Central banks seem not able to tell their magic porridge pot to stop

Sir, Robert Armstrong, Oliver Ralph, and Eric Platt make a reference to the fairy tale of the magic porridge pot writing “Every working day, $100m rolls into Berkshire — cash from its subsidiaries, dividends from its shares, interest from its treasuries. Something must be done with it all. The porridge is starting to overrun the house.” “‘I have more fun than any 88-year-old in the world’” Life&Arts, April 27.

And the magic porridge pot fairy tale ends this way on Wikipedia: “At last when only one single house remained, the child came home and just said, "Stop, little pot," and it stopped and gave up cooking, and whosoever wished to return to the town had to eat their way back”

Sir, the excessive stimuli injected by means of QEs, fiscal deficits, ultra low interest rates and incestuous debt credit relations, like the 0% risk weighting of the sovereign that provides credit subsidies to who provides banks with deposit guarantees, or loans to houses increasing the price of houses allowing still more loans to houses, against very little capital… all of that is the porridge of our time.

And it’s clear central bankers everywhere, have no idea of how to tell their pot to stop.

Will we be able to eat our way back? Not without sweating it out a lot at the gym. You see too much porridge, meaning too much carbs, and too little proteins, meaning too little risk taking, produces an obese not muscular economy. 

@PerKurowski

You redistribution profiteers: There’s very little cash in “cash”; and wealth is mostly just frozen purchasing power

Sir, Eric Platt writes about “the lack of detail…typical of the 30 large US-domiciled companies analysed by the FT that hold more than $10bn of cash and other securities on their balance sheets”, “Patchy disclosure gives investors little to chew on” September 28.

The article should help to indicate to you how little real cash there really is in all that cash to which so many, time after time, including FT, have referred to in terms of that it should be repatriated, so as to put to better use.

As we can see, the fact is that most of the $262bn of cash and cash equivalent held by Apple has already been deployed, one way or another; which means that even if Apple does not use it for its own purposes, that does not mean it is not being used by others for other purposes.

Sir, the whole very valid debate about offshore wealth and growing inequality, would be greatly sanitized by the acceptance of the facts that there is very little cash in “cash”; and that wealth is mostly just frozen purchasing power.

Perhaps then we would also be allowed to discuss such political incorrect issues such as what assets would not exist but because of great wealth and great inequalities.

Then perhaps we could at last focus more on the much more important cause of fighting unproductive unequal wealth creation, than about how to getting our hands on wealth after it has been created.

Unfortunately the redistribution profiteers, those who need to instigate hate against wealth and inequality in order to maximize the value of their franchise, will fight tooth and nails in order to stop such debate taking place.

https://perkurowski.blogspot.com/2016/10/i-tweeted-how-do-you-morph-200-million.html

https://perkurowski.blogspot.com/2015/08/if-we-are-going-to-squeeze-rich-let-us.html

@PerKurowski

When frozen in other types of “cash”, it is hard to free up cash to spend on good causes without losing much value

Sir, I refer to “Debt Collectors” September 16, in which Eric Platt, Alexandra Scaggs and Nicole Bullock search to explain what could happen to the “portfolio of cash, securities and investments worth roughly $840bn, held outside the US by just 30 US companies, because of tax reform designed to … encourage American companies to bring back jobs and profits trapped overseas”.

The article, though it refers to difficulties such as the “repatriation process itself could involve selling bonds” and the impact of that on interest rates, fails to illustrate the whole truth.

The reality is that all that “cash”, as well as all that “cash” held by other wealthy (for instance in Panama) except for the less than 1% that could be in real cash, is in other assets like securities investments, perhaps even in art collections.

So, in order to convert all that “cash” into real cash, those other assets have to be sold to others who are then required to give up their real cash for these. And, in that process, clearly a lot of the value of the “cash” would just change hands or disappear.

Why are these difficulties of converting “cash” into cash not more discussed? Because doing so would be sort of inconvenient for those redistribution profiteers who try to sell their politically beneficial envy, for instance that present in the “one percenters being against all us 99 percenters” theme.

What is a £20 million flat in London or a US$200 million Picasso hanging on a wall but the voluntary freezing of millions in alternative purchase power that could be out there in the economy competing for consumer goods… and generating inflation? Is a lowering of the value of hard-assets the inflation driver central banks want?

PS. Of course the above does not take away one iota of the need to relentlessly pursue those who have accumulated “cash” assets illegally, and might hold these in places like in Panama.

https://teawithft.blogspot.com/2016/04/tett-get-it-whats-stashed-away-in.html

https://perkurowski.blogspot.com/2016/10/i-tweeted-how-do-you-morph-200-million.html

http://perkurowski.blogspot.com/2016/01/the-wealth-of-62-richest-equals-that-of.html

The risk weighted capital requirements give banks great incentives to hide risk from their regulators.

Sir, Eric Platt and Alistair Gray write “US regulators have joined investors in voicing concern over risky bank lending… particularly when projections make a company appear more creditworthy… ‘The agencies continue to see cases of aggressive projections used to justify pass ratings on transactions that examiners consider non-pass’… although they said the number of cases was “at much lower levels than in prior periods” “Wall Street watchdogs sound alarm over risky bank lending” July 4.

In good old banking days, around 600 years, before Basel Committee’s risk weighted capital requirements, bankers argued their clients riskiness in order to collect higher risk premiums. Now banks argue more their clients safety, in order to convince regulators that they can hold less capital. That distortion makes the efficient allocation of bank credit to the real economy.

“The Fed and its fellow regulators… give deals a pass or non-pass rating which is then used to build a picture of banks’ lending activities.”

Considering that bank crisis only result from unexpected events or excessive exposures to something perceived, concocted or decreed as safe, and never ever from something perceived as risky, does this pass or non-pass rating activity make any sense? Absolutely not! It is as silly as can be… except for those who earn their livings from working on bank regulations. 

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

“the agencies said that risks had declined slightly but remained “elevated”. Lending considered to be non-pass had fallen from 10.3 per cent to 9.7 per cent of the overall shared national credit portfolio” As I see it, we could just as well argue that where the real dangers lie, increased from 89.7% to 90.3%.

Sir, again for the umpteenth time, without the elimination of the insane risk weighted capital requirements, there is no way our banks will recover their sanity. I am amazed on how you have decided to keep silence on this.

@PerKurowski

Should it be required for a sovereign to be placed on a “The Bad” list, for its financiers to be morally concerned?

Sir, Jonathan Wheatley and Eric Platt write: “Just how much room for manoeuvre does cash-strapped Petróleos de Venezuela have? It is the question that has dogged investors, economists and the South American country’s own people as the government of Nicolás Maduro struggles to manage a crippling debt burden and cling to power” “Debt swap respite for Venezuela state oil group” October 25.

No! I can assure you Sir that most Venezuelan’s, are much more concerned with where they will get food or medicines for today, and about whether they should dare to walk out on the street, than with PDVSA’s debt.

And that should also concern PDVSA’s creditors, because it is truly a shame if they are totally uninterested in what human right violations they might be financing.

For instance, petrol (gas) is still being sold at about US$ 1 cent per liter, only so that government partners can make a killing smuggling it over the borders.

Really, it surprises me that these type of issues seem so irrelevant to FT. 

@PerKurowski ©

Compared to the poor of Venezuela, PDVSA’s bondholders, as a group and over time, have benefitted way too much

Sir, Eric Platt and Robin Wigglesworth write that PDVSA’s Rafael Rodriguez, Mr del Pino’s chief of staff, appealing to the investors to take part in the proposed swap said: “We hope investors will support PDVSA in the same way that we have supported them for many years”, “Caracas piles on pressure for $5.3bn bond swap” October 19.

For the poor of Venezuela, who demonstratively might not have received more than 15 percent of their per capita share of Venezuela’s oil revenues, that is an insult. I don’t care one iota about these bondholders; as a group and over time they have benefitted way too much.

As an example, Elaine Moore and Simeon Kerr when recently reporting on an upcoming international bond issue of Saudi Arabia wrote: “a banker not involved in the (US$ 20bn) deal, estimates that Saudi Arabia will price at 150bp above US Treasuries for a five-year bond and 160 to 165 for 10-year debt”. “Saudi debt pitch focuses on youth and reform” October 18. Sir, compare that with what the land that advertises itself to have the largest oil reserves in the world, has to pay.

Sir, very high risk premiums paid by a sovereign debtor, might evidence that a government and its financiers, are in cahoots for some mutually benefitting corruption.

And please do not tell us PDVSA is not Venezuela, as like if Aramco is not Saudi Arabia.

@PerKurowski ©

FT, where’s the real hurdle? In PDVSA’s debt swap, or in PDVSA and Venezuela’s government?

Sir, Eric Platt and Jessica Dye write: “Analysts and bankers remain optimistic that a deal will be clinched, as a default would cut both Venezuela’s and PDVSA’s credit lines with lenders and deepen the country’s recession.” “PDVSA debt swap plan hits hurdle” October 11.

Really? Could it not be so that helping to finance one of the demonstratively most inept governments ever could only deepen and prolong a recession that, right after a huge oil boom, in a country that states it holds the largest oil reserves in the world, has its citizens starving and without access to medicines?

Venezuela is in utter disorder, and its people in utter despair, and still its government sells gas at less than US$ 4 cents a gallon, thereby allowing some to smuggle it out and make juicy profits. That, no matter how you look at it, is a de facto economic crime against humanity.

So “T Rowe Price owned $274m worth of the 2017 bonds”. Does T Rowe Price really think that its clients, though they might make huge speculative profits in the short term, are truly benefitted long term by financing an entity as mismanaged as T Rowe Price knows PDVSA is? Would T Rowe Price’s investors have liked it if Venezuelans had financed a PDUSA and thereby helped keep a hypothetical authoritarian regime in power? When is what is being financed going to be an issue? Or is it really that you can finance anything at all, as longs as the risk premiums are juicy?

Sir, to be clear, I am not writing this solely in “opposition” to the current Venezuela government. For decades, long before the Chavez years, I have been opposed to odious debts, odious credits and odious borrowings… anywhere.

PS. I am supposing no one would dare to expose such naiveté as arguing that lending to PDVSA is distinct from lending to the Venezuela government.

@PerKurowski ©

Moody, what would happen to US credit ratings if suddenly it was not any longer the world’s mightiest military power?

Sir, Rochelle Toplensky and Eric Platt write that according to Moody, the four primary factors it considers when assessing a country’s creditworthiness are “very high degree of economic, institutional and government financial strength and its very low susceptibility to event risk”, “Moody’s warns next US president over debt” September 8.

In the case of the US they perhaps miss a very important factor. As I once argued in a letter that the Washington Post published, “Much more important than a triple-A for the United States is the fact that this country is, by far, the foremost military power in the world. Lose that supremacy and all hell breaks loose. Keep it and a BBB rating could do.”

And so perhaps you should ask Moody: How would it impact your credit rating of the US if the US was no longer, by far, the mightiest military power? And would the credit rating of any closing up mighty then automatically improve?

@PerKurowski ©

The AAA and AA rated are especially exposed to bank regulations that endanger their future.

Sir, Eric Platt quotes Nick Gartside of JPMorgan with: “In a way, double A has become the new triple A, when you have a lot less triple A debt out there,”“Triple A quality fades as groups embrace debt” May 24.

But, in terms of the risk weights imposed on banks with Basel II, triple A and double A have the same one, 20%. A+ to A has 50% and then all the rest jumps to 100% or more.

Like Platt writes many factors affects the disappearance of Triple A. But, the distortions produced by allowing banks to leverage more when lending to the safe, than when lending to the risky, cause the banks to pester and tempt “the safe” for business. And that guarantees that too much bank credit will be given in too easy conditions to the safe… and that will, sooner or later, endanger the safe (and the banks). C’est la vie!

@PerKurowski ©

Though redistribution profiteers believe it and demagogues want you to believe it, there are no “huge piles of cash”

Sir, the word “cash” appears 8 times in Eric Platt’s “US tech cash pile soars to $504bn as groups seek to avoid tax hit on profits” May 21. And huge cash piles are referenced to in terms of “companies hoarding cash”. 

All as if it was some cash stacked away under some mattresses. Its not, there might not even be a single dime of cash; most and perhaps all of it has already been deployed to do something; it might be invested in shares or bonds, perhaps even in long-term municipal infrastructure bonds  J   

And so what should these “cash hoarders” that currently do not want to take investment risks do? 

  

Why do not bank regulators start with ending their risk-weighted capital requirements, those that effectively tell banks not to take risks but to keep it safe?

Sir, the truth is that legions of dumb redistribution profiteers searching for business opportunities, believe there are plenty of Ali Baba caves to be found.

And the problem is that demagogues and populists, like our Chavez and yours whoever, use that to further their own causes. FT, stop collaborating with them!

@PerKurowski ©

Bank regulators’ magnificent pro-cyclical machine is fueled by credit rating downgrades

Sir, Eric Platt writes: “US corporate downgrades soar past $1tn as defaults gain pace” December 5.

He discusses several of its implications but forgets one of the most important, namely its impact in the capital requirements for banks. As is, because of the risk weighted capital requirements for banks, these will be required to hold more capital, meaning they will be able to lend less, or even have to dispose of assets, meaning everything will get worse, all the courtesy of dumb and useless pro-cyclical regulations.

The moment a bank puts an asset on its books, that is the moment when it needs to have sufficient capital, and that sufficiency should obviously include the possibility of a future downgrading.

How is it bank regulators cannot understand that the safer something is perceived the larger the potential for bad news?

@PerKurowski ©

Risk weighted TLAC intensifies the irresponsible regulatory distortion of bank credit allocation to the real economy

Sir, I refer to Eric Platt’s and Ben McLannahan’s “S&P downgrades 8 US lenders on support fears” and to Lex’s “US banks: losing their safety harness”, December 4.

It is mentioned: “Since the financial crisis of 2008-09 regulators have launched a succession of measures designed to ensure that taxpayers will not be burdened again in the event of another Lehman-like crisis, forcing banks to hold more capital and liquid assets while limiting the amounts they can return to shareholders through buybacks and dividends” “Banks are expected to hold total loss absorbing capacity — TLAC — of at least 18 per cent of their risk-weighted assets.” “S&P on Wednesday pronounced the US Federal Reserve’s latest capital rules as up to the task”

So, on top of the distortions produced by the risk weighted capital requirements now regulators want to add this.

18 percent of risk weighted assets means that normal unrated creditors, and those rated between BBB+ to BB-, will generate the bank an 18 percent TLAC requirement, while for example private sector assets rated AAA to AA will only generate a 3.6 percent requirements TLAC. Those unlucky to have a rating below BB- they will generate a 27 percent TLAC requirement, which of course will not make their plight any easier to solve.

I am so amazed at how bank regulators seem to not care one iota about whether their regulations distort the allocation of bank credit to the real economy. Might it be that they have still not defined the purpose of those banks they are regulating? God, save us from this type of irresponsible regulators.

@PerKurowski ©