FT journalists. Is this really the legacy you want to leave to your children?

Not daring to ask bank regulators to explain why they've decided that what’s ex ante perceived as risky, is more dangerous ex post to our bank systems than what’s ex ante is perceived as safe

The Financial Times’ FT’s lack of curiosity is astonishing

Sir, to this date I have written you 50 letters questioning the wisdom of those bank regulators who assigned a risk weight of only 20% to what is AAA rated, and of 150% to what is below BB- rated.

It is precisely what’s perceived as very safe, AAA rated, that could cause the buildup of dangerous exposures that could result in major bank crisis if those perceptions turn out to be wrong; and it is precisely what’s perceived as very risky, below BB-, that is the most innocuous to our bank systems, since banks would never ever create any larger exposures to borrowers or investors so rated.

One could have thought that Financial Times would be interested in exploring and analyzing the arguments regulators could have been using to come up with such strange risk-weights.

But Sir you are clearly not curious at all about this. Why? Is not your motto "Without fear and without favor"?

PS. I have tried to make sense out of it all but failed

@PerKurowski

Should we not also be concerned with the behaviourism of the Financial Times? I mean FT having such a delicate ego?

Before we need to concern ourselves with the behaviourism and the market, which is quite some nonsense, unless we want to ordain the markets to behave in some special way, we should concerns ourselves with those whose behaviourism could most distort the markets… like the bank regulators.

So, what behaviourism could cause them to regulate banks without defining the purpose of the banks, more than that of being safe mattresses to stash away the cash?

So, what behaviorism could cause them to believe that what bankers perceived as risky was more dangerous than what bankers perceived as safe?

So, what behaviourism could cause them to believe they needed to tilt so much in favor of the public sector so as to assign the sovereign a risk weight of zero percent and to us, We the People, one of 100%?

So, what behaviourism could cause them to believe the world becoming a better place with the banks avoiding taking the risks of lending, like for instance to SMEs and entrepreneurs?

Etc., etc. 

Why do I ask? Because I have sent FT thousands of letters on this issue, and which they have 99.9% ignored, because, though they might say otherwise, they are not without fear nor without favour.

FT, when will you stop lying about “a light-touch oversight of financial markets before the 2008 crash”?

Sir, you write Brussels played no part…in the light-touch oversight of financial markets before the 2008 crash” “Pooled sovereignty has advanced national goals” June 13.

When are you going to stop advancing that notion of a light-touch oversight of financial markets?

In 1988, with the Basel Accord, Basel I, the regulators decided that for the purpose of calculating the risk weighted capital requirements for banks, the risk weight of some friendly sovereigns was zero percent, while the risk weight for supposedly equally friendly citizens, was 100 percent.

With that they started the most heavy-handed statist interventions of financial markets ever.

Banks needed no capital when lending to the infallible sovereign, but 8 percent when lending to citizens.

Banks could leverage equity infinitely when lending to the infallible sovereign, but only 12.5 to 1 when lending to the citizens, those from which the sovereign derives all its strength.

And then, with Basel II, in 2004, the regulators topped up their heavy-handedness by declaring that the risk weights for a private rated AAA to AA was 20 percent while the risk weight of a speculative and worse below BB- rated, one of those banks would never ever dream of building up excessive exposures to, was 150 percent.

And things have not changed significantly. In fact, on the margin, the intervention has become worse.

Was it a light-touch intervention that caused the 2008 crisis to result from excessive exposures to assets allowed being held, against specially little capital? Like with AAA rated securities, or with loans to sovereigns as Greece! No way José!

So FT, when are you to stop lying? It is sure way over time for it. 

@PerKurowski ©

Financial Times - FT: Sir, on the causes of the crisis of Greece, how about some journalistic honesty from yourself?

Sir, you write that “Ms Merkel has allowed the entire euro crisis to be portrayed within Germany as a fiscal mess caused by profligate peripheral countries. This analysis ignores the role of the financial bubble fuelled by banks — including Germany’s”. And then you title it as “The need for honesty in the crisis over Greece”, August 22.

But this Merkel analysis, and your analysis, ignores what I have been writing to you about in over a hundred of letters over the last decade, namely that the financial bubble fuelled by banks, was a direct result of Basel’s credit-risk weighted capital requirements for banks.

You know, because I do not believe you dumb, that had banks needed to hold the same capital they are required to hold when lending to any European SME or entrepreneur, 8 percent, instead of the 1.6 percent or less allowed by regulators when they lent to the Greek government, this Greek tragedy would not have resulted, no matter how much Greece might have manipulated its financial data.

You even published a letter of mine I wrote in November 2004 in which I asked: “how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

So may I suggest it is high time for the Financial Times to also display some honesty over the causes of the crisis in Greece. Who are you covering up for? Is it perhaps for some too delicate big egos? Is yours really ethical journalism? Dare to live up to your motto!

http://teawithft.blogspot.com/search/label/Greece

@PerKurowski

FT, McKinsey should it not be: Piketty “Winner of the 2014 Book Business of the Year Award”?

Sir, you, FT states that: “The prize will go to the book that is judged to have provided the most compelling and enjoyable insight into modern business issues.”

Sir, even though during 15 years I was a columnist at Venezuela’s most important paper, until I was expelled by the new pro-government owners, I never considered myself to be a journalist, so I would not know what to do as an FT journalist, if seeing FT approving of Thomas Piketty’s “Capital in the Twenty-First Century” as the “Winner of the 2014 Business Book of the Year Award”.

But, as a consultant, and if a consultant of McKinsey & Company, I would feel much ashamed and would most certainly resign, immediately.

Of course unless all was just a monumental typo and what was really intended was: “Winner of the 2014 Book Business of the Year Award”… with that price I could agree since it must have made Thomas Piketty a quite rich man.

PS. Enjoyable? From what I hear, in number of pages not read by its buyers, this book might go for a Guinness record... hardly something compatible with enjoyable.

A very simple question to all of you there at FT

If you were a bank regulator, which rating would you use to set the capital requirements for banks? That of a borrower defaulting or that of a borrower’s default causing a banks default? I ask, simply because they are clearly not the same.

After taxing the social capital wealth represented by Facebook followers, do we then tax FT’s social capital?

Sir, I am pleasantly surprised you dared to publish Hans Byström’s creative and provocative proposal of taxing the social capital wealth represented by the followers on Facebook, “Tax the socially wealthy too!” April 5. I mean from that there is very little distance to taxing the immense social capital wealth of the Financial Times, with its influential editor and columnists, and its many readers.

If that tax on FT could be used, for instance to increase the voice of a smalltime blogger like me, that would definitely help to combat what at least I perceive to be a monumental unjust inequity. 

That said, and even if he comes from my own Alma Mater, Lund University in Sweden, I must argue with Professor Byström. What he holds to be social capital, number of followers, is just sort of gross earnings. Since all followers at Facebook do not necessarily have an equity interest in your well being, they might just as well represent liabilities, the final net social capital from being followed in Facebook can in fact also be enormously negative. A tax credit?

Should I have been more careful my comments were more palatable to FT’s senior egos?

Sir, in “BoE’s self-criticism” November 11, you quote Bill Winters “gently” saying “[while junior staff] are often willing to challenge their superiors… there appears to be some tendency for them to filter recommendations in such a way as to maximize the likelihood that senior staff will find the recommendation palatable”. 

What is your own take on that? I myself have sent many recommendations and comments to you over the years and though I believe many of these were important different and should not have been ignored, but they were. Did I give too much credence to your motto “Without fear and without favour”? Should I have been more careful my letters and comments were more palatable to your senior egos and their friends? Do the egos have the right of blackballing? 

I mean should not FT’s commitment to truth be the same as the Bank of England’s? I mean, as a specialized media with a lot of readers, is not FT’s voice on critical issues as important or even more than BoE’s?

An essential part of the narrative on the eurozone crisis is withheld, among others, by FT

Sir, Wolfgang Münchau, in “Why Weidmann is winning the debate on policy”, September 10, writes the following: “The German public has bought into the narrative that the crisis was caused by profligate southern European and consumers who had wasted the first decade of their membership of the eurozone indulging in a debt financed housing and consumption boom. It is a false morality tale, mostly devoid of economic reasoning. But this has not stopped it from becoming the dominant narrative. Not enough politicians, certainly not enough journalists and commentators are pushing against this narrative” 

And I ask again why is it that FT resists to present my argument of that this crisis was doomed by the regulators, some of them Germans, to happen? The fact is that for instance a German bank, was allowed to lend to a Greece holding only 1.6 percent in capital, making it possible for it to leverage its equity 62.5 to 1 with Greece´s risk-adjusted returns, while, when lending to a German small business or entrepreneur, it was required to hold 8 percent in capital, meaning it could only leverage its equity with those risk-adjusted returns, 12.5 to 1. If you do not think that this fact is an essential part of the real narrative of what has gone wrong, I just do not understand you. 

(Would it really hurt the FT´s ego so much acknowledging that little me, who has written hundreds of letters to you about it, was correct, and so that you prefer to shut up about it? Poor Europe... with friends like that)

FT, do the “not-risky” need additional help accessing bank credit and the “risky” need to be hindered more?

Sir, do you really think that giving those perceived as “not risky”, like those rated AAA, regulatory assistance in their access to bank credit, and which of course translates into hindering the same more for those perceived as risky, like a small business, is an acceptable and worthy distortion of the market? 

Apparently you do, that is unless you have not yet been able to understand, what capital requirements for banks based on perceived risk does.

A prominent and important FT journalist interviewed invisibly on my empty chair?

Sir, I recently sat down a prominent and important bank regulator invisible on an empty chair and made him some questions. And I am sort toying with the idea of now inviting a prominent and important FT journalist, to do the same. I tell you why. 

Over the last decade I have been writing literally hundreds of letters (over 700) to the Financial Times referring to the fact that the current capital requirements for banks, based on perceived risks, constitute a formidable and dangerous source of distortion of the markets, to such an extent that it can even be blamed for the current crisis. 

Why distortion? Setting the risk-weights which determine the capital requirements for the banks, in a quite arbitrary way, means that the regulator is, in a very non-transparent way, intruding in how the market evaluates risks. That they for that purpose use the same risk perceptions which are cleared for by not blinds bankers makes it so much worse, as that only guarantees that the banks will overdose on the perceptions of risk. 

Why dangerous? Because by giving the banks additional incentives to search out the “not-risky”, that will cause a dangerous overpopulation of the safe-havens. And also because by giving the banks additional incentives to stay away from what is officially perceived as “risky”, the banks will not perform adequately their role of allocating capital in the markets. 

But you the Editor, and the journalists in FT, have for all practical purposes been totally silent about this. I have been told by one of you that I am just too monothematic, which if you look at all my letters is really not true, but, even if so, that would be something much less serious than your monothematic silence. 

When I hear one of you described as an “uncompromisingly pro-market columnist”, but he is still incapable of understanding and much less defending the market against this really unauthorized regulatory intrusion, I do not know whether to cry, or whether to believe that he is just too dumb to get it, or whether he has his own agenda.

Yes, occasionally, someone in FT refers to some of my arguments, but then, always in a very partial way. 

Imagine what could have happened to bank regulations, Basel III and other, if FT had helped to give me voice, earlier, in time. Can you imagine how much buildup of dangerous exposures to what was perceived as absolutely safe could have been avoided? Can you imagine how much better use we could have given to that scarce fiscal and monetary policy space that is being consumed so fast? 

Why was I and my arguments censored this much by a paper that so bravely announces in its motto "Without fear and without favor"? 

The Western World is in a freefall, and no one is discussing the reason why

Simplified, if the cost of funds for a German bank was 2 percent; if it wanted to earn a 1.5 percent margin; if the cost of analyzing the credit worthiness of a German small business was 1 percent; and if the risk that the borrower would default was perceived as 3 percent, then the German bank would charge the German small business an interest of 7.5 percent. 

And if the cost of funds for a German bank was the same 2 percent; if it wanted to earn the same 1.5 percent margin; if the cost of analyzing the credit worthiness of Greece was zero, because that is paid by Greece to the credit rating agencies to do; and if the risk that Greece would default was perceived as 1 percent, then the German bank would charge Greece an interest of 4.5 percent. 

If the German bank was required to have about 8 percent in capital against any loan, and could therefore leverage its capital about 12 times, the bank could expect to earn 18 percent on its capital when lending to a German small business or when lending to Greece. 

But that was before the bank regulators of the Basel Committee intervened and messed it all up. 

These regulators, ignoring the empirical evidence that bank crisis never occur because of excessive exposures to what was considered risky but only because of excessive exposures to what was considered as absolutely not risky, with their Basel II, told the banks “You German bank, if you lend to a “risky” German small business you need 8 percent in capital, but if you lend to an infallible Greece you only need to have 1.6 percent in capital”. 

And because that 1.6 percent allowed for a leverage of more than 60 times when lending to Greece, the German bank, though it still could earn a decent 18 percent on its capital when lending to a German small business, suddenly could expect to earn 90 percent on its capital when lending to Greece. Hell, the German Bank could even afford to lower the interest rate it charged Greece and still earn more when lending to Greece than when lending to a German small business. 

And of course the German bank, as did all banks in the Western world, started running to the officially perceived safe-havens of Greece, Italy, Spain, triple-A rated securities and others, where they could earn much more; and of course the governments of the safe havens could not resist the temptations of cheap and abundant loans, and all these safe-havens became dangerously overcrowded… while the small German business found it harder and much more expensive to access any bank credit… and while the too big to fail banks grew even bigger.

And, many years into a crisis that has the Western World in a freefall, this issue is not even discussed, and the same failed bank regulators are allowed to work on Basel III, using the same failed loony and distorting ex-ante perceived risk of default based capital requirement discrimination principle.

Hell, even the Financial Times has decided to ignore the hundreds of letter I sent them about it, and this even when they know they published two letters of mine that clearly warned about what was going to happen. In January 2003, “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” and, in October 2004, “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? 

Occupy Wall Street? No! Occupy Basel! (Perhaps occupy the Financial Times too!)

PS. This post was made before I realized that the reality was even so much worse because, instead of applying to Greece the 20% risk weights Basel II would have ordered EU authorities assigned Greece a 0% risk weights and so European banks, when lending to Greece did not have to hold any capital. How crazy is that?

PS. At the end of the day the EU authorities kept total silence about their mistake and blamed Greece for it all. No solidarity. What a Banana European Union.

The bank crisis and the Basel Committee banking regulations explained to a golfer

Once there was a golf Club with a somewhat narrow golf course and where, even though the members were very careful, sometimes the hooking or slicing of the golf balls into adjacent holes, caused some serious accidents.

The Club’s Board was ordered to find a solution. To that effect the elected members of the Board consulted with some Experts and asked for recommendations. The Experts told the Board “most of the slicing and hooking is the product of bad players and so, if you want to solve this problem, you need to get rid of them”. Knowing this idea would not be received with much enthusiasm, and could in fact pose a direct threat to their reelection as members of the Board, they all decided to immediately delegate the “how” to a Committee of Experts.

The Committee of Experts decided that they needed to appoint some Golf-Player Rating Agencies (GPRAs) to rate the real quality of the players and thereafter created a parallel handicap adjustment requirement that effectively eliminated the bad players… without these even noticing it. According to their ratings, the AAA rated players had their normal handicap increased by 5 strokes, while the players rated B- or worse had their normal handicaps officially reduced by 5 strokes.

It worked! Though, just initially… Since having to play with a very low handicap was pure hell for a bad player, most of the bad players rapidly decided to change clubs and, as a result, the Club gained immense recognition for having the best players and being the safest club in the country… and the Committee of Experts was wildly acclaimed for having true experts. We will never ever have more accidents in our Club… was the Board’s self congratulatory message at the year’s end… four years ago.

But life is life, even among golfers, even in a golf club… and so the membership of the Club started changing. For instance, many great golfing has-beens around the country were attracted by a system that so clearly could help to pro-cyclically prolong their golf-life, just like many never-able-to-be-good players were also attracted by the possibility of joining a club renowned for having exclusively good golf players… and so they all started to read up and converse with the GPRAs about what was necessary in order to be conveniently rated.

There was such an avalanche of enquiries that the GPRAs got confused and overworked and started to make mistakes… to such an extent that the Club rapidly became overcrowded with dubiously rated golf-players. This would, of course, not have meant anything in the old days, but, since everyone had been duly informed that the accidents had been forever eliminated and that therefore there was no need for being careful… the accident rate shot up and rapidly turned, three years ago, into a pandemic disaster that threatens even the survival of the Club… and aggravated by the fact that the beginners and the decent-bad players, those who really are the heart and soul and economical support of a golf club, want nothing to do with a club that has a handicap system that so harshly discriminates against them, and have therefore joined other clubs.

But, golfing friends, the saddest part of this story is that since the logic of “getting rid of bad players and allowing only good players” sounds so very attractive and so very logical, the Board has not even today understood what they did wrong and so they insist on using exactly the same Committee of Experts to come up with better solutions. And the Committee of Experts is currently studying only refinements of their original handicap adjustment requirement formulas because, as “experts”, they cannot under any circumstances acknowledge that they were so fundamentally wrong.

And, unfortunately, the local media is not sufficiently "without fear and without favour" to dare to really fundamentally question the wisdom of the local Club´s Board or of the Committee of Experts.

I strongly object to Basel I, II and III.

Sir, I have written you hundreds of letters that reference my strong objections to the regulatory paradigms used by the Basel Committee and I know my arguments are not baseless… and you know that too. Can you at least once, for the record, publish these objections… or is there something that you want to silence? You are the Financial Times and so I should be able presume this topic should be of interest to you:

I strongly object what is basically the only pillar of bank regulations created by the Basel Committee in Basel I, II and III, namely having the capital requirements for banks to be based on perceived risk of default.

First: All systemic bank failures in history have occurred only as a result of excessive lending to what is perceived as not-risky, and never because of excessive lending to what is perceived as risky, which makes these capital requirements counterfactual.

Second: The market and the banks already discriminate against higher perceived risk by means of the risk-premiums imbedded in the interest rates, and so these capital requirements are just an extra layer of risk-aversion that hinders the banks to help the world to take the risks it needs in order to move forward.

Third: Since needing less capital when doing business with the “less risky” makes the profitability of bank business with the “less risky” to shoot up to the skies, this causes the banks to forget or discriminate against the “risky”, such as the small businesses and entrepreneurs on whom we depend so much for the future generation of jobs.

Ps. And the above does not even mention the problems of having empowered the credit rating agencies with a risk-information oligopoly.

Are the banks now to set their own capital requirements?

Sir on October 27, 2010, the Financial Stability Board FSB issued “Principles for Reducing Reliance on CRA Ratings” and by which they endorse a substantial part of the criticisms against current bank regulations and that I have been writing about in hundreds of letters to the Financial Times over the last years and which, for whatever reasons, since 2005, you decided you were better off ignoring.

In fact what FSB states is that the Basel Committee needs to go back to square one and start their regulatory process all over again, since most of what it has on the table is absolutely worthless. It will be interesting to see what the G20 ministers and others will interpret about what they are now supposed to do with Basel III.

What is not yet clear from the FSB statement is how the capital requirements of banks are now to be calculated, because even though it speaks over and over again that “banks should be expected to make their own credit assessments” and “should ensure that they have sufficient resources to manage the credit risk that they are exposed to”, we must assume they do not really mean that banks will from now on set their own capital requirements… if so… that would indeed be real, pure and unbridled de-regulation.

Why is not the existence of counterfactual bank regulations of interest to the Financial Times?

There is a very curious issue with current bank regulations and about which I have written hundreds of letters to the Financial Times but strangely enough, at least to me, they do not seem at all interested.

I am referring to the fact that since all financial bank crisis in history have resulted from excessive investment or lending to what is perceived as not risky, and no crisis has, naturally, ever occurred from excessive investment or lending to what is perceived as risky, the current only tool in the toolbox of the Basel Committee, higher capital requirements when risks are perceived as low and vice-versa is totally counterfactual.

In fact those capital requirements increased so dramatically the returns on equity for the banks when investing or lending to triple-A rated securities or clients that they stampeded after the triple-As, and went over a subprime cliff.

In fact those capital requirements discriminate so odiously against those perceived as of higher risk that they are making the access to bank finance much more difficult for the small businesses and entrepreneurs, precisely those clients whom banks most should help as they have little alternative access to capital, precisely those clients of banks on whom society so much depends for growth and job creation.

In fact the only truly invisible hand at work was that of the scheming banking regulators messing around with capital-requirement-risk-weights… under the table.

I ask don’t you agree with that what I describe is worthy of more commentaries? Why then is not a word of it reflected by the “Without fear and without favour” Financial Times?

Of course other media should also take it up but as you can see from this blog I have invested many efforts in having the Financial Times echoing my small and tiny though sometimes a bit noisy voice.

Most of the letters to FT I refer to you find in this blog under the label of "subprime banking regulations".

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!