank bail-ins are no better than fool´s gold” October 22. I do hope the regulators take notice and try sincerely to understand it, though I have many reasons to doubt they will. In the mutual admiration club of the Basel Committee and the Financial Stability Board, they only listen to the members.

That said there are though three issues on which I differ much with Professor Persaud.

The first is when he states “Financial crises are the result of market failure”. This is not always so. The current crisis was produced by regulatory failures present in the loony capital requirements for banks based on, ex ante, perceived risk. These made banks go, excessively, with very little capital, into areas deemed as “absolutely safe” and which we all know, or should know, are precisely those areas capable of creating big financial crises, when, as always happens, some of the perceptions turn out to be wrong, ex post.

The second is when he writes about “the failed philosophy at the heart of the 2004 Basel II global banking rules, which made the market pricing of risk the frontline defence against financial crises.” Where on earth does he get that from? The frontline of Basel II, its only pillar, were the capital requirements I just mentioned… and its implied frontline defence was allowing banks to earn much much higher risk-adjusted returns on their equity on assets deemed as “infallible” than on assets deemed as “risky”. And that is why banks now are not financing the future but only refinancing the past.

The third is when, with respect to Basel II, he mentions “a throwback” and which seems to imply he believes that Basel III is fundamentally different. That is not the case. Where it really matters, on the margins of banks' credit allocation decisions, regulatory risk-weighting is still in full force… and so the distortions of the real economy will keep on occurring… and keep on producing larger and larger crises… to be paid by all, especially by the young.

October 21, 2013

The debt-ceiling is just as much the debt-roof from which the US will need to climb down from.

Sir, Sir Samuel Brittan should really be commended for reminding us of what is also at stake when stating “The recent fiscal policy deadlocks we have seen in Washington are a price worth paying for proper checks and balances”, “A moderate outlook with the chance of a new crisis” October 18.

In many languages there is just one word for the ceiling and the roof, in Spanish “techo”. And that is why it might be so difficult to translate the nuances of a debate about the goodies of increasing a debt-ceiling, which is able to leave so much aside of the badies of raising a debt-roof, that from which the US, someday, sooner or later, will need to come down from.

And Edward Luce, in “It is stupid to believe that the Tea Party has no brain”, October 21 asks: “Can there be anything more idiotic than flirting with a voluntary sovereign default?” As a Latin American I would have to answer “Yes!” to that. And that would be flirting with an involuntary sovereign default.

October 18, 2013

Before sending watchdogs into the shadows, should we not get better ones for banks in the light?

Sir I refer to Sam Fleming and Patrick Jenkins reporting Paul Tucker saying “it would be ‘absolutely disastrous’ if the economic fragility of banks was recreated outside the mainstream banking sector”, “Watchdogs urged to look in the shadows”, October 18.

I do not agree. What we should really be scared of are for our truly bad watchdogs now also going for the shadows, after having messed up so much the banks in the light. Just as an example, in the shadows, no one would even dream of leveraging 30 to 50 times, like supervised banks were allowed to do, and did.

Sir, let me ask you one question, please!

If you were a regulator, what would you think poses the greatest dangers for us with the banks, the possibility of their excessive exposure to something rated AAA to AA and which then, ex post, turns out to be risky, or their “excessive” exposure to something rated below BB- ad which would, ex post, turns out to be even more risky than that?

I dare venture you would answer the first, since you would know there would be very few or no "excessive exposures" at all to anything rated BB-. And, if so, the banks would have collected a lot of risk premiums too... which is also capital (equity).

But the risk-weights of our current watchdogs are 20% for the first and 150% for the latter, meaning banks need, according to Basel II, only to hold 1.6% in capital against the first but 12% against the latter, which means banks are allowed to leverage 62.5 to 1 with AAA to AAs but only 8 to 1 with something rated below BB-. Explain that!

You see, the Basel Committee's risk weights measure the risks for the banks of their assets and borrowers, but not the bank risks for us. You see, our and bank regulators’ problems with banks, have absolutely nothing to do with banks and bankers getting it right, and absolutely all to do with banks and bankers getting it wrong!

Before sending watchdogs into the shadows, should we not get better ones for banks in the light?

October 16, 2013

Wolf, when spinning the US debt ceiling in favor of the spender, do not forget there is also a roof to get off.

Sir, Martin Wolf might be entirely correct when describing some of the possible horrible consequences of the US debt ceiling not being increased, but he is sure spinning the issue entirely in favor of the spender, “The debt-ceiling doomsday device” October 16.

I find the US Congress having to approve a debt ceiling, which is the same as a debt-roof from which the US has to get off from, sooner or later, to be something perfectly valid. When spending bills are presented, these are not “whatever it takes” spending bills, but spending which assumes some type of income. And, for the case those income assumptions are not met then any congress, as any corporate board, should have all the right to say… “Great! But as long as you do not take on more debt than x”.

And what would the markets be saying if all been smooth sailing for the US executive branch to take on any debt it wanted… would that not spook these even more?

PS. As for me, as Martin Wolf knows well, I am much more concerned with the shutdown of access to bank credit for the "risky" real economy, which regulators ordered with their dumb capital requirements for banks based on perceived risk.

October 15, 2013

Mr. Osborne will receive little help from banks with the real economy, thanks to current bank regulators

Sir, Janan Ganesh, in “Britain’s journey from austerity has hardly begun”, October 15, writes that “Cajoling Britain’s animal spirits while shoring up its discipline will test [Osborne’s] dexterity as a national figure”.

Indeed, and he will not find the banks being able to help him out much either, thanks to the regulators. This, because if there is anything that can kill animal spirits so much, are capital requirements for banks which are higher the higher the perception of risk. And, if it is something that can test bank discipline so much, is allowing these to have minimal capital, and be able to earn huge risk-adjusted returns on equity, only on account of something being perceived, ex ante, as “absolutely safe”. What an utterly silly reason… especially when knowing that all major bank crisis have resulted from excessive exposures to what, ex ante, was being perceived as “absolutely safe”

Financial Times, are you communists?

Sir, you end “Chaos in Caracas” mentioning that “Eventually, voters will let the PSUV know what they really think of its economic amateurism”.

Am I to interpret that as Financial Times believing that if only, a country where 97 percent of fabulous export revenues goes straight to the coffers of the State, was run by economic professionals, then everything would be fine and dandy? Are you communists?

October 14, 2013

Nassim N. Taleb. If you piss against the wind and get wet, that is no "Black Swan". That is only being stupid

Sir, John Authers in “Taleb’s pared-back argument carries an unsettling truth”, October 14 refers to “The Black Swan, which explained market’s difficulties in pricing extreme events for which they had no precedent”. Those arguments, “extreme events” and “no precedent” have provided the perfect cover for failed bank regulators to hide behind.

Just knowing that all bank crises in history have been caused by excessive exposures to what has ex ante been perceived as absolutely safe, but that ex post turned out to be risky, should have made it clear to regulators that playing around with distortive capital requirements for banks, based on ex ante perceived risk… had to doom the banks to excessive exposures to something erroneously perceived as absolutely safe, all aggravated by the fact that banks then would now hold especially little capital.

Of course Taleb is right in arguing that “natural systems work by allowing things that do not work to break”, but, sincerely you do not have to be a renowned scientist or expert to know that. For instance, little unknown me, told bank regulators working on Basel II in a work shop at the World Bank in May 2003: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the other of all bank crises.”

Authers also interprets Taleb writing “Governments should have a risk manager’s mindset, and not try to prod the economy growing. Without a risk-averse mindset, risks will grow”. I am not sure that is what Taleb means, but if so, he is wrong. Currently the biggest risk is the excessive risk-averse mindset of governments and regulators which make them distort so much of the natural systems, and for instance cause our banks to be refinancing the past instead of financing the future.

“The western economy is over-centralized and that creates extra risk”. Absolutely and that is why in November 1999 I wrote in an Op Ed “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse”.

PS. I am not a regulator but once, way back, 1966, I was a sailor… though not a drunk one… at least not too much… and so I do know something of what I am talking about.


Ms Bolivia...where I learned not to piss against the wind... 1966... 16 years old.

There can be no economic growth when banks do not finance the future but only refinance the past

Sir, Lawrence Summers in “The battle over the budget is the wrong fight” October 14 writes that “If even half the energy that has been devoted over the past five years to “budget deals” were devoted instead to “growth strategies” we could enjoy sounder economic finances”.

And, on the bottom of the page, Wolfgang Münchau in “Blame Europe’s policy makers for lost ground” writes that “If the eurozone had fixed the banking system as US did, it would now be on its way back to its pre-crisis growth.

The US has not fixed its banking system, it is only that Basel II bank regulations were not as completely implemented in the US as in Europe, and that the US banks are less important to the US economy than what the European banks are to Europe. 

Again, FT, for the umpteenth time, risk-weighted capital requirements for banks stops banks from financing the future and makes them only refinance the past. And, for God’s sake, how can you achieve sturdy and not just obese economic growth that way?

Unfortunately our bank regulators in the Basel Committee and the Financial Stability Board, caring so much about the banks and so little about the real economy, seem to be far to even understand that, and so much less able to correct it.

October 12, 2013

Janet Yellen: Basel II-III risk-weighted capital requirements do not make banks finance the future, only refinance the past

Sir, Robin Harding congratulating Janet Yellen for her appointment to chair the Fed gives her some “unsolicited advice” in “A memo to the world’s most powerful economist”, October 12.

And so would I like to do. But, as Harding says, since Yellen must now be extremely busy receiving millions of unsolicited advices, I have given long thoughts to how I could condense, in a single tweet short phrase, all of my arguments against that horrible and stupid bank regulation mistake which unfortunately survived Basel II and made it into Basel III.

The title of this is what I came up with. Anyone with better ideas… please!


PS. On this October 12, may I remind you that risk-weighting, is precisely the kind of regulations that stops an America from being discovered.

October 11, 2013

Current economic growth is not based on risk-taking but on risk-aversion, and therefore creates more fat than muscles

Sir, I refer to your Special Report on the World Economy, October 11.

While bank regulations that make it harder for medium and small businesses, entrepreneurs and start-ups to access bank credit are not eliminated, and regulators stop insisting on that banks shall only lend to the “infallible” sovereign, the housing sector and the AAAristocracy, any economic growth will only be of the type that leads to obesity.

A £1.000.000 house, but no job, and can’t pay the utilities

Martin Wolf warns correctly “Buyers beware of Britain’s absurd property trap” October 11.

Indeed, it would seem that the dream of politicians, government officials and bank regulators is for all us to be able to feel rich, sitting there in our houses. But unfortunately though the way they go about it will make us sit there without a job, and without being able to pay the utility bills.

But the trap is not solely related to houses, but to all assets that are perceived as “absolutely safe”, because those are the assets a bank is allowed to finance with little capital, which means lot of leverage, which means huge risk-adjusted returns on equity.

But Bbank financing to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups… that is of course a NO! NO! NO!

During the IMF and World Bank meetings in Washington this week we hear more and more about the scarcity of safe assets. Of course, it can’t be any other way. If you do not take a risk on risky assets, how on earth are you to produce the safe?

October 10, 2013

Tony Barber. No! Hercules would want to have nothing to do, with most of the “eurozone´s crisis-fighters”

Sir, Tony Barber holds that “Fixing the eurozone is a labour worthy of Hercules” October 10, and that, “If he were alive today, Hercules would have much sympathy with the eurozone´s crisis-fighters”. I very much doubt it!

First Hercules would now that fixing the eurozone will be the labour not of big time hero stars like him, but of millions of citizens, “The Risky” toiling away in medium and small businesses, and as risk-taking entrepreneurs.

Second, he would have little sympathy with the eurozone´s crisis fighters because in essence these include precisely those who believed themselves to be Hercules and decided they could, with risk-weighted capital requirements, manage the risks for all of the banks in the eurozone… and caused its crisis.

Mario Draghi, for example, as Chairman for many years of the Financial Stability Board, the only herculean lifting he helped doing, was lifting the bank leverages to the sky, for instance by finding it perfectly normal that banks from all over Europe, including little Cyprus, could lend to the Greek government holding only 1.6 percent in capital, in other words leveraging their bank equity 62.5 times to 1.

Instead Hercules would suggest allowing the capital requirements for banks, on exposures to “The Risky”, to be the same, or even slightly less, than on exposures to “The Infallible”.

And this because he would understand that regulators should not react to the same ex ante perceived risks that the banks have already reacted to, with interest rates, size of exposures and other terms.

And this because he would understand that, you cannot afford bank regulations which hinder the risk-taking necessary to win any war. Europe will not survive if European banks, for senseless regulatory reasons, end up holding only sovereign debts, even if all that is German debt.

And what do I mean with “Or even slightly less capital”? Yes because “The Risky” never ever poses any real systemic threat to banks, only the false members of “The Infallible” do that.

Europeans… go and pray in your churches, “God make us daring!” and then throw out those impostors who want you to believe them Hercules.

October 09, 2013

Why is it so difficult for Martin Wolf to understand the need for rebalancing the access to bank credit?

Sir, Martin Wolf, October 9, writes about “The pain of rebalancing global growth” but, stubbornly, keeps on refusing to even mention the most important rebalancing act that must occur. And I refer to of course the capital requirements for banks which, as these are risk-weighted, produce a completely imbalanced access to bank credit in favor of the “infallible sovereigns”, housing sector and the AAAristocracy; and thereby discriminates against “The Risky”, the medium and small businesses, the entrepreneurs and start-ups

Why can it be so hard for a seemingly so lucid man like Martin Wolf, to understand that “The Risky” are those who most need access to bank credit in competitive terms, for the real economy to thrive?

Wolf also repeats his mantra of criticizing governments for not taking the opportunity of “ultra-low interest rates for a large expansion of investment”. He still does not understand that since those low interest rates do not include the opportunity costs of all the lending to “The Risky” that has not occurred as a result of the regulators favoring the sovereigns, these nominal rates could, in real terms, be the highest ever.

This week Wolf will be doing the rounds in the World Bank and IMF meetings. He could be interested in that, more than 10 years ago, April, 2003, as an Executive Director of the World Bank I formally stated:

"The Basel Committee dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In its drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. The World Bank seems to be the only suitable existing organization to assume such a role.

Unfortunately neither the World Bank, nor any other similar institution, wanted to listen… not then, not yet.

Banks and regulators managing the same ex ante perceived risks, simultaneously, can only result in chaos and tears

Sir, Ian Cormack writes of “Banks´ deadly blend of complexity and leverage” October 9. And he holds that though many large businesses are very complex “the differentiator for banking is risk… demanding rigorous risk managing and risk reporting”. That is true but that does not even remotely describe the real difficulties, or impossibility, of managing bank risks today.

Banks look at the ex ante perceived risk of assets and adjust to these (in the numerator) by means of interest rates, size of exposures and other ways like hedging or contractual terms. But then come the bank regulators and adjust for basically the same ex ante perceived risk (in the denominator) by means of their risk weighted capital requirements.

That creates all sort of feed-back noises and, of course… the whole system overdoses on ex ante perceived risks, and all result in chaos.

God, make these regulators understand what they are doing!

October 08, 2013

Too careful is also “carelessly”

Sir, Gideon Rachman writes “It is a standard, self-pitying complaint in Brussels that the crisis in the eurozone was triggered by the collapse of a US investment bank, Lehman Brothers”, “America cannot live so carelessly forever”, October 8.

Yes that is the superficial fact, but the real truth is that what caused both Lehman Brothers, the eurozone and the US to have a financial crisis, were bank regulations coming from the Basel Committee. For instance, on April 28, 2004, the Securities and Exchange Commission, which supervised Lehman Brothers, effectively delegated its role to the Basel Committee.

And by the way, the crisis was not caused by being too careless, on the contrary by being too careful. It was capital requirements for banks which were so much lower for what was perceived as “absolutely safe” than for what was perceived as “risky”, which caused that extraordinary dangerous large level of bank exposures, backed with minimal capital, to AAA rated securities, to banks of Iceland, to real estate in Spain, and to sovereigns like Greece.

October 07, 2013

How does Italy break out of bank regulations which are slowly but surely shutting down its real economy?

Sir, I refer to Wolfgang Münchau’s “Italy’s chance to realign – or mess things up further” October 7. There Münchau states that, in Italy, “The most urgent task is to fix the banks. Without credit growth, there can be no sustainable recovery. The overindebted and undercapitalized banks have loaded up on Italian government bonds instead of lending to the private sector”.

Unfortunately, as that is a direct result of regulations which require banks to have about 8 percent in capital when lending to the private sector, but allow for zero capital when lending to the public sector, there is very little Italy and Enrico Letta can do about it. That is unless they distance themselves completely from the creators of this stupidity, the members of the Basel Committee and the Financial Stability Board.

Of course the fact that Mario Draghi was one of scientists, who failed in the laboratory, does not make it easier for a country that also depends on the support of the ECB.

October 05, 2013

What, do I now need to darken my teeth?

How do you know a customer who enters a store in scruffy jeans is actually worth £11.8bn? The answer according to what Nicole Mowbray reports in “Moment of tooth”, October 5, is “their teeth. People with good dentistry are also often the ones with healthy bank balances”.

What? Does this now mean I have to reduce some grades the white in my teeth in order to qualify like Oprah for some discounts and good economic advice?

FT, don’t scare or bullshit us, with that September and October labor data is indispensable for the Fed to know what to do.

Sir, Robin Harding reports that “Experts fear loss of October data could influence tapering policy” October 5. Boy if that is what we depend on for the Federal Reserve to act correctly, we are, as the somewhat vulgar expression goes, most certainly up shit creek without a paddle.

He also quotes an expert saying “It’s like flying blind”. Come on, the Fed is flying truly blind by not knowing what would be the real interest rates on public debt, net of the subsidies implicit in bank regulations which allow banks to lend to the public sector against much less capital than when lending to citizens. Compared to that blindness the labor data would be, also in a somewhat vulgar expression, chicken shit.

That the Fed, not having a clue about what to do, would naturally like to have that data in order to explain itself, well that is a quite different proposition.

October 04, 2013

FCA, if there are “high interest rules” should there not be “low interest rate rules” too?

Sir, I refer to your “High interest rules”, October 4.

When reading about the laudable efforts of Financial Conduct Authority (FCA) of trying to reign in the excesses of payday lenders, one can also wonder about when the FCA would tackle the other side of the coin; namely the absurd low interest government pays on its debt and which might even be the reason for why many savers might end up having to reach out for moneylenders.

Let us not ignore that besides awful money lenders who could break your kneecaps, there are also awful money borrowers too, even though these use more subtle methods. Like for instance the borrowing public sector, who have the regulators allowing the banks to lend to it holding no capital, while simultaneously requiring the banks to hold about 8 percent in capital when lending to any ordinary citizen.

October 03, 2013

Current low interest rates on sovereign debt could, in hindsight, be the highest real rates ever.

Sir, Kenneth Rogoff writes that “with hindsight, yes, the UK could have borrowed more –but we do not have hindsight when decisions are taken”, "Britain should not take its credit status for granted” October 3.

The underlying assumption of that is that current interest rates on much public debt, not only in UK, are very low… and that, in future hindsight, might not be true.

The risk weighted capital requirements for banks favor immensely bank lending to the “infallible sovereign” (and the AAAristocracy), in detriment of the access to bank credit of “The Risky”, the medium and small businesses, entrepreneurs and startups.

And so the cost of public debt which is currently not recorded anywhere, are the most certainly monstrous opportunity costs derived from the distortions in the allocation of bank credit this regulation produces. In fact, it is akin to taking the spark-plug out of the real economy. Yes, our economies might be moving, but perhaps that is only because they are going downhill.

October 02, 2013

If Peter Clarke is right, Keynes would be outraged about capital requirements for banks based on perceived risk.

Sir I do not know enough of economic history, or of Lord Keynes, to know whether Peter Clarke is correct when he says that Keynes “would have recognised the long gradual deterioration in income equality, and its consequences. He would also have been concerned about the redistributive effects of today’s extreme monetary policy. He would have recognised that today’s financial system is ineffective at channelling savings towards long-term productive investment and is configured more towards rent extraction”, “Reach of Keynes’ thinking deserves to be appreciated” October 2.

But, if that is what Keynes would opine, then I can swear he would be as outraged as I am, about the stupid capital requirements for banks based on ex ante perceived risk, and which allow for much higher risk adjusted returns on bank equity when lending to “The Infallible”, like sovereigns, housing and AAAristocracy, than when lending to “The Risky”, like the medium and small businesses, the entrepreneurs and the startups.

Martin Wolf has forfeited his right to preach on budgets, public debt limits and the growth of the real economy

Sir, the whole Western World is flirting with self-destruction as a consequence of having accepted capital requirements for banks based on ex ante perceived risk. These only guarantee dangerous excessive bank exposures to “The Infallible”, like sovereigns, housing and the AAAristocracy; and equally dangerously small exposures to “The Risky”, like to medium and small businesses, entrepreneurs and startups.

Much of the problems of the huge public debt overhang in the USA, and in Europe, are a direct consequence of these regulations. 

I have written, and corresponded on many occasions about this with Martin Wolf. But, since he has deemed it fit to ignore the argument of how these capital requirements distort the allocation of bank credit, I at least feel he has forfeited any right to preach on budgets, public debt limits and the growth of the real economy, like he does in “America flirts with self-destruction”, October 2.

I am not that convinced about the health reform in the USA, since I believe it tackles insufficiently the root problem of excessive costs. Even so I would much rather prefer that the actual line drawn in the sand for any budgetary and debt limit agreement, was the total elimination on any discrimination based on perceived risks; something that should in fact already be prohibited because of the Equal Credit Opportunity Act (Regulation B)

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, since he understands it all… at least so he thinks. For instance I believe Wolf does not understand how subsidized sovereign debt is by these regulations and so in fact, the current public debt level, is considerably higher in real terms. Perhaps Wolf could benefit from reading Jens Weidmann's "Stop encouraging banks to load up on state debt" of October 1.

October 01, 2013

At long last, the truth about the incestuous relation between banks and sovereigns, is coming out of the closet

Sir, at last someone in the highest spheres, Jens Weidmann, the president of the Deutsche Bundesbank, speaks out. In “Stop encouraging banks to load up on state debt” October 1, he dares to admit that the banks’ “Sovereign exposures are privileged by low or zero capital requirements”

What Weidmann now denounces is that viciously incestuous relation I have denounced for more than a decade and which can be described in terms of: “I government allow you banker to lend to me without capital, and I in my turn will guarantee your obligations to the market” 

And as Weidman daringly admits: “This undermines market discipline for governments and reduces their incentive to carry out the necessary reforms” and “banks, which can obtain unlimited cash against sovereign collateral from the central banks, are protected from discipline from investors who provide the funding.”

In this respect let me remind you of my letter to you, published on November 18, 2004, and which said:

Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits. Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters

As an Executive Director at the World Bank 2002-04, I also protested loudly against privileging the sovereign, but to no avail.

Over many years I have not seen anyone in the Financial Times even mentioning the issue of how privileging so much the sovereign, and others like the AAAristocracy, completely distorts the allocation of bank credit to the real economy. I must say that speaks quite badly about your journalists, unless of course you want to excuse them by having to push a political agenda.

So will some of them now, again, bash Jens Weidman’s rational arguments for being excessively austere?

Of course, Mr. Weidman seems to just recently be waking up to the problem, and is not yet totally clear about it. For instance when he states “No market participant would judge a French bond to be as risky as the Greek one: the riskiness of each is reflected in their prices” he is probably not aware that he is with that really explaining why the whole idea of setting capital requirements for banks, based on an ex ante perceived risks, as Basel regulations does, is so utterly dumb, and only dooms banks to overdose on perceived risk.