Don’t help bank regulators get away from being held accountable for their mistakes by politicizing the issue.

Sir, Gillian Tett commenting on Ben Bernanke, Henry Paulson and Timothy Geithner comments on the 10-year anniversary of the Lehman Brothers collapse writes:“Critics on the right complain that markets have been hopelessly distorted by government meddling” “European banks still have post-crisis repairs to do” July 20.

Frankly, you do not have to be from “the right” to “complain that markets have been hopelessly distorted by government meddling”

In 1988 bank regulators, based the risk weighted capital requirements for banks they were introducing on the nonsense that what was perceived as risky was more dangerous to our bank system than what was perceived as safe. With that they dangerously distorted the allocation of credit to the economy… and caused the crisis.

Would the Lehman Brothers have suffered the same collapse had not the SEC authorized it in 2004 to follow Basel II rules, and it could therefore (just like the European banks) leverage 62.5 times with securities backed with subprime mortgages, if these counted with an AAA to AA rating issued by human fallible credit rating agencies. Of course no!

But here we are a decade later and this major flaw of current bank regulations is not even discussed. What especially excessive exposures to something perceived decreed or concocted as safe are banks in Europe, America and elsewhere building up only because of especially low capital requirements, and which will guarantee, sooner or later, especially large crises? That should be the concern.

But, come to think of it, it could be that Ben Bernanke, Henry Paulson, Timothy Geithner and Gillian Tett, still believe in the story the Basel Committee told them, perhaps because they want so much to believe that a fairy could make banks safe and still be able to serve the economy. 

@PerKurowski

Whose side are you really on FT?

Sir in “Paulson’s gamble”, April 1, you refer to “investor stupidity” without mentioning that the only fault or sin that probably most of these investors committed was to deposit too much trust in the credit risk surveyors appointed by the regulators. Is not the original stupidity the regulators? And the investor’s and yours only let yourselves be fooled by them?

What happens to the environment is indeed a risk that finance ministers should talk more about

Sir the finance ministers from the US the UK and Japan speak with one voice when in “Financial bridge from dirty to clean” February 8, they say that without a global investment framework built on market incentives the global deployment of clean energy technologies is going to be very difficult but they also note that not doing so will be very risky for us all.

Well this is exactly the sort of real societal risks that were ignored by financial regulators when they designed the minimum capital requirements for banks based on a very narrow definition of risk namely that of a default. If a default occurs because someone was trying to help the planet it would seem like something more acceptable to the society if there were no default but the bank was financing the purchase of a new car that will produce more carbon.

It is not that I am saying that banks should take stupid risks in environmental protection projects…but neither should finance ministers through their regulations create non-transparent subsidies for what just the credit rating agencies believe are low risk projects while ignoring all other risks faced by humanity.

If a bank lends a AAA corporate client a 100 dollars the bank need 1.6 dollars in capital if it lends to riskier below BB- reacted environmental project the bank needs 12 dollars in capital. Is this what the minister’s mean with market incentives?

Spanish sayings and subprime woes

Sir, there is a Spanish saying that goes “we were many and then granny gave birth”. It came to my mind when reading Michael Waldorf’s letter “What Paulson and others are concerned about is manipulation of the market” June 11, in reply to some articles in FT that put forward the unkind possibility that some hedge funds could be against “loan modifications” that help mortgage payers, since they have a vested interest in the defaults (a short position). I say this because the market manipulation here denounced by Waldorf, namely that some credit coverage sellers (a long position) are buying up defaulted mortgages at par in order to keep up the value of their portfolio, only indicates another factor to be added to the current messy confusion that surrounds the subprime-affair. Seems that while some do not mind increasing the number of homeless, others are more concerned that we would notice it. The much rumbling and mumbling we hear also reminds of another Spanish saying that says “when the river sounds it is because it brings stones”.

About financial trust and integrity

Sir, Henry Paulson is absolutely right when he says that “The key test of accurate financial reporting is trust” May 17, but he totally ignores the most fundamental origin of trust, which is being able to look someone in his eyes.

If something is needed now in terms of trust in the financial sector that would be to de-corporatize the auditing process, so as to allow us to find next to each auditing statement the name and photo of the responsible auditor, or the names of the jointly responsible auditor team, and who are all willing to be held accountable and responsible for what they say, and will not run and hide behind any anonymous corporate veil. When Paulson mentions that “our markets must retain the integrity” he seems to have forgotten that integrity is inherently an issue of personal responsibility, impossible to delegate.