February 28, 2015

‪#Oxfordlitfest‪ ‬An opportunity to see if Martin Wolf has overcome his intuitions with respect to bank regulations

"More-perceived-risk-more-bank-equity and less-risk-less-equity", sounds so utterly logical, that perhaps intuition kills understanding… or, in Daniel Kahneman’s terms, that System 1, the fast intuitive and emotional one, is so convinced it has done its part, so as not to allow System 2, the slower more deliberative and more logical thinking process, to kick in.

For instance Martin Wolf, in July 2012 wrote: “Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk.” 

Yet Wolf has not been able to take it from there and deduct that, if so, and as all empirical evidence supports, then those bank equity requirements should perhaps be 180 degrees the opposite.

Sir, what on earth has a regulator to do with the perceived risks of bank assets, when what he should be exclusively concerned with, is with how bankers perceive those risks and manage these?

Our banks currently are like in a car with two steering wheels; the first one controlled by bankers, and the second by regulators who are responding, simultaneously, to basically the same risks the banker sees. And so of course we must crash either because banks embrace excessively what seems safe, or because of an excessive aversion to what seems risky.

Perhaps ‪Oxfordlitfest‪ would provide an opportunity to see if Martin Wolf has finally managed to engage System 2, by asking him: 

Mr. Wolf: If bank crises usually result from excessive exposures to something which ex ante has seemed safe but that ex post turned out to be risky: Why are equity requirements for banks lower for what is perceived as risky than for what is perceived as safe?

Mr. Wolf: Give us one single bank crisis resulting from an excessive exposure to something that was perceived as risky, when banks put that asset on their balance sheet.

We’ve fallen into the dangerous and spooky hands of an inept bunch of amateurish masters of the universe.

Sir, I refer to Andrew Sentance’s “We expect too much of the new masters of the universe [central bankers]” February 28.

Sentence asks “Are we now too optimistic about the abilities of the financial system’s new overlords?” I would answer: Absolutely! We have landed in the hands of some very inept masters of the universe. And one very clear example of that is how they try to regulate banks by means of their credit-risk-weighted equity requirements and which, to top it up, are even portfolio invariant.

I just ask: What on earth has a regulator to do with the perceived risks of banks’ assets, when what he should be exclusively concerned with is with how bankers perceive those risks and manage these.

Our banks are currently like in a car with two steering wheels; the first one controlled by bankers, and the second by regulators who are responding, simultaneously, to basically the same risks the banker sees. And so of course we must crash either because banks embrace excessively what seems safe, or because of an excessive aversion to what seems risky.

And yes, to have central bankers inducing negative interest rates, and announcing inflation targets, and not realizing that this is a haircut like any other haircut, is something quite spooky to say the least.


No Tim Harford. On a train it is the passenger who takes the decision which class he travels.

Sir, Tim Harford might have seriously confounded us explaining some downside of net neutrality for us with his splendid train allegory in “Battle for the web’s ‘last mile’” February 28.

But, the web’s ‘last mile’, still ends up in my TV or my computer. And I should not be forced to have the services I want, to have to travel third class just because the railway company, behind my back, without me having a chance of bidding for it, sold out the whole first class to a content provider that is of no interest to me.

Let instead cable companies put that power into us their customer’s hands, and so that we can decide in what class different content providers should travel to meet us. Is that an optimum solution? No, but better. Currently on the last mile of the electrical transmission line to my house in Maryland I, at least in theory, decide who the generator of the electricity reaching my lamps is to be. By the way perhaps I should perhaps get to know that generator better… you cannot let anyone into your house.

And, while Harford is at it… as I have a feeling I own my own preferences and myself, perhaps he should think about whether Google should pay me a royalty whenever it sells to an advertiser an access to me. But of course, since some consumers are worth more than others that could perhaps lead to an increase in inequality, and we would not want that in these Piketty days, would we?


February 27, 2015

Negative yields give crystal clear evidence of QEs not working, as a result of dumb bank regulations

Sir, I refer to Elaine Moore’s “QE hopes draw investors to negative yields” February 27.

Is that not proof enough of what is wrong? If QEs worked it would cause money to be shipped out to more productive areas of the economy… not to markets accepting getting a voluntarily minimum haircut by taking refuge in the most unproductive “safe” haven of them all, that of sovereign debts.

What’s wrong? What I have been telling you for years, what I have even written in a letter you published in 2004…“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? 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.”

Do you think there would be negative rates if small businesses and entrepreneurs had fair access to bank credit and could be producing all that which could tempt buyers?

But you all at FT prefer to ignore that. Unless you are devout communists, I cannot understand why.

February 25, 2015

Nowadays, in banking, more important than the “Know your client” is the “Know your equity requirements”

Sir, it used to be that, beside general cost control, negotiating with the client was all a bank did to look for an acceptable return on its equity. Those were pre-Basel Committee days when any bank asset generated the same equity requirement.

Today the most important return on equity maximizing tool is the equity minimizing game. Today, more important than the “know your clients”, is the “know your equity requirements”.

And that is tragic. When we read Caroline Binham and Martin Arnold reporting on February 25 “Big banks face fresh capital clampdown” our heart goes out to all those legitimate credit aspirations of borrowers, which will be turned down, only because these generate for the bank higher equity requirements than other operations.

And Sir, the most amazing thing with it all, is that regulators are not even aware of how much their credit-risk weighted equity requirements distorts the allocation of bank credit to the real economy.

There are credits for building the future and credits for consuming the past. And these must live in harmony.

Sir, Martin Wolf writes “The world desperately needs new ways to manage its economy, ones that support demand without creating unmanageable rises in indebtedness” “How addiction to debt came even to China”, February 25.

Indeed, but to achieve that it is an absolute must to understand that, in order to harvest and consume you need to first finance the sowing.

Currently regulators, by just looking at credit risks, which obviously favors what is already harvested, have with their lower equity requirements, mindlessly tilted bank credit in favor of financing the consumption over the sowing.

Creditworthiness should not only be based on repayment, but should also consider what the credit is to be used for.

In fact, many decades ago bankers used to tell us: “Know your client - What is the credit for? - How do you intend to repay?”

Current regulations have bankers outsourcing the “know your client” to credit rating agencies and caring little about what the credit is for. Nothing good can come of that.

I prefer one and the same equity requirement against all bank assets so as not to distort the allocation. But, if I had to choose, then thinking of those who will come after us, I would allow banks to hold less equity against what builds the future then against what consumes the past.

That way banks would earn their higher risk adjusted returns on equity working for our children and grandchildren, instead of working for us.

But of course, there are also plenty of baby-boomers asking: “Why that? I need or want it now!… après moi le deluge

February 24, 2015

That banks do not lend to small businesses in Europe has a reason and is not something irreversible

Michael Sherwood and Richard Gnodde write “The international regulatory response to the financial crisis, which is intended to make sure that banks are better capitalised and their lending operations more cautious, could in some ways make the predicament of small business worse”, “A ‘big bang’ to expand the European economy” February 24.

And they go on: “Robust banks will strengthen the financial sector as a whole. But bank credit is likely to become less freely available and more costly — to the detriment of those companies and economies that are more dependent upon it.”

Sir, are we supposed to believe these two vice-chairmen of Goldman Sachs Group do not know, that is not an irreversible process? That what is making it difficult for small businesses to have access to bank credit in Europe, is foremost that banks need to hold much more equity when lending to these than when lending to something able to be perceived as less risky from solely a credit point of view?

I doubt it, the problems is that they, as bankers, have a vested interest in maintaining the current system which allows banks to earn higher risk adjusted returns on equity with exposures to assets perceived, or made to be perceived safe. It is after all a bankers dream come true… a big ROE without having to take risks.

What is hard for me to understand though is why FT, who is not a bank, does not even want to acknowledge the distortionary impact produced in the allocation of bank credits to the real economy by requiring banks to hold different amounts of equity against different assets.

More than about the euro, Europeans needs to worry about their own future.

Sir, on the eve of the euro I published an OpEd in which I expressed doubts about its long term viability quite similar to those expressed by Gideon Rachman in “A Greek deal cannot fix the euro’s flaws”, February 24.

The title of my OpEd was though “Burning the bridges in Europe” by which I implied that once launched, the euro was not that easy to roll back, especially since there was not a word about how to proceed in such a case.

Of course, as Rachman argues, there are big differences between the north and the south Europe, but let us also be aware there are a lot of similarities too.

For instance, all small business and entrepreneurs, on account of incredibly being perceived by regulators as risky for the banks’ stability, are being just as discriminated from having fair access in Germany than they are in Greece.

And in that respect, more than worried about the euro, I believe Europeans should be worried about their own tomorrow, and this not only because of Putin.

With banks instructed to stay away from financing the future because that is deemed riskier than refinancing the past, no one has a future, whether he is German or Greek.

February 23, 2015

Andrew Bailey, and what about the highly irresponsible conduct of bank regulators?

Sir, I refer to Andrew Bailey’s “Irresponsible conduct carries consequence in British finance” February 23. I agree with all but, what about the regulators?

Bank regulators decided that lending to those perceived as risky, from a credit risk point of view, required banks to hold much more equity than lending to those perceived as safe. That was an extremely irresponsible thing to do.

Not only did it mean that lending to the safe then generated much higher risk adjusted returns on bank equity than lending to the risky; something which completely distorted the allocation of bank credit to the real economy; but it also meant that banks would be standing there naked, with little equity, precisely where all major bank crises have always occurred, namely the terrain of excessive exposures to what ex ante was perceived as “absolutely safe” but that ex post can shows its other real colors.

Do I want to jail these regulators? No! We are living in different times. But I surely do not want to see these failed regulators also hide behind “an accountability firewall”, which permits them to keep on regulating… and sometimes even being promoted.

Let them just parade down our avenues wearing cones of shame.

It is always dangerous when intuition overtakes understanding - The Kurowski Matrix

Sir, I refer to Lucy Kellaway’s “No need to ‘lean in’ when laziness can be just as effective”, February 23.

It mentions a clever vs. dim and lazy vs. energetic matrix designed by Helmuth von Moltke, head to the Prussian army, for the purpose of assessing the quality of officers. It produces the “clever and lazy” as the “top field commanders as they get results”.

And Kellaway compares that with how “management theorist have ruined it” by picking “the clever and lazy” CEO’s as those “in need of coaching”.

I have also used a matrix; call it the Kurowski matrix if you want in order to explain what with our banks, is really dangerous for us. My matrix is composed of what is ex ante perceived as risky vs. safe and what ex post turns out risky vs. safe.

My matrix indicates, without a shadow of a doubt, that what is really dangerous is what banks (and regulators) perceive as absolutely safe, but that ex-post turn could turn out to be very risky… quite often, precisely because perceived as “safe”, it got way too much bank credit.

And what have our current bank regulating theorists in the Basel Committee done? They decided that what is perceived ex ante as “absolutely safe” merits the lowest equity requirements. That is of course a mistake of monstrously tragic implications for our economies and our banks.

How to solve it? Not easy. With “more perceived credit risk more bank equity… less perceived credit risk less bank equity” sounding so logical, intuition manages to overtake understanding.

February 21, 2015

Our risk with banks has nothing to do with risks of their assets, and all with how banks manage risks of their assets

Sir, Tim Harford writes: “It’s particularly easy to fool ourselves when we already think we have the answer”, “Take a guess at JFK’s age in 1963” February 21.

Indeed, but it is even worse when we think we have the answer, but we are answering the wrong question.

Look for instance at what inspired bank regulators to create the pillar of current bank regulations; the risk-weighted equity requirements for banks: “more-risk-of the bank assets-more-bank equity and less-risk-less-equity” does it not sound so logical, does it not sound so right?

Yet the problem was regulators never posed themselves the right question. What they should have asked is: “What is the risk bankers will either not perceive the risks with bank assets or manage these correctly?” which is something that has clearly little to do with the risks of bank assets.

Look for instance at Martin Wolf. In July 2012 he wrote: “As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." And yet Wolf is incapable to take it from there, so as to accept that perhaps current bank regulations, with respect to perceived credit risk, are 180 degrees off target

February 20, 2015

FT, here is an “innocent” question to Obama and his White House advisors.

Sir, Sam Fleming reports: “During the past 65 years, middle-class incomes have gone from doubling once a generation to showing almost no growth by some measures”, and quotes Obama with “we need to do more to restore the link between hard work and opportunities”, “White House warns on risk to growth” February 20.

And, as you know, I would innocently ask White House advisors the following: Don’t you think that it might have something to do with those recent bank regulations by which we allow banks to earn much higher risk-adjusted returns on equity when financing the extraction of value from the "safer" past, than when financing the "riskier" construction of the future?... In the Home of the Brave?

The real oil revenue fixer is not Opec, much less American shale oil, but the European taxman.

Sir, I can’t believe you use extremely valuable influential space such as your “Comment” space to allow Alan Greenspan to opine such nonsense as the higher cost American shale oil extractor’s having taken over from Opec the power over the price of oil.

What’s wrong with him? Does he not know that the price per barrel of oil is between $50 and $60? Does he not remember that as late as March 1999, The Economist, in “The next shock?” wrote” “$10 might actually be too optimistic. We may be heading for $5”. Had oil not gone over $50, there would be no American shale oil extraction to talk about. 

But, if there is anyone who effectively has taken over the power of generating revenues from oil, which is even more important than influencing the price of oil, well that is the European taxman who by means of gas (petrol) taxes, gets way more revenue than what is paid for a barrel of non-renewable oil of any provenance.

PS. In fact Opec and American shale oil extractors have a common interest fighting the European taxman.

Few things hamper growth as much as sissy bank regulations.

Sir, Gillian Tett writes that according to BoE’s Andy Haldane, there has been “a shift in cultural attitudes towards the future” with “our hyper-connected technology [perhaps] inadvertently shortening our time horizons [making us] less ‘patient’ less able to plan and invest long term” “How impatience hampers long-tem growth”, February 20.

And Ms. Tett, as an anthropologist who knows “cultural attitudes toward time vary”, finds this interesting. And indeed it is!

But, why on earth is Ms. Tett, the anthropologist, not interested in the willingness of societies to take the risks, that which gives future a chance?

At this moment, the most significant danger to growth is the risk-aversion imposed on banks, by means of equity requirements based on perceived credit risks; those that allow banks to earn higher risk adjusted returns on equity when lending to the safe than when lending to the risky. That goes back a very short time, to the early 90’s Basel I, and then much increased in 2004, with Basel II.

Ms. Tett also refers to Daniel Kahneman’s fast and slow modes of thought. And so let me explain in those terms:

The at-first-sight “System 1: Fast, automatic, frequent, emotional, stereotypic, subconscious” standard basic intuition of risky-is-risky and safe-is-safe, has proved too strong so as to permit opening a more reflective “System 2: Slow, effortful, infrequent, logical, calculating, conscious” analysis… which would lead to risky-is-safe and safe-is risky and most specially if that means questioning some of the other members of a mutual admiration mutual important network club.

Look for instance at Martin Wolf. In July 2012 he wrote: “As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." And yet Wolf is incapable to take it from there, so as to accept that perhaps current bank regulations, with respect to perceived credit risk, are 180 degrees off target.

Bank regulators have placed a reverse mortgage on our economies that extracts all present value and builds no future.

Sir, Martin Wolf writes about the growth of fiscal spending in health and other “predominantly age-related areas” and about “a conflict between the young and old and between the successful and less so”, “This year’s election will decide the future of the British state” February 20.

It is much worse than that. Regulators, with their equity requirements based on credit risks, de facto ordered banks to function as if they were the portfolio managers of retiree… “Don’t finance the future, that’s too risky… refinance the past, that’s safer.” And that has meant something like placing a reversed mortgage on our economies… extract maximum present value and leave no inheritance to those coming after.

And anyone that thinks that the fiscal deficits of tomorrow could be compensated by higher taxes only… and that if growth is needed then it suffices with governments proceeding with some infrastructure investments has no idea of the workings of the economy.

Those valves that control the flow of bank credit to “risky” SMEs and entrepreneurs are closed shut. They need to be open… as they always were… before my me-and-only-me baby-boomer generation outsourced bank regulations to an après nous le deluge Basel Committee.

February 19, 2015

FT, the letter on Greece, signed by many important persons, won’t cut it for Greece…or for Europe.

Sir I refer to the letter about Greece signed by so many persons of importance and that appears in FT today February 19.

Yes “the essence of a union is give and take” but much of Greece’s current problem derives from the fact that Greece was earlier given too much by means of European regulators allowing European banks to lend to Greece against very little or even zero equity.

The signatory describe Greece’s urgent needs as follows: economic recovery — aided by a significant easing of fiscal targets, of a maximum of 1.5 per cent of GDP surplus; by some financial restructuring of its debts, including linking debt servicing to meaningful growth; and by fiscal reform that involves cracking down on corruption and weakening of the economic powers of oligarchs.

That wont cut it. What Greece most needs now is for all of Europe to throw out the credit risk weighted equity requirements for banks, which for a way too long time have been blocking the fair access to bank credit of all those not perceived as “absolutely safe”, like SMEs and entrepreneurs. If Greece believes that it is the responsibility of government bureaucrats, or members of the AAArisktocracy to make Greece grow, then it will only dig itself deeper into the hole it’s in.

PS. The rest of Europe suffers too. A negative interest rate, resulting from lack of growth, is just a less transparent haircut.

That banks are instructed to push out pension funds, widows and orphans from safe havens is absurd, and immoral.

Sir, I refer to Percival Stanion’s “When prospect of certain loss unleashes risk-seeking impulse”, February 19.

There are two major types of risk directions: that of loans to those perceived as risky, and that of excessive exposures to what is perceived as “absolutely safe”. Regulators have instructed banks, in no unclear terms, by means of portfolio invariant credit risk weighted equity requirements, to stay away from the first type, but they have not said a word about the second.

As a result, and most specially in these days of scarce bank equity, European banks are entering more and more into that terrain that already in some places signify at its best “locking in a loss at redemption”. In fact, with pre-announced inflation targets you do not even need negative rates for that.

Today Roula Khalaf gives a nice illustrating account on what is happening to Russia, by means of looking at Russian tourism in Switzerland, “A slippery slope for Switzerland’s Russian skier”. How sad that the Financial Times does not ask its journalists to look equally look at what is happening in Europe, by looking at where bank credits in Europe have been traveling ever since Basel II was introduced in June 2004. At this moment those credits are going into sovereigns squeezing out widows and orphans. Is that not an absurd and even immoral state of affairs?

PS. I have been lately been calling those negative rates as “pre-agreed minimum haircuts” because that is what they are… and so not only does Greece want a haircut… Germany and others are already giving de facto haircuts.

PS. Sir I have also asked you whether a pension fund would be authorized to accept such haircuts in the name of the beneficiaries… but I have not yet been given an answer.

February 18, 2015

The only deal good for both Greece and the Eurozone is not even on the table.

Sir, you write about the need “to reduce the stranglehold of a clientelist bureaucracy over the Greek economy” and hold that “Greece and the Eurozone can still reach a deal” February 18.

Unfortunately, I can’t see on the table, the only deal that could work out great for both Greece and the Eurozone. That would be the following:

Eurozone: We admit our responsibility for imposing bank regulations that allowed banks to hold much less equity against lending to sovereigns and against member of the AAArisktocracy than against lending to SMEs and entrepreneurs.

Greece: And we the Greek government admit to our responsibility in having admitted such nonsense.

Both: That of course could never ever have allowed Greece to catch up with their other Eurozone brethren.

And therefore, we the Eurozone, and we Greece, have entered into the following agreement:

For the next five years, we will all allow our banks to lend, to SME’s and to entrepreneurs in Greece, against the same equity we require our banks to hold against when lending to us sovereigns or to any members of our AAArisktocracy.

Of course, any member of the Eurozone is free to allow that to be applicable to its own SME’s and entrepreneurs.

Of course if that after five years seems works out well, we leave it be, and promise never ever to allow regulators to come up with such foolishness again.

The most dangerous economic imbalance lies between “the risky” and the “absolutely safe”.

Sir, I fully agree with the title of Martin Wolf’s article of February 18, “Unbalanced hopes for the world economy”; only that for me the current most important and dangerous border of imbalances does not go between currencies or countries, but between what is perceived and has been deemed by regulators as “risky”, and what is perceived and deemed by regulators to be “absolutely safe”.

And so when Wolf refers to “what one saw inside the pre-crisis Eurozone was a combination of low interest rates with a burgeoning of cross-border net lending”, I would ask him to look more closely to where that cross-border lending went to. It was not German banks lending to Greek small businesses or entrepreneurs, against which they would have to hold 8 percent in equity, it was German banks lending to the Greek government against minimum or even zero equity requirements.

And how on earth are you supposed to fix other economic imbalances doing that? Does anyone really believe a Greek bureaucrat does a better job fixing that than a Greek SME or entrepreneur?

And so when Wolf writes “the monetary policies of the ECB will work only if the falling euro promotes a boom in net exports”, something that could perhaps only promote a boom in German exports, the truth is that it will work only if the liquidity of bank credits are allowed to reach the atoms of the economy, the risky, the SME’s and entrepreneurs.

Wolf keeps on insisting with his “big economies suffer chronic demand deficiency syndrome” when as I see it as suffering from a regulatory imposed chronic deficiency of demand hunters.

We must let SMEs and entrepreneurs go out and hunt scaring up the demand, otherwise we will very soon begin to vomit much more of what, supposedly, was “absolutely safe”.

November 2004, in a letter published by FT I wrote: "We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. 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." I came from a developing country but of course developed countries can undevelop too.

February 17, 2015

At the end of the day, with these bank regulations, even Germans will suffer the same or worse tragedy than the Greeks

Sir, bank regulators, the Basel Committee and the Financial Stability Board, fully endorsed by ECB, allowed all European banks to hold much less equity when lending to the government of Greece or to the banks in Greece, than when lending to Greek small businesses or entrepreneurs. That led to the excessive indebtedness of Greece and Greek banks, and caused too little bank credit to be awarded to those who could best drive the real economic growth in Greece.

And because of that Greek and Cypriot citizens will now have to suffer deflation or inflation (same shit), having to pay higher taxes, and perhaps even be the subject to capital controls as those Hans-Werner Sinn proposes in “Impose capital controls in Greece or repeat the costly mistake of Cyprus” February 17.

If I was a Greek citizen I would of course lodge my “J’accuse the ECB of high treason or imbecility” … but I would also warn my fellow Europeans, that, with these lousy and discriminatory regulations, they are all no doubt heading the same way to a similar tragedy... including the Germans.

In fact Germany, which shares with the US the largest possibility of becoming the last safe haven in town, might end up with its sovereign safe haven as the one most dangerously overpopulated.

February 16, 2015

Could a beneficiary sue a pension fund for blatant breach of trust if it buys a bond with negative interest?

Sir I refer to Ralph Atkins’ and Elaine Moore’s “Negative rates to hit financial system”, February 16.

I have a question: Could a beneficiary sue a pension fund for blatant breach of trust if it buys a bond with negative interest? I mean is that not something like agreeing to a sort of prepaid pre-accepted haircut with somebody else’s money?

If I managed a pension fund, I would sure send a letter to all those who are expecting my management to provide them with a decent retirement stating something like: 

“Warning, we must inform you that central banks and governments are creating dangerously strange market conditions for which we hope you will not hold us personally responsible… and, for the time being, forget about expecting something like an 8 per cent return... if you earn enough with us to pay our costs, consider yourself a winner”.

What flight to quality? To dangerously overpopulated safe havens?

Jonathan Wheatley quotes Stuart Oakley, global head of EM foreign exchange trading at Nomura: “The point of QE is to inflate the real economy. But instead of driving growth it is creating asset bubbles”, “Emerging bubble”, February 16.

How could it be otherwise? The growth of the real economy depends much on allowing the real economies’ “risky” risk-takers, like SMEs and entrepreneurs, to do their job. And that has been blocked by capital requirements for banks that force equity scarce banks to hold more equity when lending to the “risky” than when lending to the “safe”.

And the article speaks about “Flight to quality”. What quality? The usually safe havens, those usually used by widows and orphans, are now being dangerously overpopulated by banks following the instructions imparted by regulators.

Wheatley also refers to “while the yield on the benchmark US Treasury bond has fallen from 6 per cent in 2000 to less than 2 per cent today, the returns sought by many US public pension funds have barely changed at about 8 per cent.” And Sir, if you consider that “less than 2 per cent”, in light of a by the Fed declared inflation target of 2 per cent, then buying those bonds would amount to a sort of prepaid pre-accepted haircut, which could be something prohibited for pension funds to do.

Venezuela must be an Emperor Severus’ dream come true… that is until…

Sir I refer to Daniel Lansberg-Rodriguez’ “A civilian sacrifice is more likely than a coup in Caracas” February 16.

It is a great article though perhaps his reference to the Roman Emperor Septimius Severus’ strategy to: “Enrich the soldiers, and scorn all others”, could have been made even more potent.

In Venezuela an Emperor Severus would not really have to be concerned with how all others were doing, so to be able to enrich the soldiers. In Venezuela an Emperus Severus would be receiving, directly into his coffers, 97 per cent of all the nations abundant exports, and that must be an Emperor Severus’ dream come true… that is until fast dropping oil prices turns it into a nightmare.


February 14, 2015

But our besserwisser bank regulators express no doubts about what banks should do.

Sir, Henny Sender asks: “Which is better - to invest in the debt of lower-rated issuers because they offer more attractive absolute yields; or, to invest in the debt of higher-quality companies but do so with leverage in order to generate acceptable returns?”, “When investing is all about second-guessing the Federal Reserve” February 15.

I don’t know the answer… but bank regulators, with their portfolio invariant credit risk weighted equity requirements, imply they know that very well. They have definitely instructed the banks to go for high-quality-very-high-leverage... like for AAA-rated-securities and sovereigns. 

By the way Sir, with respect to second guessing the Fed: If I now bought a10-year US government bond which pays 1.97%, and the Fed’s declares its inflation target to be 2%, would that imply I am buying a preannounced haircut?

An oil cursed country deserves more than "get-rid-of-these-to-have-these-instead”

Sir, in Venezuela in an article I quoted extensively from Tom Burgis’ “Nigeria unravelled” February 14. And I ended with the following:

Friend, compatriot, reading about Nigeria, is seeing our own country. Accept that it is impossible to compete with oil, and so if we don’t do something drastic about it, we are doomed to live from oil, with all the economic and political degenerations that implies.

What shall we do? As you know I have for more than a decade, and before I was censored by the new owners of El Universal, published over 100 articles suggesting that at least to get rid of the political and social curse of oil, we should hand over directly to the citizens their share of the net oil proceeds.

But perhaps what we should do, is simply to destroy 80 percent of our oil extracting ability, so to allow for a nation of free and not subjugated citizens; and whose future would depend on their own personal abilities, and not on the occurrences of their ever always new-rich Chiefs.

Unfortunately, at present, in Venezuela, we lack a plan different from the "get-rid-of-these-to-have-these-instead”


February 13, 2015

10-year US government bonds yields 1.97%. Fed declares an inflation target of 2%. Is buying those bonds a prepaid haircut?

Sir, today, Friday the 13th, February 2015, I read on your first page that a 10-year US government bond yields 1.97%. And I have a question for you. If the Fed tells us that they are targeting a 2% inflation, if I purchase that bond, would that be sort of a prepaid haircut?

Boris Johnson, if you want to help small digital companies in London, then you'd better travel to Basel than to New York

Sir, Gillian Tett writes about Boris Johnson, the major of London, going to New York in order to look for finance sources for small digital companies, start-ups, and who find access to finance difficult in a city like London that has so many banks, “The British tech industry needs a homegrown cash boost” February 13.

Why does not Boris Johnson travel to Basel and ask the Basel Committee to stop allowing banks to hold less equity when lending to those perceived as “safe” than when lending to “risky”, since that must clearly de-facto erode the interest of banks in lending to “risky” small businesses… like these small digital companies.

February 12, 2015

What German prudence is Jűrgen Stark really talking about?

Sir, though I agree with most that Jűrgen Stark writes in “German prudence is not to blame for the Eurozone’s ills” of February 12, I still need to ask him the following to clarify the concepts.

German bank regulators, following the lead of the Basel Committee, required German banks to hold around 8 percent in equity when lending to German small businesses or entrepreneurs, but allowed banks to hold basically zero equity when lending to Greece. And so, what German prudence is Stark really talking about?

As I see it, it was indeed lousy bank regulations, those to which Germany subscribed, that did the Eurozone in

For access to confidential private Swiss banks accounts, why not “wealth asylum”, something like political asylum?

Sir, John Gapper writes “there are decent reasons apart from tax evasion, or even legal tax avoidance, for the wealthy to put money in Swiss banks”, yet he with reason asks “the rich”, whether that is “any way to behave”, since doing so they will “resemble money launderers”, “Private banks must be more than laundries” February 12.

But Sir, why should a rich have to give up his private Swiss bank account if his reasons are decent?

It seems that what could be needed is something like a Swiss government office where a person can go and request “wealth asylum”. He would there of course have to present reasonable evidence of his source of wealth not being illegal.

If granted, such asylum would offer special confidentiality rights, which would be guaranteed for as long as the Swiss government does not receive substantial proof that shows the application contained major falsehoods.

If Robin Hood could hide in Sherwood Forest why can’t wealthy hide in private banks? I mean let us be frank; there are many bad Sheriffs of Nottingham out there.

If persons are allowed to carry guns against bandits, why not, in these Piketty days, can the wealthy carry private Swiss bank accounts against some overly greedy government bureaucrats?

And sometimes even if its not all "legal": If a poor North Korean managed to evade paying taxes and escape with some money, should not his capital have right to anonymous asylum?

But why on earth should you think about putting the burden to decide about what’s decent and what’s is not, on a small bank clerk who might rarely been out of his country?

PS. Am I wealthy? No! But just like for instance a shoe-artisan in Milan knows it, I know that the higher the number of wealthy around me, the more likely I am to be better off… and so, sometimes, though not too frequently, I also have to think a bit about how to keep the wealthy wealthy. If you have to be a servant, then most often, though not always, you are better served having to serve a wealthy master.

I am very suspicious of those who seem wanting to promote shared poverty… because quite often it sounds like their populist business plan for trying to become very wealthy themselves. And I do oppose the redistribution profiteers

PS. But then, now and again, I get hit by the thought: "If the wealthy could not safeguard their wealth in other countries, then perhaps they would make a stronger stance and defend their wealth more in their own country". And that sometimes could be what is really most needed.

February 11, 2015

Perhaps crony-relation-weighted equity requirements for banks could be useful in Ukraine and other places?

Sir, I refer to Martin Wolf’s “Help Ukraine seize this chance” February 11.

Wolf writes: “Also important will be the reform of banking, particularly the elimination of lending by banks to the connected parts of larger business entities. This is aimed at limiting the dominance of the oligarchs, most of whom seized wealth in the early years after independence.”

That describes well a problem which affects the allocation of bank credit in many developing countries, and I would hold that has been the direct cause of most serious bank crises there.

In that respect perhaps crony-relation-weighted equity requirements for banks should substitute for those credit-risk-weighted regulations currently favored by the Basel Committee, and which so much benefits the "infallible" sovereigns and other members of the AAArisktocracy.

More-coziness-more equity… but then again there might not be someone daring o able to rate those relations objectively.

February 10, 2015

Anyone knows in what those “targeted corporate cash piles” are currently invested in?

Sir, I refer to Ferdinando Giugliano’s “Corporate cash piles targeted in hunt for growth”, February 10.

It is hard to undersand all the implications of for instance taxing those cash piles, if you do not really know in what those cash piles are currently invested in… because one thing is for sure, that cash is not really cash under some corporate matrasses… Who knows, they could even be invested in public debt at negative rates. And that would of course require a rethink of the whole issue.

If government actions induces the mobilization of all those $3.5tn in cash reserves held by non-financial companies in the world that Giugliano writes about, that sure sounds like a large wave you would want to keep a very close eye on.

Future generations are and will pay dearly for regulators distorting bank lending in favor of sovereigns

Sir, I refer to Christopher Thompson’s “Risks lie in Eurozone banks’ government links”, February 10.

Thompson writes: “banks have boosted their profitability by using cheap ECB loans to buy government debt offering a higher yield. … An additional incentive is that holdings of sovereign debt do not incur any regulatory capital charge while, by contrast, loans to businesses would do.” 

And that is not exactly right. The capital (equity) requirements are not “an additional incentive” these are what make that operation possible. If banks had to hold as much equity against sovereign debt than against loans to businesses, they would not do this carry trade.

If banks had to hold as much equity against sovereign debt than against loans to businesses, they would not hold any sovereign debt at current rates… not in a million years.

The real risk of this regulatory discriminatory distortion is that governments are getting too much and paying too little for their debt, a subsidy paid initially by small businesses and entrepreneurs by means of less fair access to credit; and finally by the future generations that will suffer from the lack of real undistorted bank lending.

I qualify those regulations in favor of the sovereign simply as communism introduced by the backdoor.

PS. In 2004, in a letter published in FT I wrote: “bank supervisors in Basel are unwittingly controlling the capital flows in the world…how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector” and I now have serious doubts about the "unwittingly". 

February 09, 2015

Government spending should be based on transparent tax revenues, not on regulatory scheming.

Sir, Lawrence Summers’ admonishes to “Only raise rates when the whites inflation’s eyes are visible”, February 9. Since inflation is such a fuzzy variable, no one can be really sure though about what we are seeing when the whites of its eyes are not visible.

But one thing is for sure; Government’s do not deserve the current low interest rate on their borrowings… that is a hidden tax.

It is urgent we eliminate those risk-weighted equity requirements for banks which translate into a tax on the borrowings of small businesses and entrepreneurs, and a subsidy of the public sector’s. That leads to something much worse than deflation, namely to highly ineffective allocation of bank credit.

It all started when innocent foolish technocrats, or dangerous terrorists, with the Basel Accord, came up with the idea that banks needed to hold much less equity against loans to their governments than to citizens. That translated into requiring banks to hold much less equity against loans to be managed by bureaucrats not subject to such limitations as having to feel the money as theirs, than against loans in the hands of small businesses and entrepreneurs.

That was, de facto, to invite communism to come in through the backdoor. And so, if we need to keep interest rates low in order to stimulate the economy, let those apply to all and not especially to the public sector.

Some are unfortunately the “Too Small To Be Invited To Basel Or Davos Banks”

Sir, Tracy Alloway reports on that “New rules hit small US banks ‘hardest’” February 9. She is right, but this has been since the imposition of credit-risk-weighted equity requirements, because:

Small banks, compared to big, attend proportionally much more the borrowing needs of clients who are perceived as “risky”, like local small businesses and entrepreneurs.

Small banks, compared to big, find it more difficult to engage in that financial sophistication, whether real or pseudo, used to dress up balance sheets as safer.

And therefore small banks, compared to big, must usually hold proportionally more equity, which makes it more difficult for these to produce competitive returns for their shareholders.

The small banks and their “risky” clients are never invited to discuss their problems with the Basel Committee or the Financial Stability Board…they are too small to be able to adequately feed the ego of regulators.

Small banks are never invited to Davos, as neither are their small “risky” clients.

February 07, 2015

Thanks to credit risk weighted equity requirements, borrowers and banks now share the objective of fooling regulators.

Sir, Tracy Alloway refers to the transformation of unsafe loans into super-duper “safe” ones “eBonds that strip out risk would be financial alchemy at its oddest” February 7. She misses out on what I would hold to be the most important incentive for such process.

Borrowers have of course always been interested in selling themselves to the banks as having a very low credit risk, in order to negotiate lower risk premiums.

And bankers used always to be very interested in questioning the creditworthiness of borrowers, in order to obtain higher risk premiums.

And that struggle helped to allocate bank credit efficiently to the real economy.

But then came regulators with their credit-risk-weighted equity requirements for banks and changed the priorities for the banks.

Now more important for the risk adjusted return on bank equity than the negotiation of risk premiums with borrowers, is dressing up the credit operation in such a way so as to make it seem as safe as possible, so as to allow the highest possible leverage of bank equity.

In other words regulators, instead of fully exploiting the tensions between borrowers and lenders, managed to align both of these with the objective of fooling them. Not too bright doings Basel Committee!

There are some questions that really can dent our smug feelings of righteous political correctness.

Sir, Gillian Tett, with respect to the barbarous murders that Isis is showing off in videos, gives a “loud Amen” to Frances Larson, an anthropologist at Durham University, when he argues: “There is no triumph in the killer’s actions until we watch…Modern technology may offer a hiding place to voyeurs but it can also give a voice to human decency.” “To stop horror, turn it off”, February 7.

I have not seen those videos, and I was also educated to share into that “Amen”.

But, but, but, in “Thinking” 2013, Daniel C. Dennet, a Professor of Philosophy at Tufts University, seriously dented my smug feeling of righteous political correctness when asking:

“Suppose we face some horrific, terrible enemy, another Hitler or something really, really bad, and here’s two different armies that we could use to defend ourselves. I’ll call them the Gold Army and the Silver Army: same numbers, same training and weaponry… The difference is that the Gold Army has been convinced that God is on their side and this is the cause of righteousness, and it’s as simple as that. The Silver Army is entirely composed by economists. They are all making side insurance bets and calculating the odds of everything. Which army do you want on the frontline?”

And Dennet further drives that wedge of doubt into us by quoting William James’ “The variety of religious experience” with: “Far better it is for an army to be too savage, too cruel too barbarous, than to posses too much sentimentality and human reasonableness”.

And then I make it so much worse for myself by telling me: Don’t answer that as Per Kurowski, answer that as Per Kurowski the father and grandfather.

As an anthropologist, which army would Gillian Tett prefer?

Sir FT, Your “Do whatever you can, as long as you do not allow banks to take risks” is hard to understand and forgive.

You write: “Punishing savers for hoarding cash encourages them to put their money to work” but “negative rates are a sign that authorities are failing in any attempt to stimulate the economy.”

And then you conclude in that “there are better ways. Central banks should be given more expansionary targets, such as ambitious goals for inflation or nominal growth. Monetary and fiscal authorities can combine, either by financing deficits with money or through straightforward unsterilized transfers of cash to the public.”

Now the absolute best way an ordinary saver can put his money to work is by having the banks allocate credit efficiently to the real and “risky” economy. Banks are though currently impeded to do so, because of the credit-risk-weighted equity requirements that, in these times of scarce bank equity, force them to keep to the officially deemed “safe” economy.

Sir your reluctance to advance that line of explanation is mindboggling. My blog www.TeawithFT.blogspot.com exists as a historic record of your behavior, a major financial newspaper, in times of crisis, and not of mine. I’m too small fry for that.

February 06, 2015

A “lack of accountability” worthy of the Guinness Book of Records

Sir, Louis Brennan refers to Peter Doyle's letter highlighting the “unprecedented scale” of the IMF’s forecasting error in relation to its 2010 programme for Greece, in order to argue for “reform of institutions such as the IMF and the ECBm so that an ethos of transparency and accountability obtains in their operations and decision-making.”

Though forecasting errors are usually seen in the rear window, and though IMF sits in the uncomfortable position of at times influencing so much so as to make their forecasts come true, damn if you’re right, damn if you’re wrong, no one can deny Brennan has a valid point.

But, in terms of lack of accountability, that is really peccata minuta when compared to that of the Basel Committee’s. Let me just describe it this way. Neither Hollywood nor Bollywood would ever dream of placing the responsibility for the production of a Basel III, in the same hands of those who produced that incredible box-office flop that was Basel II.

But there they are, with some of their players, like Mario Draghi and Jaime Caruana, having even promoted. It should apply to the Guinness book of records.

PS. In the case of IMF, and as it there had a much more active role, I regard Argentina as a much worse mistake than Greece

Sir FT, what would European public borrowing cost be without bank regulations which discriminate in favor of such borrowings?

Sir, I refer to Ralph Atkins "Greece’s clash with its creditors is part of a global challenge" February 6. It states “More controversial would be further sovereign debt restructurings…This debate has so far largely escaped markets’ notice as a result of QE — most lately by the European Central Bank — which has suppressed private and public sector borrowing costs.”

Yes, QEs have artificially suppressed borrowing costs, meaning also the returns to investors. But what really has escaped the debate, is on how much the borrowing costs of sovereigns all around the world, are being suppressed by those risk-weighted equity requirements for banks imposed by the Basel Accord and that so much favor the public sector borrowings?

Tell me Sir FT: what would the public sector borrowing cost be for the European sovereigns, if banks needed to hold as much equity against their loans than what they are required to hold when lending to small European businesses or entrepreneurs?

November 2004, in a letter you published I asked: “How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. 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.”

Sir, why have you for more than a decade not even tried to advance an answer to that concern?

Sir FT, don’t you know that those who do not criticize what’s dumb, do de-facto confess to be coward or dumb themselves?

February 05, 2015

Sir FT, I do not understand how you cannot find current bank regulations more than a bit loony.

We citizens authorize governments to support banks among others with some backstop mechanisms, and not to mention the bailouts.

And then come the regulators and allow banks to leverage that support especially when banks invest in those safe assets in which we, risk adverse small investors, want to invest in, with are own not-leveraged funds.

And in this way the regulators make the banks compete directly with us for what little supposedly really safe is available; and also make them stay away from what should be the banks’ prime business, namely lending to the risky, like small businesses and entrepreneurs, as they are the experts in that... not we.

Sir FT, I do not understand how you cannot find that more than a bit loony.

Spain (the whole Western world) needs a manifesto that explains what happened and then inspires hope… and here is what I propose.

Sir, Andres Ortega’s “The debt Greece owes us is the least of Spain’s worries” February 5 is a very responsible written article… perhaps too responsible for the times, because a call for responsibility, to produce responsibility, must be accompanied by a clearer reason for hope than what is reflected in his “So extend and pretend — and reform and grow.”

The following would be my message, my manifesto to Spain.

“Bank regulators, with the intentions of making our banks safer, decided that banks needed to hold more equity against what was perceived as risky, than against what was perceived as safe. Unfortunately, this translated into that banks were able to earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky… and that, as you should be able to understand, excluded all small businesses and entrepreneurs, our primary growth agents, from having fair access to bank credit.

In this respect we are announcing that, effectively today, we are requiring our banks to hold the same equity against all assets, 8 percent; and since that generates immediately an immense deficit of required banks equity, which the markets will not be able fast, we, the government of Spain, will subscribe all equity needed to fill that gap, with the intention of not exercising its voting rights and of selling it back to the market, little by little over the years.”

Andres Ortega writes about “a wedge between the north and south of the Eurozone”. He would benefit from understanding that the real wedge is between “the risky” and “the safe”, between the ordinary citizens and their "infallible sovereigns" and the AAArisktocracy.

Europe, Western world, there’s no future in having banks investing in what widows and orphans should invest.

Sir, James Macintosh, in Short View of February 5, writes of Eurozone bonds the following: “Buy with a negative yield and sell to the ECB at an even more negative yield when quantitative easing starts next month… The result is likely to be lower yields everywhere, and the mispricing of risk.”

Mispricing of risk? Of course, but what about that monstrous mispricing of risk provoked by bank regulators with their senseless and purposeless portfolio invariant credit risk weighted equity requirements for banks, presented to the general public as the risk-weighted capital requirements?

The mispricing that resulted from allowing banks to earn higher risk adjusted returns on equity on “safe” than on “risky” assets not caused the crisis but also blocks the road for getting out of it.

A dangerous extreme risk aversion has now banks investing in what should be the investments of widows and orphans. Sir, as you should be able to understand, unless you are likewise risk-adverse, that is no way to build future.

February 04, 2015

If used as geopolitical weapons beware, credit ratings can be more dangerous to your homeland than to your enemies

Sir, FT Alphaville should be commended for bringing up a discussion on what credit ratings can signify and which, even though it could have a fundamental impact on our future, has been so irresponsibly neglected, “Credit ratings warped by geopolitical pressures”, February 4.

Alphaville quotes Guan Jianzhong, the president and CEO of Dagong Global Credit Rating Company of Beijing saying:

“The global credit crisis has shown us that credit rating concerns the safe development of the human society… The current international credit rating system is favourable to the countries behind it, who apply their value and ideologies to the rating standards… It becomes the origin of the crisis and is no longer able to shoulder the credit rating responsibility for the world… However, the human society in the credit economy stage needs fair and just credit rating.”

That puts the finger on a thousand aspects… like for instance what is “fair and just credit rating”?

And it is completely in line with what I argued in a letter published by you in January 2003, namely: “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”… and all this made so much worse in June 2004 when Basel II’s credit-risk weighted equity requirements for banks, exponentially leveraged the dangers of credit ratings.

But let me here just focus on “credit rating concerns the safe development of the human society” in order to repeat to FT, for the umpteenth time, the following warning:

Risk-taking is the oxygen of any development, and so there is nothing as contrarian to a safe development of the human society, as an excessive risk aversion… such as that one imposed by the Basel Committee on our banks.

Now you may observe “What about all those excessive risks banks took and which caused the crisis?” and to which I would respond, again for the umpteenth time: “This crisis, as all bank crises in the past, have been caused not by excessive exposures to what was considered risky, but by excessive exposures to what was ex ante considered safe but that ex-post turned out to be risky”.

Sir, I have been arguing for years that since the information contained in credit ratings is already cleared for by banks, in interest rates and size of exposure, it is sheer lunacy to reuse that same information when setting capital requirements… something which should have much more to do with the possibility of the credit risks having being wrongly perceived.

And I have also argued that to distort the allocation of bank credit to the real economy, based on perceived credit risk, serves absolutely no social purpose. If regulators absolutely must distort, it would better of they did it with for instance ethic-ratings, sustainability-ratings or potential-of job-creation-ratings.

Alphaville introduces Guan Jianzhong’s comments with “It is no joke the way modern finance is being warped by geopolitical pressures and ambitions”. Indeed, but careful, the use of credit ratings as weapons can easily turn out to be more dangerous to your own homeland than to your enemies.

PS. The article is a consequence of Fitch Ratings placing a BBB minus, barely investable rating on [Russian] Gazprom. Beware, good ratings can also take some down, ask Greece.

February 03, 2015

All Eurozone’s banks are also in a periphery, which is something that should be considered by ECB’s-Draghi-QEs

Sir, I refer to Christopher Thompson’s “Banks seek lower cost risk capital” February 3.

It states “Under proposals from international regulators, the biggest 27 “globally systemic” banks will have to double the capital they must hold under the Basel III requirements by 2019. This implies a €200bn-€300bn capital shortfall in Europe alone according to estimates by Citi.”

Is that not a clear indication that where an ECB-Draghi-QE could be most useful, would be by filling that equity gap, as fast as possible, subscribing bank shares to be later resold to the market.

Otherwise the travel from here to there in terms of bank equity is going to hurt a lot… especially all those “risky” small businesses and entrepreneurs which borrowings generate the largest equity demands on banks.

And the beauty of that is that even Germany would agree because, in terms of the Eurozone’s banks, including the German, all find themselves, just like Greece, in the periphery.

The ECB might also benefit from looking at how Chile solved its bank problem