Why should Goldman Sachs financing 1Malaysia Development Berhad (1MDB) be worse than it financing Venezuela’s Maduro’s regime?

David Crow and Laura Noonan in an FT The Big Read write, “Goldman is under increasing scrutiny over its role in underwriting $6.5bn of bond offerings for 1MDB in 2012 and 2013, a service for which it reaped a hefty $600m in fees and trading gains. After the money was raised, $2.7bn was allegedly siphoned off by the Malaysian financier Jho Low, who is accused of masterminding the fraud, to pay for a lavish lifestyle and to bribe Malaysian officials.” “Tim Leissner: Goldman Sachs banker at the heart of 1MDB scandal” December 24.

Sir, why should this operation be considered so worse than when, in May 2017, Goldman Sachs, Lloyd Blankfein approved to hand over about US$800 million to the notoriously corrupt, criminal and human rights violating government of Venezuela’s Maduro?

GS, in exchange for their money obtained $2.8billion Venezuelan bonds paying a 12.75% interest rate, which if repaid would provide GS with about a 42% yearly return, 2.000% more than what US pays. Is that not bribing foreign government officials and should therefore perhaps fall under the Foreign Corrupt Practices Act of 1977?

With respect to money being siphoned off, if anyone in GS doubts that much of that loan did not go the same route, then the days of GS are soon over. Such naiveté does not survive in the world of finance.

We are now in December 2018, and still not the slightest sign of a "Sorry Venezuelans" from Lloyd Blankfein. An elite, aware of its true responsibilities, would be shaming Lloyd Blankfein… and surely not inviting him to their homes. 

@PerKurowski

If elites do not socially sanction those they should sanction, there’ll be no society left to sanction.

Sir, Laura Noonan writes “Goldman Sachs is considering a special surveillance programme to monitor higher-risk employees in far-flung locations so the bank can demonstrate that “lessons have been learnt” from the 1MDB scandal” “Goldman eyes monitoring of high-risk staff after 1MDB”, December 3.

Great, but they should also monitor high-risk bosses in home office locations, like Mr. Lloyd Blankfein. And I here refer to that lending by him and Goldman Sachs to a notoriously inept, notoriously corrupt, notoriously human rights violating regime of Venezuela’s Maduro.

Do I want Goldman Sachs’ Lloyd Blankfein to be punished by the justice? No! I much prefer the elite; universities, media among others should do that, shaming him, by socially sanctioning him, by for instance not inviting him to anything.

Sir, do not give Lloyd Blankfein, or an unrepentant Goldman Sachs, one inch more of space in the Financial Times, they do not deserve it.

PS. To this date Lloyd Blankfein has not been able to find in himself to utter the slightest “I’m sorry Venezuelans”.

PS. But perhaps justice might also have a bone to pick with Blankfein.

@PerKurowski

Any banker, like Goldman Sachs’ Lloyd Blankfein, who does not ask the borrower “What are you going to use the money for?” should not be allowed to be a banker.

Sir, David Crow and Laura Noonan, with respect to the Malaysian financier-cum-socialite known as Jho Low scandal that I know nothing about write, “Goldman has always maintained that it did not know how the proceeds of the bond offering were spent” “Blankfein revelation piles pressure on Goldman”

I guess just like Lloyd Blankfein was not interested in how that notoriously human rights violating regime of Maduro’s in Venezuela was going to use the funds Goldman Sachs provided it, because all he cared about was whether the risk premiums were juicy enough to support his bonus aspirations.

Sir, again, corrupting not some government official but the regime itself, by offering fresh money in return for the possibility of huge returns, sounds to me like something quite punishable by US’s Foreign Corrupt Practices Act (FCPA).

We are now in November 2018, and Mr Blankfein has not found it within himself to yet utter the smallest “Venezuelans, I am so sorry”

Sir, what kind of elite do we have when a Lloyd Blankfein still gets invited to all kind of academic and social engagements? If the elite gives up on holding their own accountable, it is lost. 

@PerKurowski

For some, Lloyd Blankfein will be not kindly remembered and one of those who financed Venezuela’s Nicolas Maduro

Sir, Robert Armstrong, Laura Noonan and Arash Massoudi write that “Mr Blankfein may be remembered as the last leader of a Goldman Sachs that ruled Wall Street and the first leader of a sedate provider of financial services” “Blankfein’s legacy still up for grabs at Goldman” July 17.

Many, or at least some of us Venezuelans, will with fury remember Goldman Sachs’ Lloyd Blankfein, as one that helped finance a regime that publicly and notoriously violates human rights.

I just wonder if the Britain of Financial Times had had a regime like that of Nicolas Maduro, what is it would be saying of the legacy of someone who had helped to finance it? “Doing God’s work”? Well definitely not my God’s Sir.

Or is it too political incorrect for the elites to hold one like Lloyd Blankfein accountable for his doings? If so, what truly poor elites the world has to count on.

@PerKurowski

Some might see Donald Trump’s bankruptcies as a weakness, but others, especially in America, as a symbol of go-get-it strength.

Laura Noonan, Patrick Jenkins and Olaf Storbeck write: “Deutsche Bank has been one of Mr Trump’s longest-standing and most supportive lenders, extending him hundreds of millions of dollars in credit for real estate deals and other ventures despite his history of bankruptcies.” “Deutsche Bank hands over Trump files to Mueller probe of Russian influence” December 6.

Sir, the way it is phrased might reflect some profound cultural differences. Is it really “despite Trump’s history of bankruptcies”, or could it precisely because of it, that Deutsche Bank could be interested, as that would indicate business opportunities?

Let me quote the following from “The Wisdom of Finance” by Mihir A. Desai, 2017, Chapter Seven “Failing Forward”:

“Until 1800 [in America], borrowers who could not service their debts were moral failures. As a consequence, imprisonment was common for debtors…

Failure would be redefined away from moral failing or a sin and toward a more natural consequence of risk taking with the 1800 Bankruptcy Act. [The first bankruptcy law]… the new republic desperately needed risk takers, and punishing them so severely froze commerce in the late 1790. If the young country was to flourish, failure had to be redefined, and the moral stigma associated with it had to be lessened.”

Sir, after current regulators, with their risk weighted capital requirements, for soon three decades now, have exacerbated the normal risk aversion of our bankers… I would argue we currently are also in desperate need of risk takers. God make us daring!

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html 

PS. That 1800 law was to be repealed in 1803 and followed by many other laws. The last major one the Bankruptcy Reform Act of 1978

@PerKurowski

Regulatory easing, if done right, could make risk managers of banks care about real risks, not just about capital reductions.

Sir, Laura Noonan reports that risk models have more uses than assessing capital levels “Regulatory easing will not kill off the model makers” March 13.

What kinds of easing? Because of the risk weighted capital requirements for banks, risk managers have lately been operating with one single mandate… namely that of reducing the capital needed, so as to help maximize the allowed leverage, so as to be able to produce truly large risk adjusted returns on equity.

In essence that has signified that banks, if compared to Volkswagen, have been able to control their own emissions, with the emission managers having been instructed to maximize these. Crazy? Yes!

So if the easing signifies the elimination of different capital requirements for banks, then risk managers could begin to serve a real purpose instead of a regulatory one.

Then SMEs and entrepreneurs would be able to compete on level ground for access to bank credit with sovereigns, AAA rated or residential mortgages, as they have been able to do during around 600 years, before the Basel Committee messed it all up for them. 

But Sir, I am not sure that is the kind of regulatory easing banks are after.

@PerKurowski

Shame on you bank consultants! For a quick buck, you sacrifice the future of our children and grandchildren

Sir, Laura Noonan reports: “Post-crisis consultancy spending soars to $200bn”, December 7.

Clearly that must be the cause why otherwise brilliant consultants, like those of the high powered consultancy firm McKinsey & Company, keep absolutely mum on the fact that regulators, with their risk weighted capital requirements for banks, are dangerously distorting the allocation of bank credit to the real economy.

With it, banks no longer finance the “riskier” future but only keep to refinancing the “safer” present and past.

With it, banks finance basements where jobless kids can live with their parents, but not the SMEs and entrepreneurs who could create the jobs the kids need in order for them to have a chance to become responsible parents too.

Since those bank consultants must also have children and grandchildren to who they owe great responsibility, I can only say: Shame on you!

@PerKurowski

Using Basel Committee’s standardized risk weights could also be worse than using banks' internal risk models.

Sir I refer to Caroline Binham’s, Laura Noonan’s and Jim Brunsden’s “Basel fails to agree key risk measures” December 1.

Currently: The lower the risk - the lower the capital requirement - the higher the leverage - and so the higher the risk adjusted return on equity. Therefore it is clear that, as long as bank shareholders and bank creditors do not own 100% of the skin in the game, you cannot leave it in the hands of banks to use their own internal risk models. The conflict of interest with these is too much to handle for even the most disciplined banker. You would not like your kids to decide the nutritional values of their diets…would you?

But Sir, Basel II’s standardized risk weights makes it clear you can much less place the responsibility in hands of regulators who have no idea about what they are doing. Just an example: for an asset rated AAA to AA they assigned a 20% risk weight, while for what’s rated below BB-, something which would therefore never constitute a major danger for banks, that received a 150% risk weight.

And regulators assigning 0% risk weight to sovereigns, and 100% to We the People, more than regulators, seem to be simple statism activists.

@PerKurowski

I would not shed tears for the Basel Committee for Banking Supervision’s demise. Neither would millions of SMEs.

Sir, Caroline Binham and Jim Brunsden, with help of Laura Noonan, report that the Basel Committee for Banking Supervision is introducing reforms that include a contentious “output floor” that would limit banks’ ability to use their own internal models to assess risk. “In many cases this will effectively raise the amount of capital that banks have to hold” “Basel group warns of call for lenders to ramp up capital” October 8.

What do they mean with “in many cases”? How can anyone believe all banks authorized to use internal models do not use these to minimize the capital they need to hold …so that they can maximize their returns on equity?

Sadly, what is really contentious with all this, is how on earth we ended up with such infantile regulators.

Anyhow the authors report these reforms are creating some discord between the US and Europe; to such an extent it “tests the viability and purpose of the Basel group, founded 41 years ago to harmonise banking rules around the world.”

Sir, if that would signify the end of the Basel Committee, you know I will not shed a tear. Neither would the millions of SMEs and entrepreneurs who over the years have been denied fair access to bank credit, if they finally came to realize that was a direct consequence of Basel’s regulatory discrimination. 

Knowledgeable bank regulators know below BB- rated assets are risky. Wise ones know what’s AAA rated is dangerous. The world is overdosing on information and knowledge and it sorely needs more wisdom.

PS: Here is an aide memoire on the regulatory monstrosity of the risk weighted capital requirements for banks.

@PerKurowski ©

The most stressful banks to me are those who least help the future of our real economy.

Sir, Laura Noonan, Rachel Sanderson and James Shotter present EU’s bank stress test results. “Bank stress tests single out the usual suspects” August 1.

And it ranks the banks based on their 2018 fully loaded common equity tier one ratio, which is CRD IV Common Equity Tier 1 capital divided by CRD IV Risk Weighted Assets. And so let us be very clear, if the risk weights used are wrong, the results are absolutely meaningless.

Sir, how long will you all play along with the current regulators as if they were geniuses setting risk weights, as if they had any idea of what they are doing? Are you totally deprived of intellectual honesty?

If you go to EBA’s stress result you will read “The EU banking sector has significant shored up its capital base in recent years leading to a starting point capital position for the stress test sample of 13.2 % CET1 ratio at the end 2015… 2% higher than the sample of 2014 and 4% higher than the sample in 2011”. 

That’s great!... sort of… because it also states that “the aggregate leverage ratio decreases from 5.2% to 4.2% in the adverse scenario”. In terms of real leverage what does from 5.2% to 4.2% leverage ratio mean? It means that in their “adverse scenario” the bank leverage of equity has increased from 19.2 to 23.8 to 1… and that’s just the average!

How is it possible, an increase of the CET1 ratio, at the same time the leverage increases? Easy, banks take on more of those assets perceived, decreed or concocted as safe that carry low risk weights, and less of those assets perceived by bankers and regulators alike like more risky that carry higher risk weights, such as loans to SMEs and entrepreneurs. The real economy will suffer the impacts of this stupid and short-sighted regulatory risk aversion.

We should of course be concerned with the safety of our deposits in our banks… but, should we not concerned with that these banks take the risks needed to offer our children and grandchildren a future at least as good as that one our parents offered us? I sincerely think so.

PS. And it not only about the young. The welfare of future pensioners depend very much too on the health of the economy.

@PerKurowski ©

Banks, to get out of their dead-end street, must make a convincing case they can prosper holding much more capital.

Sir, James Shotter, Laura Noonan and Martin Arnold write: “At yesterday’s close, investors were implying that the biggest bank in Europe’s most stable economy [Deutsche Bank] is worth €17.7bn, just a quarter of the book value of its assets.” And then we read of efforts to better that by reducing operations and cutting down on risk weighted assets. In other words being placed in an Incredible Shrinking Machine. “Big Read: Deutsche Bank: Problems of scale” July 29.

Because of the risk weighted capital requirements, banks were set on a road of increasing returns on equity by diminishing the capital they needed. And, on that road they lost many opportunities, like lending to “risky” SMEs and entrepreneurs. And they also ended up in dangerously over-populated safe-havens that, when compared to the “risky”, suddenly offer lower real-risk adjusted returns. They now are in a dead-end street.

So, if it was me, I would try to make the strongest case possible to my shareholders that there are good and safe returns on equity to be obtained by ignoring Basel regulations. “Give us 12 percent in equity, against all assets, so as to allow us pursue the undistorted highest risk-adjusted returns out there.”

Sir, I have of course no idea if that is a viable strategy for any individual bank, such as Deutsche Bank. Most banks are caught between a rock and a hard place. They need to ask for much capital, but that much capital might be so much, that they could scare away everyone. Anyhow, I would not like to work in a bank that is going to stretch out the suffering by asking for more capital, again and again, little by little. To get it all and get over it would benefit everyone, including current shareholders.

Is that impossible? Not really, here “one of the bank’s top 20 investors” is quoted with “The problem for Deutsche is that it has got to the stage where if it continues to cut assets, it is going to lose a significant amount of revenues”.

And on a different issue, the litigations and fines banks face, I repeat what I said over the years. 

When we all know that for the banks’ good and for our economies’ good banks need more capital, to extract fines paid in cash is irresponsible and masochistic. All those fines should be paid in shares.

@PerKurowski ©

IIF confesses the distortions in the allocation of bank credit caused by Basel’s risk weighted capital requirements

Sir, Laura Noonan writes “The Institute of International Finance has denounced regulators’ proposals to give banks less freedom to use their own models to decide how much capital they need to support their loan books.”, “Risk warning over change to lenders’ safety measures”, June 7. It contains the following fascinating information.

“A low quality borrower with a risky BB- credit rating. Right now…generates a return on capital of just 7.7 per cent today. At the other end of the credit spectrum, a bank’s return on equity for an A+ rated borrower could fall from 13.9 percent today”.

So here IIF confesses that because of the risk weighted capital requirements, an A+ rated borrower (50% risk weight) currently generates about twice the return on equity for the bank than a BB- rated one (100% risk weight). Sir, do you think banks in such a case would lend to those BB- rated? Of course not! But are there not many BB- rated who should have access to bank credit, even if in small amounts? Of course there are. Can’t they get credit? Of course they can, but only if they pay much higher interest rates, so as to overcome the regulatory discrimination against them. 

Sir, that bankers, those who are supposed to be able to evaluate credit risks, should now earn a higher risk-adjusted return on equity on what is perceived as safe than on what is perceived as risky, sounds to me like the regulators have made bankers’ wet dreams come true.

And IFF then states that “a bank using the new rules could earn a return on capital of 11.4 percent on a low quality borrower with a risky BB- credit rating [but], a bank’s return on equity for an A+ rated borrower could fall to 4.6 percent under the new regime.”

Does that mean the A+ rated borrowers would not have access to bank credit any more? Of course not! It is only that they would have to pay slightly higher interest rates since they would not count with as much regulatory subsidies.

Sir, I have soon written a thousand of letters to you all in FT on how the risk weighted capital requirements dangerously distort the allocation of bank credit to the real economy. You have ignored all of these. Now here you are getting a clear and loud confirmation of that distortion from the horse’s mouth, will you still ignore it?

How should it be? Those rated A+ and those rated BB-, and all other, should compete on equal footing for bank credit, by means of offering different risk premiums, and the bank should assign the credit in an appropriate amount to whom has offered to provide it with the highest risk adjusted return on equity. And that can only happen if the capital required for lending to an A+ or to a BB- is exactly the same.

PS. An “appropriate amount” is that which guarantees a good diversification of the banks’ portfolios. The current risk weighted capital requirements are, to top it up, portfolio invariant.

@PerKurowski ©

The “risk” appetite that caused the 2007-08 crisis was for AAA-rated securities, residential mortgages and sovereigns.

Sir, Laura Noonan quotes Bank of England’s Andrew Haldane with: “I think the risk culture, not just from the regulator but from financial firms, is much different [than before the crisis], the risk appetite is much diminished.” “WEF group issues urgent call for fintech forum” April 19.

What risk appetite before the crisis? Was there any excessive exposure to something that was not perceived, decreed or concocted as safe? No, of course not!

In Basel II regulators assigned a 35 percent risk weight to residential mortgages; AAA-rated securities backed with mortgages to the subprime sector carried a 20 percent risk weight; and the risk weight for sovereigns rated like Greece, hovered between 0 and 20 percent.

Now, soon a decade later, regulators seemingly still think that ex post realities and ex ante perceptions are the equivalent. They keep on thinking that the expected is a good basis for estimating directly the unexpected.

The worse risk to a banking system derives from excessive exposures; and those excessive exposures are always built up with something ex ante perceived as safe… but which ex post could perhaps be risky. And that is currently made much worse, by the fact that those “safe exposures” require the banks to hold the least capital.

So NO, in terms of dangerous excessive exposures to “the safe” I would, contrary to Haldane, hold that the real appetite for real bank risk has not stopped growing for a second, it has even accelerated. 

Sir, again, for the umpteenth time, in Basel II the regulators set a 150 percent risk weight for assets rated below BB-. How on earth can anyone justify that assets that when booked carry a below BB- rating, are riskier for the banks than all other 100 percent and below risk weighted assets?

And how is it that, even after the evidence of the 2007-08 crisis, they still believe so? It is mind-boggling to me… and it should be to you too Sir.

Something is truly rotten in that mutual admiration club we know as the Basel Committee for Banking Supervision.

@PerKurowski ©

There is risky bank lending and then there is "risky" bank lending

Martin Arnold and Laura Noonan quote Gonzalo Gortázar, chief executive at Spain’s Caixabank with “In a world of low or negative interest rates, that is a possible consequence. You could see banks taking more risk” “Europe bank chiefs fear risky lending from ultra-loose policy” March 22

Of course I cannot be absolutely sure but, when “banks taking more risk” is said, it most probably refers to larger exposures to something that because it is perceived, deemed or sold as safe, carries lower capital requirements.

What is perceived by regulators as risky, like loans to unrated corporations, SMEs or entrepreneurs, and which is risk weighted 100 percent or more, and so require banks to hold more capital, well that’s not the risks banks are taking, unfortunately for the economy.

It would be nice to see reporters digging up a little bit more about what risks is being referred to. In fact, I start any risk assessment by identifying what risk one cannot afford not to take... because that would be too risky.

PS. Another interesting detail is whether it is the ex-ante perceived risk or ex-post resulting risk that is being considered.

@PerKurowski ©

“Government, I will lend you fresh money if you favor me with huge risk premiums” Does that not sound a bit corrupt?

Sir, Max Seddon and Laura Noonan write about the plans of Russia to issue its first sovereign bond since the US and Europe imposed sanctions on Moscow, and of some reactions of Washington to that. “Russian bond poses dilemma for bankers” February 26.

And in this respect: “The Treasury told the banks that while there was technically no ban against helping the Russian government raise money, the banks would have to be mindful of the fact that the money could be diverted into activities that were not consistent with US foreign policy.”

But what about the case of money that could be diverted into activities that was not consistent with Russian citizens’ interests? Is that irrelevant?

I ask because I am Venezuelan, and the government of my country has taken on loads of debt, something that clearly is not justifiable in the midst of an incredible oil boom. And all this odious credit/debt is now supposed to be repaid by all citizens who had absolutely nothing to do with how the loan proceeds were used, in much because of a big lack of transparent information.

And the financier’s of Venezuela have been quite aware that things in Venezuela were not fine and dandy. Among publicly notorious issues was that the government was selling oil to some countries a highly subsidized prices for its own political benefit; giving away gas to its own citizens for a value that exceeded all social spending put together; the existence of rampant corruption; and that its human right’s behavior was being questioned over an over again.

But the financiers loved the risk premiums, and so I ask:

In the case of a loan to an individual government official in return for a favor, there would be no doubt that it could be classified as an act of corruption, and the financier could be held liable in the US under the Foreign Corrupt Practices Act.

But, what about a loan that provides money to a whole government, in return of the favor of extravagant risk premiums, could that not also be classified as an act of corruption?

The world no doubt needs a Sovereign Debt Restructuring Mechanism (SDRM) but, if that is going to help the citizens of the world, which it primarily should do, that must begin by making clear the difference between bona-fide normal credits and odious credits.

@PerKurowski ©

How could it be in the interest of any bank regulators to have CoCos with unclear and haphazard conversion terms?

Sir, I refer to Thomas Hale’s, Martin Arnold’s and Laura Noonan’s discussion on the regulatory uncertainty that exists, “Coco trade seeks to emerge from dark period” February 24.

I am amazed. If I was a bank regulator and I had signaled that one way for banks to cover for the capital regulators required were the CoCo’s, I would want these to be as clear and transparent as possible. That not only to make sure banks could raise these funds in the most competitive terms, but also to be sure I covered my own share of responsibility in the disclosure process.

Something must have gone seriously wrong if there is still such huge regulatory uncertainty. I mean I could not for a second believe that any regulator would want to withhold such information on purpose.

In April 2014 I sent you a letter that asked “Can bank regulators keep silence on the conversion to equity probabilities of cocos?" 

In it I wrote: “Do regulators have any moral or formal duty to reveal to any interested buyers of cocos if they suspect the possibilities of these having to be converted into bank equity being very high? I say this because if so, and if they keep silent on it, that would make them sort of accomplices of bankers. Would it not?... Of course banks need capital, lots of it, but tricking investors into it, does not seem like the right way for getting it.”

In May 2014 I wrote you a letter asking “Is it ok for a regulator, like EBA, to withhold information from 'experienced investors'?"

In it I asked “What would be the legal responsibility of bank regulators, towards any coco-bond investors, if they withheld important information with respect to the possibilities of those bonds being converted into bank equity?”... and also:“Britain´s regulator, the Financial Conduct Authority, has said it plans to consult on new rules to ensure cocos are only marketed to experienced investors…Would that imply that a regulator can withhold important information from “experienced investors”? If so, just in case, for the record, I have no knowledge about investments whatsoever.

And then in August 2014 I wrote you a letter that alerted: “The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.”

But then again regulators might also have decided it was better to go and fly a kite J

@PerKurowski ©

The CET1 (common equity tier 1) divided by the leverage ratio, gives you a Gross Risk Hiding Ratio

Sir, James Shotter and Laura Noonan, while admitting that “the absolute level of the CET1 (common equity tier 1) is only part of the equation, they do compare Deutsche Bank’s CET1 with that of other banks. “Deutsche focus turns to towering task ahead.” February 10.

The common equity tier 1 ratio is calculated with the bank’s core equity in the numerator and with in the denominator the risk weighted assets, calculated with risk weights not assigned by me. So the safer the assets are perceived or deemed to be, the higher the CET1.

And the Leverage Ratio uses in the denominator the gross value (of most) assets.

As FT should know by now, I have always felt much more nervous about the assets a bank (or regulators) could perceive as very safe than with assets perceived as risky. And so I do give more importance to the leverage ratio than, for instance, to the CET1 ratio.

But the regulators would not allow us data on the leverage ratio, because, in their opinion, that would not reveal the real leverage to us and it would therefore only confuse us. And so they decided to credit-risk weigh the assets, and came up with the CET1 ratio or the slightly more generous Tier 1 Common Capital Ratio.

And of course that made many in the market feel much more comfortable with that the banks were quite adequately capitalized.

But one needs to adapt, and so I felt that new interesting ratios would be found in the market whenever the leverage ratio was published. And among these the CET1 ratio to the leverage ratio-ratio, because that ratio could be said to represent, the Gross Hiding Risk Ratio.

Though I admit I could be using wrong data, I found the following leverage ratios at end of 4th quarter 2015: Deutsche Bank 3.9; Goldman Sachs 5.9; Wells Fargo 8.0; and Morgan Stanley 8.3.

And if we take the CET1 ratios reported in the article and divide these by the leverage ratios we obtain the following Gross Risk Hiding Ratios: Deutsche Bank 2.85; Goldman Sachs 2.19; Wells Fargo 1.34 and Morgan Stanley 1.70

So if these calculations are correct then no wonder why Wells Fargo “is often described as the US’s safest banks [and] there are no [current] calls for a capital raising”… and no wonder Deutsche Bank faces quite bigger challenges.

@PerKurowski ©

Were bank regulators sufficiently vetted, or did those who appointed them simply not understand what banks are for?

Sir, Laura Noonan writes: “Here lies the big bank that once loaned billions to local businesses, but is now unwilling and unable to support the economy. Fondly remembered by its risk-adverse managers and overzealous regulators, its passing is deeply regretted by local business owners. Rest in peace… Surveys from the Bank of England chart an almost uniform contraction of lending to UK businesses from banks and building societies in recent years”, “Challenger banks move to stand out from the crowd” February 9.

Was it really a case of “overzealous regulators”? No! It was a case of dumb regulators who allowed banks, depending on how the risk of an asset was perceived or deemed to be, to have different levels of capital (equity); and who thought that would not distort the allocation of bank credit to the real economy. Or, worse, did not care one iota about if that happened.

How many of you in FT have read Basel Committee’s 29 Core Principles for effective banking supervision? To read these, and to think about their implied regulatory arrogance, should cause anyone to ask whether someone has properly vetted these bank regulators, before they were assigned with the responsibility of writing the rules for all of our banks… or did not vet them because they did not want to admit they did not understand what was being argued?

We have recently read about the extraordinary self-created reputational extravagances of a Paolo Macchiarini, and how some uncritical acceptance of these is even questioning the committee of the Karolinska Institute of Sweden that selects the Nobel Prize for medicine.

After so many years, and so many unanswered questions about current bank regulations, I have all the reasons to suspect something equally terribly wrong could be happening in Basel.

Adam Cyralsky wrote about Paolo Macchiarini in ‘The Celebrity Surgeon Who Used Love, Money, and the Pope to Scam an NBC News Producer”, Vanity Fair January 2016.

And there Cyralsky, in order to understand how “someone of considerable stature could construct such elaborate tales and how he could seemingly make others believe them”, turns to Dr. Ronald Schouten, a Harvard professor who directs the Law and Psychiatry Service at Massachusetts General Hospital. The answer he gets is: “We’re taught from an early age that when something is too good to be true, it’s not true… And yet we ignore the signals. People’s critical judgment gets suspended. In this case, that happened at both the personal and institutional level.”

And I translate this to perhaps mean that when bank regulators said: “We can save you from banks failing” and backed it with something that sounded so reasonable as “more risk more capital and less risk less capital”, then the critical judgment of those who appointed them got suspended.

But the world can ill afford such suspension. The credit risk adverse regulations cause banks to finance less and less the risky future; and only refinancing more and more the “safer” past. That has to stop, for the good of our children and grandchildren.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

For the good of the real economy, let’s pray the day of the so much needed bank regulatory enlightenment arrives soon.

Sir, Caroline Binham and Laura Noonan informs that “The Basel Committee on Banking Supervision said yesterday it had dropped a plan to ban banks from relying on rating agencies when they calculate risks in their portfolio” And with that “The banking lobby has beaten back a global reform plan that it claimed would result in a “substantial” increase in capital”, “Lenders win Basel U-turn on assessing risk” December 11.

I am not sure because the Basel Committee recently issued a Consultative Document on the issue and we should wait what could come out of it.

Anyhow, what is completely missed is that banks already look at credit ratings when setting their risk premiums and the amounts of exposure. And so when also having to use the same credit rating to set their capital requirements, means that the credit risk info contained in those ratings is excessively considered. And any risk, even if perfectly perceived, causes the wrong actions if excessively considered.

The day the Basel Committee wakes up to the dangers of distorting the allocation of bank credit to the real economy based on credit risks, something that has not one iota to do with whether borrowers pursue objectives that deserves fair access to bank credit, that day everything will change.

For the good of the real economy and of the perspectives for our young to find good jobs in the future, let us pray that day of regulatory enlightenment arrives soon.

http://subprimeregulations.blogspot.com/2015/12/the-basel-committee-insists-in-not.html

@PerKurowski ©

Mifid 2 could be creating dangerous risks promoting Systemic Important Research Institutions

Sir I refer to Laura Noonan’s “Deadline looms for banks to get their research arms in order” November 17.

We read “European rules, known as Mifid 2, will reshape the way analysts report on companies and how the research can be priced and circulated to investors… going from quantity to quality… banks to become more selective in the sectors they deal within an environment where clients will no longer support the 60-70 research teams that cover each major European industry… number of analysts publishing Emea research for the 12 top banks fell 17 per cent from 2007 to 2014.”

What are these busybody regulators doing? Don’t they understand what systemic risk is all about? And now they are pushing for Systemic Important Research Institutions, SIRIs.

Don’t they understand that going from quantity to quality often just entails going from the open market into even less transparent small mutual admiration clubs? Did they not learn about the systemic risks of giving information power to few like when they gave it to the credit rating agencies?

Quality? Quality is a result of the diversity that includes many “un-qualified” players but who could suddenly bring forward fresh perspectives, or be making those insolent questions required for having a chance at sustainable quality.

Did they not do enough damage to financial research when they subordinated the importance for banks of getting the risk premiums right, to getting the equity required low?

The more I read about what arrogant and hubristic regulators are up to, the more I feel we have to put faith in shadow organizations to be able to help our grandchildren to a livable future.

@PerKurowski ©