I denounce Basel Committee’s bad bank regulations, while FT protects the regulators. Who fulfills best his civic duty?

Sir your “Regulators should take on kid gloves” January 16 ends with: “The world economy was broken by banks’ cavalier attitude to risk and rules. When authorities suspect outright wrongdoing, a final finding for or against guilty conduct must be sought. Anything less is an insult to the public’s intelligence on top of the injury inflicted on their livelihoods”.

No! The world economy was broken by the regulator’s foolishly believing that they could drive out risk from banking by setting up different capital requirements depending on the perceived risk of the asset,blithely ignoring that the perceived risks are already cleared for by the interest rates, the size of the exposures and other terms.

By favoring so much what is perceived as absolutely not risky they have our banks drowning in exposures to precisely what has always caused the big crises, namely the absolutely-not-risky-turned-very-risky, while at the same time they are making it much more difficult for those perceived as risky, many of whom could be our absolutely not risky of tomorrow, to access the bank credit they need today.

And what do you call capital requirements which allowed banks to leverage their equity 62.5 times to 1 when investing in securities that are blessed with an AA to AAA rating, or when lending to Greece? Is that not a truly “cavalier attitude to risk”?

And is not, as Basel II decrees, allowing banks to lend to their sovereign against zero capital while requiring them to hold 8 percent when lending to an unrated or not so good rated citizen, just an odious discrimination in favor of the State and against the citizen?

You at FT must be well aware of my seriously argued criticism of the Basel Committee’s regulatory paradigm, and you must also have noticed that my questions have not even been acknowledged and much less given answer from any regulator.

If I find current regulations to be utterly crazy and dangerous and therefore the authorities engaged in wrongdoings, is it not my civic duty to denounce that? Why should I as FT seems to do, keep silence and protect the bank regulators?

Does this mean that I condone the wrongdoing of bankers? Of course not! And you know that.

The marginal authorized leverage was then 125 to 1!

Sir John Gapper in “How banks learnt to play the system” May 7 is slowly identifying the AAA-bomb that set of this crisis. He writes about how regulatory bank equity, by not being real hard cash equity, and how assets, by being minimized through regulatory risk-weighting, made “some investment banks enter this down-turn with capital ratios of 30 times or more.”

But Gapper is not there yet since he seems to forget that in economics as well as in finance, the most important price is not the average but the marginal. If I am allowed to assume what Gapper seems to do that only the 4% equity of tier 1 capital was for real, and consider the fact that loans or investments to corporations and securities that were rated triple-A were risk-weighted at only 20 %, then he should be able to calculate that the marginal authorized leverage for the banks on some operation were 125 to 1... or more, if as Gapper holds, that even the tier 1 capital was partly made up of illusions.

P.S. I just wonder. If I had been a PhD, from a well known university, would I have not been referenced as someone who has warned and argued over this problem over and over again for years? After 258 letter to the Financial Times labelled “subprime banking regulations”? Not including this one.

Geithner could be heading onto the wrong direction.

Sir FT reports quite extensively on the confirmation hearings of Timothy Geithner, the Treasury nominee held by the US Senate’s Finance Committee on January 21. Though he did not give away much on what he will do I cannot say that I disagreed with most of what he said… it all sounded so reasonably. But given that we do not live in reasonable times what most interested me was whether he possessed the type of deep-core beliefs or philosophy that helps anyone to stand firm against the storming winds, and I must confess I felt somewhat disappointed.

When Geithner referred to the credit rating agencies he mentioned they were guilty of “systematic failures in judgement” but he did not say a single word about the regulator’s fatal mistake when empowering the credit rating agencies they created the systemic risk bomb that was bound to explode, sooner or later, as it sure did. Anyone who at this moment might be inclined to dig us even further down in the regulatory hole we’re in is someone that I cannot feel truly comfortable with.