Fabrice Tourre has been duly scalped, but where is the SEC’s mea culpa?

Sir, I have no doubt whatsoever that the prime responsible for the current financial mess were dumb bank regulators. That’s is why I dislike so much reading when Tracy Alloway and Kara Scanell report “SEC elated after claiming Tourre’s scalp.” August 3.

The whole story can either begin with the little guy, the mortgage underwriter underwriting bad mortgages to the subprime sector; and those bad ingredients were then sold by underwriter bosses to security packagers, who packaged these bad mortgages into very bad subprime sausages; but who were are able to turn these into valuable delicacies, only because of the high credit ratings these received from human fallible credit rating agents. And then the story could end with those selling the sausages to the investors, and some of them, like Goldman Sachs, even taking bets on that these would make their buyers puke. And all involved in the bad sausage chain made huge profits… and should all be ashamed, some more than others.

Or the story can begin with bank regulators, the Basel Committee, who with its Basel II of June 2004 authorized banks to hold AAA rated sausages on their books against only 1.6 percent in capital (equity), which meant they authorized banks to leverage their capital a mindboggling 62.5 to 1 times with these sausages; and who with this created the irresistible profit motivations that induced all humans previously mentioned to break all the rules.

Fabrice Tourre’s own word “More and more leverage in the system, the whole building is about to collapse any time now” says it all. Those directly responsible for that leverage were the bank regulators. Without the explicit blessing of regulations which allowed it, the system would never ever have been able to leverage as much. And the SEC was all in agreement with is, as can be read in its Open Meeting records of April 28, 2004.

Yes, Fabrice Tourre and all others involved in the subprime sausage chain are guilty and should be held responsible. But, if we allow regulators to get away, feeling elated, without even a mea culpa, then we truly have not learned the lessons we most need to learn from this crisis.

ABACUS 2007-AC1: The whole truth and nothing but the truth!

Sir I refer to the extensive report by Patrick Jenkins and Francesco Guerrera, “Goldsman versus the regulator” April 19. Yes Goldman Sachs might have behaved unethically and even illegally but the whole truth and nothing but the truth would in this case have to include the following facts, no matter how politically or agenda inconvenient they might be.

IKB the German bank bought the two tranches of ABACUS 2007-AC1 almost exclusively because of the following two reasons:

First both tranches, the A1 paying Libor plus 85 basis points, and the A-2 paying Libor plus 110 basis, points were rated Aaa by Moody’s and AAA by S&P when purchased by IKB.

Second, in order to invest $150 million in these securities, which because of their ratings were risk-weighted by Basel II at only 20%, IKB needed only to have $2.4 million of capital, 1.6%, when compared to the $12 million it would be required to have if lending that amount to unrated small and medium sized German companies.

If IKB had known that Paulson had had his hand in the picking and known fully about his motives then they might have asked for a slightly higher interest rate, perhaps 10 basis points, and still bought the securities.

If the securities did not have the splendid credit ratings assigned to them by the credit rating agencies then they would probably not have bought them even if Mother Teresa had done the picking.

If the regulators had placed the same type of capital requirements on all assets then IKB would have stayed home, probably lending to their traditional clients, instead of going to California to dig prime rated subprime gold.

And so while naturally we should lend all our support to efforts to eliminate wrong-doings like those described in the action by the SEC against Goldman Sachs that should not signify we take our eyes of the unfortunate truth of the world having been saddled with grossly inept regulators who created grossly bad regulations.

PS. The truth was even worse. Years later I found out the EU authorities, in a gesture of misunderstood solidarity had assigned Greece a 0% risk weight, which meant European banks could lend to Greece against no capital at all.