Without the endorsement by regulators, banks would never have leveraged their equity 60 times to 1 with any asset.

Sir, Gary Silverman writes: “exempting the derivatives known as credit default swaps from more rigorous federal regulation…[was] one of the biggest mistake leading to the financial crisis”, “Why it is wrong to forget Lehman’s fall” September 20.

That is not so. Again, for the umpteenth time, I will explain prime cause of the financial crisis, namely the capital requirements for banks, and this by using the examples of Lehman Brothers, AIG and Greece.

The regulators in June 2004, with Basel II, decided that against AAA rated private sector assets, and against any sovereign rated as Greece was until November 2009, banks needed to hold only 1.6 percent in capital, meaning banks could leverage their equity with those assets over 60 times to 1. In comparison, when holding “risky” assets like loans to entrepreneurs and SMEs, banks were only allowed to leverage 12 times to 1. 

On April 28, 2004 the SEC decided that what was good for the Basel Committee was good enough for them, and so allowed Lehman to leverage over 60 times to 1 with AAA rated securities guaranteed with mortgages to the subprime sector… Since Europe were allowing their banks to do the same… the demand for these AAA securities became so huge that it overpowered all the quality controls in their manufacturing and packaging process… and Bang!

If AAA rated AIG guaranteed an asset, banks could also dramatically reduce the capital they needed to hold against that assets, and this overwhelmed AIG’s capacity to resist selling “very profitable” loan default guarantees… and Bang!

And Greece was of coursed offered loans in such amounts, and in such generous terms, so that its governments could not resist the temptations… and Bang!

As can be seen the above has nothing to do with deregulation, or with exempting anything from rigorous federal regulation, and all to do with imposing extremely bad and distorting regulations. On their own, and without the direct endorsement of regulators, banks would never ever have dreamt of leveraging their equity 60 times or more, with any asset… no matter how safe it looked.

If we are not going to spell out the real reasons why Lehman Brothers fell, then we better all forget Lehman’s fall.

PS. Here are 7 questions US Congressmen and Governors should ask bank regulators.

@PerKurowski

American Founding Fathers never suspected bank regulatory power to be delegated or outsourced to a Committee in Basel.

Sir, I refer to Gary Silverman’s “Wasting Dimon’s time is the way we do things” January 17.

With respect to the complaints of Dimon about having to cope with too many regulators, Silverman deems this to be “as American as apple pie”; argues that the founders “believed the survival of a popular government depended on keeping any particular faction from growing too powerful”; and quotes James Madison with: “The constant aim, is to divide and arrange the several offices in such a manner as that each may be a check on the other”.

So is the reason why they delegated or outsourced so much of the American bank regulatory discussions and powers into a Basel Committee for Banking Supervision, that some wanted to escape from such checking-on-each-other?

I say this because frankly, the credit risk weighted equity requirements for banks concocted by the Basel Committee, and which so much favors the bank borrowings of the sovereign and the AAArisktocracy, over the bank borrowings of its “risky” not-rated citizens… in the home of the brave seems to be as un-American as can be.

Should the founding fathers have been more aware of this possibility and been more explicit in prohibiting it?

PS. The day SEC delegated to the Basel Committee

Other related links:

http://subprimeregulations.blogspot.com/2010/04/please-explain.html

http://subprimeregulations.blogspot.com/2013/11/have-risk-weights-of-current-bank.html

http://subprimeregulations.blogspot.com/2012/07/complaint-i-presented-to-consumer.html

As oaths come, a bank regulators´ is much more important than a bankers´.

Sir, Gary Silverman refers to the possibility of bankers, as masters of the universe, having to take an oath of office, “A cynic´s case for the bankers´ oath” August 1.

It could not hurt but, long before that it is more important that bank regulators take one… they are after all public servants… at least in concept.

What could be included in that oath? Perhaps the following could at least be a good start.

“I swear that regulating I will never forget banks have a purpose that goes way beyond guaranteeing their existence. In this respect I accept that helping banks to fail expeditiously, before they grow too large, is part of my responsibilities. I also swear that I will not believe myself to be a master of the universe, and for instance distort the allocation of bank credit through the use of credit risk weights that only very partially reflect the purpose of banks.

I also swear I will remember that all major bank crises have always resulted from excessive exposures to what was erroneously perceived as absolutely safe, so as to never confuse my own ex ante monsters with real ex post dangers”

121 words… too much? Then perhaps at this time, with lack of jobs menacing our children perhaps just having them quote John Augustus Shedd, 1850-1926, would do. “A ship in harbor is safe, but that is not what ships are for”

Banks, thanks to regulators, only excavate the successes of yesterday, while not seeding those of the future

Sir, Gary Silverman writes "On one of its biggest nights of the year, the music industry could think of nothing better to do than recycle one of its dead in the form of a high-tech light show. The people who did it aren’t creators. They are excavators.", "Michael Jackson is good for bonds", May 23.

And it amazes me how a FT writer can come up with such an insightful statement looking at what is happening in the music industry, without realizing that that is precisely what has been ordered for our banks by their regulators, by means of their risk-weighted capital requirements.

So let me explain it this way. Currently banks are allowed much higher risk-adjusted returns on equity when excavating "the safe", who many were "the risky" of the past, than seeding the risky, those who could become the safe of the future. Capisce!