To drop money on an economy, without cleaning its clogged pipes, is not to give helicopter money a fair chance to work

Sir, Adair Turner the former chairman of the Financial Services Authority writes: “Eight years after the 2008 financial crisis the global economy is still stuck with slow growth, inflation levels that are too low and rising debt burdens. Massive monetary stimulus has failed to generate adequate demand. Money-financed fiscal deficits — more popularly labeled “helicopter money” — seems one of the few policy options left.” “Not too much, not too little — the helicopter drop demands balance” May 22.

What? Should we not first begin by clearly understanding why the stimulus did not work?

Turner writes: “Can we design a regime that will guard against future excess, and that households, companies and financial markets believe will do so. The answer may turn out to be no: and if so we may be stuck for many more years facing low growth, inflation below target, and rising debt levels. But we should at least debate whether the problem can be solved.”

Yes we should really debate! But we should start that debate by questioning the risk weighted capital requirements for banks, those that were first introduced by the regulators almost three decades ago, and later, in 2004, made much more poisonous with Basel II.

And so, just for a starter, I would ask these five questions:

1. Where did you regulator get the idea of being able to regulate our banks without first clearly defining what is the purpose of our banks?

2. Where did you regulator get the idea of giving a risk weight of zero percent to the sovereign, and one of 100 percent to those citizens that define the sovereigns’ strength? Do you really believe bureaucrats know better what to do with other peoples’ money than citizens with their own?

3. Where did you regulator get the idea of assigning a risk weight of 150 percent to those below BB- rated, and only one of 20% to those rated ex ante AAA that you know cause more the major bank crises in the world, when they ex post turn out to be risky?

4. Where did you regulator get the idea that assigning different capital requirements, and thereby different equity leverage possibilities, would not seriously distort the allocation of credit to the real economy?

5. And, where did you regulator get the idea that requiring banks to hold more capital against the risky, would not make it harder for the risky to access bank credit, and thereby increase inequality?

Sir, it is soon a decade since a big bank crisis broke out because of excessive exposures to something that was backed with very little capital, only because it had been perceived, decreed and concocted as safe… and yet that truth is not being discussed. Sorry, that is totally unacceptable. All evidence points to the tragic truth that highly unqualified technocrats are regulating our banks.

I advance the explanation that the previous stimulus had no chance of working because these regulations had clogged some pipes of the economy. And to drop helicopter money on an economy, without cleaning those pipes, is not to give helicopter money even a fair chance to work.

PS. Also, why should we trust the helicopter pilots?

@PerKurowski ©

FCA, if bank regulators distort the allocation of credit to the real economy, is it good conduct or criminally stupid?

Sir, I refer to Caroline Binham’s interesting story on how FSA, later FCA, investigated at a cost of £14m, a case of insider trading that led to the conviction of five men, “Spectrum: Watching the ‘insiders’” May 21.

In it Binham quotes Mark Steward, the Australian who leads the enforcement team at the FCA with: “We need to look at the potential for our markets to be undermined by systemic and organized crime – people who organize themselves to commit this kind of crime. And we are doing exactly that.”

But what if technocrats that can only be accused of criminal stupidity, unwittingly undermine our markets?

If there is ever a FCA investigation that is really needed, urgently, that is the one about the validity of the risk weighted capital requirements for banks.

By allowing banks to leverage more with assets perceived as safe than with assets perceived as risky, banks were allowed to earn higher expected risk adjusted returns on equity on safe assets than on risky assets; and that obviously dangerously distorted the allocation of credit to the real economy.

And for no reason at all! Never are major bank crises caused by excessive exposures to something ex ante considered as risky. The regulators assigned a risk weight of 20% for the prime AAA rated, and one of 150% for what is highly speculative and worse below BB- rated. Is one as a regulator really allowed to know so little about banks and be so stupid? Not to me!

PS. Here is an aide mémoire that could be helpful for FCA in its investigations

@PerKurowski ©

Bank regulators distorted and unleveled the access to bank credit playing field

Sir, Shamit Saggar, a former Non-Executive Director of the Financial Service Authority (1998-2004) writes: “Regulators cannot avoid getting involved: their role is to level the playing field” “Regulators must keep banking culture in check” January 14.

Exactly! But then he should explain to us why he kept mum when regulators, by means of credit risk weighted capital requirements for banks, unleveled the whole playing field.

They allowed banks to leverage much more with loans to those perceived or deemed as safe, than with loans to those perceived as risky; which meant banks would earn higher risk adjusted returns on exposures to those perceived or deemed as safe, than to those perceived as risky.

And so “The Safe”, like the sovereigns and the AAArisktocracy, got much easier and cheaper access to bank credit than usual; while the Risky, SMEs and entrepreneurs, had to face much lesser and more expensive bank credit than usual.

Mr. Saggar, like so many others of his regulatory colleagues, should be ashamed of what he allowed to happen on his watch.

@PerKurowski ©

A ‘light touch’ does not distort. Risk weighted capital requirements for banks was pure ‘heavy-handed dumb touch’

Sir, commenting on “Bank of England’s damning report on the 2008 failure of HBOS — seven years since the financial crisis” you write: “A [drawback] is that the regulators themselves — and the politicians who established the “light touch” regulatory regime for the City of London that encouraged the HBOS failure — do not face similar action… Meanwhile, the FSA, which was supposed to ensure that the UK’s biggest banks did not run aground and put the taxpayer at risk, was broadly deficient in its job. It operated within the prevailing political assumption of the time that the FSA “had to be ‘light touch’ in its approach and mindful of the UK’s competitive position”, “Better late then never for banking discipline”, November 20.

Twice you reference ‘light touch’. Wrong! A ‘light touch’ does not distort. The portfolio invariant credit risk weighted capital requirements for banks was pure and unabridged ‘heavy handed dumb hugely distortive touch!

I have explained it to you and your columnists and reporters a thousand of times, in hundreds of different ways, and so here comes a reprise of some of my arguments:

Bank capital is to be a buffer against unexpected losses. To base them on expected credit losses does not make any sense.

Any risk, like credit risk, even if perfectly perceived, causes the wrong actions if excessively considered.

All major bank crises have resulted from excessive exposures to assets perceived ex ante as safe, never from excessive exposures to what was perceived as risky.

To allow banks to hold less capital against some assets allow the banks to earn higher risk adjusted returns on equity on these. And that distorts the allocation of bank credit to the real economy.

To allow some banks to use their own risk models to determine the capital requirements is like allowing kids decide how much ice cream and chocolate to eat that leaves out the spinach and the broccoli.

Without these regulations banks would never ever have been allowed to leverage as much as they did.

To regulate banks without considering their purpose, like allocating bank credit efficiently to the real economy, is utterly irresponsible.

To allow some few credit rating agencies to have such importance for the capital banks needed to hold was to invite systemic risk.

Sir, it was clear that with this piece of regulations banks would dangerously overpopulate safe havens and, equally dangerous for the real economy, underexplore risky, but potentially very rewarding, bays. And that is what happened, and still you have difficulties of seeing it, I do not understand why. Is the difference between ex ante risks and ex post realities too much to handle?

Not understand the role of risk-taking in keeping the economy moving forward so as not to stall and fall, shows lack of vision and wisdom.

And you know I could go on and on.

You write: “By naming [some] who ran HBOS “without due regard to basic standards of banking” and recommending that several face possible bans from working in the industry, it clarifies responsibility.

I wish that would be valid for failed bank regulators too. Most of them have been promoted and are busy hiding or ignoring their own responsibilities.

@PerKurowski ©

William Coen. Do you really think that government bureaucrats use bank credit more productively that SMEs and entrepreneurs?

Sir, I refer to Laura Noonan, Caroline Binham and Barney Jopson reporting that “Basel group faces up to compliance challenge” May 26.

We read David Green stating that still to be answered “is whether the new regulations actually does what it was intended to do and whether the side effects are acceptable, whether they are intended or not”. And that is something that does not sound quite unimportant eh?

But then William Coen, head of the Basel Committee’s secretariat, tells us “We hear quite often about unintended consequences of our reform when, in fact, the effects of our reforms are actually fully intended; some just don’t like them”.

But here then is a question to Mr. Coen.

The Basel Committee uses credit-risk weighted capital requirements for banks were the weight of governments is 0% while the weight of SMEs and entrepreneurs is 100%... and that is something quite discussable, especially in these days when governments announce they need to use financial repression in order to impose informal haircuts on their obligations.

But worse, much worse, looked at from the opposite side, it tells us that the Basel Committee for Banking Supervision feels that the risk of bank credit not being used productively is 0% for government bureaucrats, and 100% for SMEs and entrepreneurs.

Is that really what you believe and have intended to say Mr Coen? Are you a communist?

@PerKurowski

Lord Turner, if a helicopter is to drop money, then drop it on the citizens, who are those who will have to pay for it.

Sir, not only does Bank of England buy huge amounts of government bonds; and banks do not need to hold any equity against these bonds, so they are also big buyers; and new bank liquidity requirements will also favor them holding sovereign instruments.

But now Lord Turner, to top it up, also wants to make a Friedman helicopter drop of money, on the government, on its bureaucrats, to finance a special one shot deficit, “Print money to fund the deficit – that is the fastest way to raise rates” November 11. He really must adore government!

By the way this is not the first time Lord Turner speaks about this drop.

I have no problem with the concept of a helicopter drop (I have a gold hedge) but, if something goes terribly wrong, and run inflation results, it will be the poor who suffer the most. And so I would suggest dropping that money directly on the British citizens.

Lord Turner explains the “current mess” in terms of “excessive private sector credit growth”. Indeed, but let us not forget that, as a bank regulators, by allowing the outright stupid credit-risk-weighted capital/equity requirements for banks, was himself much guilty of that. 

That regulation caused banks to leverage their equity to the skies; completely distorted the allocation of bank credit in the real economy, and, by favoring “the infallible” and discriminating against “the risky” is also a driver of growing inequality. 

And we are to trust them?

PS. If we know that inflation is primarily a tax on the poor, then why is deflation so bad for the poor?

But, if dropping money on the real economy, don’t let Lord Turner or any of his regulatory colleagues pilot the helicopter

Sir I refer to your “Helicopter lessons” February 6, where you analyze some favorable comments made by Adair Turner on “helicopter money”, meaning “putting newly minted cash irreversibly into the economy". In it you write giving “cash to the private sector rather than to the public treasury [has] the advantage it keeps intact market discipline on budgetary choices”.

You are absolutely right. But in the same vein let me also remind you that if you drop money on the economy by helicopter, make really sure this one is not piloted by Lord Turner, or any other of his bank regulating chums. I say this because these are those who have seen it as their mission in life to make certain that banks only lend to “The Infallible” and not to “The Risky”

And when doing so, they seem to never care about the fact that bank exposures to “The Risky” have never been large enough to create a major bank crisis, only excessive exposure to “The Infallible” do that; and neither do they want to listen to that “The Risky” include many who make a living on the margins of the real economy, and who extremely important for making it moving forward, so that this one does not stall and fall, and bring all of us down, including the banks.

The regulatory distortion produced by these runaway regulators, is directly responsible for that our banks can no longer perform an efficient allocation of economic resources.

Mr. Bank Regulators “Tear down that wall!” or that electrified ringfence

Sir, Andrew Tyrie, the chairman of the parliamentary commission on banking standards, argues well to “Electrify the ringfence to shock banks into real reform” January 28, and I like his call for “rebuilding trust in the banks and restoring pride among their employees”.

That said the best way forward to rebuild the banks though, is for the regulators to trust banks and immediately stop interfering with what banks do, by means of imposing capital requirements, and now also liquidity requirements, which are based on an ex ante perceived risk, and mostly as perceived by others, the credit rating agencies.

In fact there is a high voltage electrified wall or fence that needs to be taken down. And I refer to the one which imposes on banks much higher capital requirements on exposures to “The Risky” than to exposures to “The Infallible”. That wall has forced the banks to avoid having relations with for example small and medium businesses and entrepreneurs, and instead indulge in relations with “The Infallible”, to such a degree that we can notice evidence of clear degenerative incest, now especially between the banks and the infallible sovereigns.

Tyrie mentions the bank's lobbying strength, and this can indeed be a big problem. But it would be much more useful if he helps those without a voice, those already being correctly discriminated against by the banks, "The Risky", not having also to be discriminated against by bank regulators. As is "The Risky" those actors who on the margin are the most important for the real economy, get much less access to bank credit and have to pay much more interest rates only because of these regulations. Mr. Tyrie help to tear down that wall! 

PS. Anyone building a wall must always be aware of that he might end up on the wrong side of it. In this case, bank regulators ended up on the side of "The Infallible", precisely those who always cause a bank crisis, because as they should have known those perceived as "The Risky" never do.

Regulators bully banks, banks bully “The Risky”, and “The Infallible”, they just have a blast.

Sir, Brooke Masters, Claire Jones and Patrick Jenkins report “Big banks’ capital needs under microscope” November 30. 

"Regulators suspect banks have understated possible losses and need a 'material' amount of extra capital"

Of course I favor more capital in the banks, at least for their exposures to ‘The Infallible”, which are seriously under-capitalized as a result of overly generous capital requirements. 

But what regulators must remember is that while different capital requirements for different assets exists, their pressures on banks to increase their capital, will be mostly felt by those who generate the largest capital requirements, namely “The Risky”, like small business and entrepreneurs. 

Regulators bully banks, banks bully “The Risky”, the small businesses and entrepreneurs, and “The Infallible”, sovereigns and triple-A ,they just have a blast getting even more bank funds at even lower interest rates.

PS. Could these type of capital adjustments not trigger the conversion into zero clause of Barclays' recent $3bn contingent capital notes deal?   

Pray for some shadows sufficiently dark for some banks to escape the regulators... Caveat emptor, regulators regulating!

Sir when reading Brooke Masters report on “Regulators to tackle shadow banking”, November 19, and given the regulators doing that are the same old failed regulators, I can only fret for the future of whatever they identify as “shadow banking”.

If the regulators keep acting according to their so mistaken paradigm of weighting anything for perceived risks, even if those risks have already been weighted for, then they are dooming the shadow banks, like the surface banks, to create dangerously excessive exposures to what becomes officially considered as “The Infallible”… just like those exposures created in AAA rated securities back with lousily awarded mortgages to the subprime sector, loans sovereigns like Greece, or real estate financing in Spain.

And in that case, let us pray there will still be some banks hidden away in sufficiently dark shadows so that “The Risky”, like our small businesses and entrepreneurs, can at least have some access to bank credit… even if on the unnecessary expensive terms that the regulators’ dumb and useless risk-aversion has created. 

Lord Turner magnanimously admits that “Shadow banking is like cholesterol. There is good and there is bad”, but says “now we’ve got the really difficult job of getting national authorities to dive in and determine [which part of shadow banking] really worries us.” And that should worry us… because that sounds just like when the regulators discovered the too-big-to-fail banks they helped create, they just proceeded to make it worse by naming these Systemic Important Financial Institutions, SIFIs, and thereby relegating the rest into being systemic unimportant financial institutions. 

When will the regulators understand how much they distort all, when just distorting some? Why do they not just loudly proclaim that caveat emptor rules the shadows? Or perhaps we must: “Caveat emptor, regulators regulating!”

A “can-do spirit” is not based on dumb risk-avoidance but on a smart, even audacious, embracement of risk

Sir, Lionel Barber, from Washington writes “Wanted: a president to put can-do spirit back in the US” November 7. Absolutely, and that I believe is something the whole Europe also needs. 

Again, for the umpteenth time, few things can be so anathema to a “can-do spirit” than bank regulations which discriminates in favor of what the nation has got, the past, “The Infallible”, and against what the nation can get, the future, “The Risky” 

Currently banks are allowed to obtain much higher risk adjusted returns on equity when engaging with was is officially perceived as “not risky”, because that requires from them to hold much less capital than when lending to what is officially ex ante perceived as risky. That, basically instructs the banks, to stay away from what is risky, no matter what the risky, like small businesses and entrepreneurs can do. And if that is a spirit it can only be the “let’s enjoy what we did” 

America, Europe, a “can-do spirit” is not based on dumb risk-avoidance, but on a smart, even audacious, embracement of risk.

First step… Get rid of Fraulein Basel!

Let the credit rating agencies rate, and us learn, again, just to take the credit ratings for what they are.

Sir with respect to your “Holding the rating agencies to account” November 6, there are only two alternatives: 

One is the caveat emptor route of taking the credit ratings for what they are, always subject to the possibility of human fallibility, of one or any sort, and always subject to some uncertainness which is very hard or even impossible to measure, and all for which the ratings should be handled with care. In this case, the best regulators can do, is to append a label stating: “Warning: excessive reliance on credit ratings can be extremely dangerous to the health of your portfolio.” And, the worst thing what regulators can do, is precisely to give the ratings the credibility and importance these were given in Basel II. 

The other route is that of “we must make them work” no matter what. Yes, if a credit rater had just gone out of his office for one single day to see how the mortgages that formed part of the securities he was rating, these would not have been AAA rated, and that I swear. But, since the rater preferred the comfort of his office to the subprime suburbs¸ just as you and I do, he did not go there. And so should he now be sued? Perhaps, but if you hope to get something remotely substantial out of him, you must hope he is able o enlist the support of Bernanke and Draghi. 

And here is the “sophisticated” Financial Times going for the second option and writing “Things will only change once ratings are regulated more rigorously and paid for by investors rather than issuers”. I am amazed that FT has descended into such primitive naiveté… just for starter what would a credit rating cost if the raters needed to insure themselves against any sort of malpractice. 

Really, if anyone should be held accountable in this case that should be the bank regulators, they must have known the risks. In a letter that you yourself published in FT in January 2003 I told them that “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” 

No! Let the credit rating agencies rate, and us learn, again, just to take the credit ratings for what they are.

PS. The current S&P and Kroll duet “Anything you can rate, I can rate better I can rate anything better than you No, you can’t Yes, I can” 

The Martin Wolf Inconsistency

Sir, Martin Wolf ask for “Radical policies for rebalancing Britain’s economy” November 2. In it he again favors the government to be less austere, “the case for a reconsideration of fiscal policy remains strong” and the banking sector, even though loans have contracted immensely, to be more restricted, “the case for much lower leverage is far stronger than in normal times”. Why the inconsistency? The only explanation possible is that Wolf is a firm believer that government spending allocates the resources with more economic efficiency than what banks with their credits can do. 

And yes, in many ways Wolf is correct, because regulators, by means of their capital requirements for banks based on ex ante perceived risk, exerted so much influence favoring “The Infallible” and thereby discriminating against “The Risky”, that the banks have indeed not allocated their credits in an economic efficient way. But, the solution for that should be less government intervention, not more! 

“Rebalancing?” Yes! But, Sir Mervyn King, how about rebalancing first between “The Infallible” and “The Risky”?

In this respect, for the umpteenth time, Wolf would say “monotonously”, I hold that one of the most important challenges for the UK, Europe and America, is to work themselves out of that silly bank regulatory risk-aversion, which caused and causes the banks to dangerously overpopulate safe-havens and, equally dangerous, at least for the society and the economy, to under exploit the more risky but more productive bays, like small businesses and entrepreneurs. 

Martin Wolf, when he writes “Equity targets [for banks] should be set in pounds”, and although he probably loathes admitting it, shows that he finally begins to understand how the capital requirements for banks perceived on risk distorted the economy,. 

Unfortunately, to get rid of those distortions is not as easy as Wolf would like it to be, in order for that issue to go away fast. You simply cannot attract the so much needed new bank equity, by introducing prohibitions to pay dividends subjectively set by regulators. You need to design a credible transition plan so that any new bank investor knows what he can expect tomorrow. And, to do that, you need to put at work fresh regulatory minds not encumbered by past mistakes. 

And so, before messing with tools like depreciating a currency (buying foreign low-risk assets?), in a world were so many currencies wish for depreciation, I suggest that UK, America and Europe draw up a careful plan, acceptable to future bank investors, for how to allow the banks again to take a chance on “The Risky”, those that in truth made the UK, Europe and America what they are. 

To me that plan should pursue making banking more of a safer and lower rate of returns utility, and so able to attract more widows and orphans like funds. For the rest of the economy to prosper, we must make banks be a lower returns affair.

If Draghi is the European Central Bank’s sharpest tool I pity Europe

Sir, Ralp Atkins holds that “Draghi’s resolve is European Central Bank’s sharpest tool” October 31. 

To me Mario Draghi is one of those utterly failed regulators who believed for instance that banks should be allowed to leverage their equity 62.5 to 1 when lending to those officially perceived as “The Infallible”, for instance Greece, but kept strictly to 12.5 to 1 leverage when lending The Risky, like European small businesses and entrepreneurs. And so, in this respect, if Draghi is the sharpest tool, I can only pity Europe, that tool can only keep on cutting it into pieces. 

As I have said so many times, if little me had anything to do about helping the eurozone or Europe out (or the US too) , the first thing I would do is to make certain that those most capable of saving the economy had access to bank credit in the best of terms. And that would mean that while bank equity remains so scarce, I would dramatically lower the capital requirements for banks when lending to “The Risky”, and slowly increasing these for all, until that odious and stupid regulatory discrimination in favor of “The Infallible” has been completely eliminated. 

To inject funds in any way shape or form before the distortions on how those funds will flow through the economy has been eliminated, all that is achieved is wasting away extremely scarce fiscal and monetary policy space.


PS. For those who do not know Mario Draghi was since April 2006, until 2011, the Chairman of the Financial Stability Forum, later the Financial Stability Board. And this is something I had to say about the FSF in 2008.

Martin Wolf, but what about the cumulative disadvantage for those officially perceived as “risky”?

Sir, Martin Wolf, in “Romney would be a backward step”, October 31, writes: “[A] challenge is inequality… to the extent that a child’s opportunity depends on the resources of its parents, the result will be more cumulative disadvantage”. 

Though I fail to see what that has to do specifically with Romney, Wolf is absolutely correct, but, then why on earth does he refuse to protest the cumulative disadvantage those perceived as “The Risky” are equally submitted to when trying to access bank credit? 

Not only do “The Risky” have to pay higher interests rates, get smaller loans and have to accept harsher contract terms, but on top of it all, in a cumulative way, the regulators also require the banks to hold more capital when lending to them than when lending to The infallible”. 

If a child’s education was placed under the supervision of a Basel Committee, those regulators, if applying consistently their current paradigms, would perhaps require the children of the poor to contract a special insurance to cover the risks of them not completing the education, because clearly their parents do not have the same resources as the children of the rich. Could Martin Wolf possibly agree with something like that? 

Or is it that Martin Wolf just cannot understand that when you impose a cumulative disadvantage on “The Risky” you are de-facto awarding a dangerous cumulative advantage to "The Infallible”?

What would the consequences be for failed bank regulators if failed air-traffic controllers or cruise ship captains?

Sir, Kara Scannell, in the analysis on US housing, “After the gold rush”, October 30, with respect to the mortgage frauds writes: “Critics say that prosecutors have gone after easy targets – low level fraudsters - while going easy on Wall Street executives whose banks packaged billions of dollars worth of toxic mortgage securities.”

Indeed, and though it might be difficult to condemn any one of those executives for something illegal, by now we should at least have had on the web a list of the 20 most important toxic mortgage packagers, so as to be able to shame them.

But, that said, and since for me the subprime mortgage mess was a direct consequence of the regulators having created irresistible temptations for banks to holding any AAA rated securities, namely allowing them to hold these securities against only 1.6 percent in capital, the first thing that should have happened, is for these regulators to be sent home, in utter disgrace. But that has not happened.

Not only is the name of most regulators unknown to us, but some of them have even been put in charge of drawing up new regulations, Basel III, and others promoted, like for instance Mario Draghi, from being Chairman of the Financial Stability Forum, later the Financial Stability Board, to being the President of the European Central Bank. Amazing!

But let me be even clearer about what I mean:

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

But yet, even if a little me, not a regulator nor a banker, could have been sufficiently preoccupied about the excessive lending to sovereigns to write that, the regulators allowed the banks in some cases to lend to sovereigns against zero capital, and for a sovereign rated like Greece was, required the bank to hold only 1.6 percent in capital. That signified allowing a bank to leverage its equity some mindboggling 62.5 times to 1 when lending to Greece.

And so let me just ask: what would have happened to airport controllers or cruise ship captains who had made mistakes of this exorbitant nature, and caused damages as huge as this financial crisis?

I have absolutely nothing personal against any of the regulators, and I do not know any one of them. But what I I do know is that if we are going to have bank regulations with a global reach, like those produced by the Basel Committee for Banking Supervision, we absolutely need those regulators to be held much more accountable for what they are up to.

Yes the credit rating agencies let the regulators down... but it was they who gave the credit rating agencies such an excessive importance and they should have known; again as little me wrote in another published letter January 2003 in FT: “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

Yes they can argue they trusted the financial models too much… but that is not an excuse. If little me, presumably not more a financial modeler than they were, in a written formal statement delivered as an Executive Director of the World Bank, in October 2004, could warn: “[I]believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions” they should also have been suspicious about the models.

Has Europe liquidity or solvency problem? Worse, it has a failed business model.

Sir, Wolfgang Münchau with respect to Europe references two questions: Is this a liquidity crisis only? Or is it a solvency crisis?, “Crutches can prop up the eurozone, but it’s still lame”, October 29. 

Unfortunately to me it is much worse than that. Europe has a business model failure. 

Europe, or more precisely European bank regulators thought that Europe could prosper by having its banks avoiding risks, and set up capital requirements which makes the access to bank credit more abundant and cheaper for “The Infallible”, like sovereigns and real estate, and scarcer and more expensive for “The Risky”, like small businesses and entrepreneurs. 

And that is clearly an unworkable model for nations who have thrived on risk-taking. 

Any European real recovery begins with acknowledging this problem. Otherwise Europe (and the US) will just keep on stalling and falling, with even worse liquidity and solvency crisis coming up.

It is the Old bank regulator we need to come back, he who does not distort.

Suppose a banker had to make a choice of whether to give a big loan to a very safe client, one of “The Infallible”, at a margin of Libor plus one half percent, or several smaller loans to small business, members of “The Risky”, at Libor plus four percent. An "Old" banker might have decided to lend to “The Risky” if, in his opinion, the difference in margins compensated for the difference in risk. The amount at exposure to each one of “The Risky” would also be much lower than the exposure to "The Infallible".

But then came a New regulator and told the banker, “If you lend to ‘The Infallible’ you only need 1.6 percent in capital while, if you lend to ‘The Risky’ you must hold 8 percent. And, of course, the New banker had then to decide for “The Infallible, because there was no chance on earth that the members of “The Risky”, could provide the bank with the same return on equity, when, in their case, the bank needed to hold FIVE times more equity.

And anyone who looks at and understands the implications of this absurd reality must come to the conclusion that in banking, whether our banks are to be Old or New, what we most need is an Old regulator, one who does not distort… one who does not believe himself to be the risk manager of the world. 

And, Sir, that is why David Lascelles’ “Banking’s ‘golden age’ is a myth that should be forgotten”, October 26, though an interesting article, is quite irrelevant to our most urgent needs. 

PS. FT I have tried to explain it to you in the simplest terms possible. As you can see I have not given up on that one day you will be able to understand what happened.

Italy’s earthquake vs. financial earthquake - outrageous punishment vs. outrageous forgiveness

Sir, I refer to Anjana Ahuja’s “Jailing the seismic seven will cause tremors beyond Italy”, October 25. 

If we transport what happened in Italy to the financial sector, we can observe that: the credit rating agencies correspond to the seismologist, the regulators who gave the credit rating agencies so much importance and credibility to those regulators that flouted building regulations and, all those who assured the world all was fine and dandy to Bernardo Bernadinis. 

As that major financial earthquake which was for some of us, perhaps not scientist but ordinary laymen, absolutely doomed to happen, “just follow the AAAs”, and that quake has produced immensely more widespread damages than those tragically produced in L’Aquila, the question which remains is: 

What is worse, outrageous punishment or outrageous forgiveness? 

The credit rating agencies made mistakes which one way or another should have had some type of consequence. The bank regulators should have been ashamed and not simply authorized to keep on regulating, using the same silly paradigms, as if nothing had happened. And, if the Bernardo Bernardinis’ of this world do not understand they need new advisors, they should just be sent home, for being too dumb. 

PS. In October 2004 in a formal written statement delivered at the Executive Board of the World Bank I warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions”. And, if little me sort of knew it, should regulators and credit rating agencies have known it? I dare you to read it. It contains more relevant comments.

It is not a pernicious link, it is a pernicious circle.

Sir, Wolfgang Münchau writes about bank recapitalizations to end what IMF calls “the pernicious link between banks and sovereigns”, “A monumental project, but not an end to the crisis”, October 22.

But both Münchau and the IMF seem to think that pernicious link goes only in one direction, that of sovereigns guaranteeing their banks, while ignoring that so much of the current troubles have been caused by banks being allowed to lend to sovereigns on extremely favorable conditions, with respect to the capital they must hold thereto.

Make a bank need to hold as much capital when lending to a small business or an entrepreneur than when lending to the sovereign, and watch what will happen to the interest rates on sovereign debt.

I am not giving up on making the thick as a-brick-bank-regulatory-establishment understand, and that goes for FT experts too.