Clearly the chief of Wells Fargo cannot tell us the whole truth about the "bad mortgages", so the more reason for us to expect FT doing so.

Sir, Camilla Hall writes “The US is still picking over the wreckage of the financial crisis, in which some mortgage originators willfully ignored underwriting standards to sell as many loan as possible to government-backed institutions and private investors”, “Wells chief warns on mortgage lending” August 27.

What a tremendous loss of short term memory!

First all those lousily awarded mortgages were not sold directly to any government-backed institutions and private investors, but to security re-packagers who were able to confound credit rating agencies so much that they obtained an AAA rating for these.

Secondly the investors were not buying mortgages, God forbid, they were buying AAA rated securities backed with mortgages… something entirely different.

And thirdly and most important, the only reason why there was such an intense demand for these AAA rated securities so that all caution was thrown to the wind, over €1 trillion of European investments were sunk into those securities in less than 3 years, was that Basel II, approved in June 2004, had the audacity of allowing banks to own these securities, or give loans against these securities, holding only 1.6% in equity, meaning being able to leverage their equity a lunacy of 62.5 times to 1.

Fanny Mae? Fanny Mae did not originate one single of these mortgages to the subprime sector. It also mainly got to these through the purchase of the AAA rated securities, when it could not resist the temptation.

No! If history is not told correctly how can we avoid making mistakes?

How do I know what happened? First I had warned over and over again about the risks of trusting so much the credit ratings, and when the crash came… I also took the examinations to be a certified real estate and mortgage broker in the state of Maryland, with the primary purpose of finding out what really happened.

And to hear stories told by small real estate agents being pressured into signing whatever lousy mortgage… because it did not matter… because what was important was that the interest rate was as high as possible and that the terms were as long as possible, since that would maximize the profits when selling it at low AAA rates… and because they would make bundle of commissions that would make them rich… and because “stop asking questions about what you cannot understand”… was something truly saddening.

No Sir, it is obvious that the chief of Wells Fargo cannot tell us the whole truth and nothing but the truth, as that would have to include spelling out that his regulators were stupid, but, therefore, the more the reasons we have to expect FT to do so.

Fasten your seatbelts… according to the roads´ safety ratings?

Sir, I refer to John Kay´s “How the health and safety culture can curb moral hazard” June 11.

In it Kay writes “Fannie Mae and Freddie Mac would never have assembled such bloated balance sheets had those who lent to the US state-run mortgage finance companies not believed… that the government would protect creditors from any default” Why? If the mortgages were awarded correctly why should they not?

And I could equally say “Had it not been for regulators allowing banks to hold only 1.6 percent in capital against securities if rated AAA to AA, an authorized leverage of 62.5 to 1, there would never ever have been such a demand for such securities which drove everyone crazy and caused mortgages to be awarded badly.

When you tell people to fasten their seatbelts that makes sense… when you tell people that they have to fasten their seatbelts depending on the safety rating on the road… you are getting into very shady problems.

Kay also writes “If creditors are protected from risk, the long-term effect will be more risk in the system” Indeed but what if that more risk in the system serves a purpose, like loans to small businesses and entrepreneurs who could help to avoid our unemployed youth to become a lost generation?

As is, with the risk-weighted capital requirements for banks, we are only getting much more risk into the banking system by means of higher leverages on what is believed to be absolutely safe, something which is precisely the stuff that bank crises are made off and seemingly for no good purpose at all.

PS. With respect to the safety culture it can be taken too far. Yesterday in a row boat, in a small lake, probably surrounded by hundreds of security officers, we saw several European leaders sitting there with life vests on. I bet that Winston Churchill would never ever have thought of putting a life west on in such circumstances, much less if haven his photo taken.

Let us avoid subtle muddle

Sir I have participated for many years in the debate on the regulations for banks coming out of Basel but, in order to have an even fuller understanding of what happened, I recently completed all the requirements to be a mortgage loan officer and a real-estate salesman in the state of Maryland. From what I have been able to gather Clive Crook, and many with him, is wrong when he slips by some questions that seem to attribute much of the subprime crisis to Fannie Mae and Freddie Mac, “A thin outline of regulatory reform” June 22.

There might be other real problems with these “government sponsored entities” but the subprime avalanche was created by mortgage originators that managed to channel unbelievably lousy awarded mortgages into Wall Street created securities which had managed to hustle up AAA credit ratings, so much that even Fannie Mae and Freddie Mac fell into the trap of buying up some of this securities, as investors.

There might be other real problems with these “government sponsored entities” and there is a lot of pent up criticism of these by conservatives, and much of it might be valid, but creating regulatory reform in hard times like this is not made easier by subtle muddle being thrown into the debate.

In his article Clive Crook also asks “what would better regulation of the [credit rating] agencies look like? To this I would have to reply by asking? Why would we need better regulation that could make the credit rating agencies even more dangerous? Why do we not just take away the official powers they have had since only June 2004?

The regulatory innovations are the ones to blame, not the financial.

Ben Bernanke in his most recent speech, April 17, 2009 said “Where does financial innovation come from? In the United States in recent decades, three particularly important sources of innovation have been financial deregulation, public policies toward credit markets, and broader technological change. I'll talk briefly about each of these sources.”

As for the public policies Bernanke mentions the Community Reinvestment Act of 1977 (CRA) and the government-sponsored enterprises, Fannie Mae and Freddie Mac. Nowhere does Bernanke mention the greatest source for the financial innovations that proved disastrous, namely the regulatory innovations that were put in place during the very last decade. Could it be because he also is among the ones to blame?

The regulators in Basel innovated as regulators never innovated before, and thought they could control for default risk, and therefore allowed incredible leverages as long as the default risks of borrowers were perceived as low or non-existing by the official risk sentries the credit rating agencies. After that the regulators being so sure about the value of their innovations went to sleep… but that is of course nothing new or innovative.

At the end of the day the simple truth is that the costs of regulatory innovations far exceeded the costs of financial innovations, and that the benefit from financial innovations far exceeded the benefits from regulatory innovations. Try to live with it FT!

There is a huge difference between poor and insolvent

Sir in “The year the god of finance failed” December 27 you mention as an example of government patronage “the effort to promote home ownership among the insolvent.” That is plainly wrong. Too much importance has indeed been assigned to home-ownership, in general, like the tax deductibility of interest paid on mortgages; and much of those efforts have been destined to help the poor, but no one has on purpose given assistance to the insolvent.

There is a branch of liberal radicalism on the web and that in their opposition to any sort of government intervention try to place the responsibility for this crisis fully on the shoulders of Fannie Mae and alike. The real truth is though that more than loans to insolvent borrowers most of the lousily awarded mortgages to the subprime sector were part of the production of attractive alternatives to investors that capitalized on too easily obtainable triple-A ratings.