And again, Big Blunder was kept under the table

Except for when fraud was present, bank crises have always resulted from excessive lending to what was perceived as absolutely not risky. There were never too large bank exposures to what was originally perceived as risky. 

Even so bank regulators decided to favor what was perceived as not-risky, and which was therefore already so much favored by banks, by means of allowing banks to hold extraordinarily little capital against these safe assets, and which allowed them to leverage more their equity. 

And as a natural consequence of favoring the not-risky, they imposed a de-facto regulatory tax on the risky, those already being taxed by banks precisely on account of being perceived as risky. 

And this extraordinary regulatory mistake, the greatest intellectual blunder I know of, plus the various responses to the current crisis, among others ignoring Big Blunder, has caused the most monstrously obese bank exposures to what is officially perceived as not risky and, in relative terms, truly anorexic exposures to what is perceived as risky, like to small businesses and entrepreneurs. 

And from the looks of it, unless there are immediate regulatory changes, all our banks seem doomed to end up gasping for profits and capital on the last officially perceived safe beaches, probably US Treasury and Bundesbank. 

I had bad feelings about it all quite early. In November 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world” And little did I know that the regulators were creating the AAA-bomb that detonated in mid-2007. 

And over the years I have written more than a hundred letters about this regulatory mistake to Martin Wolf, the influential Financial Times’ chief economics commentator; so many that he has accused me, quite rightly perhaps, of being a monothematic bore. 

And this is why I feel sad, for all of us, when, five years into the crisis, I read about Mr. Wolf enjoying lunch in Paris (a “perfectly pink” foie de veau), in the company of Jean-Claude Trichet, recently the chair of the oversight body of the Basel Committee on Banking Supervision, and still blithely ignoring Big Blunder. 

Or, in a mutual admiration club context, perhaps it is not comme il faut to speak about mistakes. If so, how sad silly club rules trump truths. Talk about a not- so-brilliant “unités brillantes.”

Jean Claude Trichet (and Mario Draghi) should not to be condoned by FT

Sir, you hold that “Trichet leaves Europe in his debt” October 8, as the responsibility for “reckless bank lending”, “rests largely with national politicians and policymakers”, and I must most firmly disagree. 

Jean Claude Trichet, as the President of the European Central Bank, must have been much more aware than the politicians of the existence of the outrageous bank regulations which allowed European banks to leverage 62.5 to 1 and more their equity when lending to almost any sovereign in Europe or investing in triple A rated securities… and he should be held accountable for that, something which equally applies to the incoming president of ECB Mario Draghi. 

If you harbor any doubts about what I am saying, just go back to the hundreds of articles between 2008 and 2010 where your own reporters spoke of the banks having reasonable leverage ratios, completely fooled by the zero and 20 percent risk-weights applied by regulators and that was hiding humongous risky bank exposures.

God help us, our bank regulators have really been taken for a ride!

Sir, Brooke Masters in “Regulators agree extra bank capital protection” June 27, reports that now the “global systemic important financial institutions”, G-SIFIs, have convinced the bank regulators that, for a mere 1 to 2.5 percent additional capital, to be paid in easy installments until 2019, and to be applied on risk-weighted assets, to formally award them the franchise of “Too big-to-fail”. What a sad day… for us and for all those other banks that at this moment have been deemed “global systemic irrelevant financial institutions”

And let us calculate. Since the risk weights for investments in private triple-A rated securities are still 20 percent that would dilute the maximum basic capital requirement of 9 percent to signify only a mere 1.8 percent and so the “too big to fail banks” could still leverage themselves 55 times to one, when doing that kind of business… and not to speak of what they could leverage when lending to some sovereigns with a zero risk weight. God help us, our bank regulators have really been taken for a ride!

And Jean-Claude Trichet, European Central Bank President, stepping down as chairman of the Basel overseers group is quoted saying “The agreement reached today will help address the negative externalities and moral hazard posed by global systemically important banks”, Sincerely from a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.

Jean-Claude Trichet sooths his own nerves.

Sir I feel a bit bad about Jean-Claude Trichet, the president of the European Central Bank, having to go out and affirm that he is a good and responsible parent, “Europe has mapped its monetary exit” September 4. Somehow one gets a feeling he is whistling in the dark so as to sooth his own nerves. Of course he should have an exit strategy for the current financial measures that looks to deliver price stability, and of course he should be willing to apply it, at least a priori, but both we and he know that this is just the beginning, since in any disciplinary approach a lot will depend on the children’s response.

Do you allow Mr. Trichet to get away with it?

Sir if a president of the European Central Bank can now get away with blaming the investors for the crisis as “they put full faith in the ability of rating agencies to draw up risk assessments” like Jean-Claude Trichet does in “Macroeconomic policy is essential to stability” November 13, then Europe has a bigger problem than what I thought possible.

Either Mr. Trichet is shamelessly ignoring the role of the central bankers and the bank regulators, thru the Basel Committee, played in empowering the credit rating agencies; by naming these to have their ratings decide how much capital the banks should have, or, if he does not know that, so much the worse. At least Greenspan admitted some responsibility.

Central Bankers and regulators themselves trusted the credit rating agencies too much as their sentries for the risk-watch, while they went to sleep. To have one of the recently awakened sleeping beauties advice us on what has to be corrected, seems a bit dangerous, to say the least.