September 14, 2017

FT, it would have been easy pie to predict the crisis 2007-08 had to happen, had you only dared question bank experts

Sir, Matthew C Klein writes: “Lots of people were supposed to prevent the financial crisis…most policymakers, risk managers, and academics failed in their responsibility to protect the rest of us. After the fact, the common defence was that the crisis so complex and unusual that it would have been impossible to predict “Anyone awake in the 1980s should have known about the dangers in the 2000s” Alphaville September 13.

Complex? Not at all! And you do not, as Klein usefully suggests, need for that to go back to what happened in the 1980s and 1990s.

Sir, just dare answer! If regulators allow banks to leverage their equity 60 times or more just because an AAA rating or a friendly sovereign is present… does that not doom banks to disaster? Of course it does!

Here are some examples of what I wrote:

October 1998, Op-Ed in Venezuela: “History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

November 1999, Op-Ed Venezuela: “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 its collapse”

September 2002, Op-Ed Venezuela: “What a nightmare it must be to be a sovereign risk evaluator! If they underestimate the risk of a given country, it will most assuredly be inundated with fresh loans and leveraged to the hilt.”

January 2003, letter published by Financial Times: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

March 2003, in a formal discussion at the Executive Board of the World Bank: “The sole chance the world has of avoiding the risk that entities such as the Basel Committee, accounting standard boards and credit rating agencies introduce serious and fatal systemic risks, is by having an entity like the World Bank stand up to them, instead of sort of fatalistically accepting their dictates."

April 2003, commenting on the World Bank's Strategic Framework 04-06 "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

May 2003, in comments made at a workshop for regulators at the World Bank: “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.”

May 2003, Op-Ed Venezuela: “In a world that preaches the worth of the invisible hands of the market, with its millions of mini-regulators, we find it so strange that the Basel Committee delegates, without protest heard, so much responsibility in the hand of so very few and human-fallible credit rating agencies”

October 2004, in a written statement delivered as an ED at the Board of the World Bank: “We believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

November 2004, in a letter published by the Financial Times: “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)?”

But yet you Sir have silenced me, only because you think I am obsessed with the risk weighted capital requirements for banks. I tell you Sir, indeed I am, and you should be too!

I tell you Sir, indeed I am, and you should be too!

Per Kurowski