When will the world stop referring to those giving odious loans, odious credits, as investors?

Sir, the Lex column “Venezuela debt/Maduro: crypto communist” of August 23 writes: “It beggars belief that a country with the world’s largest oil reserves has failed financially…when prices for oil, its sole commodity, fell. Borrowing has filled the gap… Investors, including the asset management arm of Goldman Sachs, can look forward to a lengthy default”

In your editorial of August 22, “The desperate plight of Maduro’s Venezuela” you wrote: “Much of the world, especially supporters of “Chavismo” from the Panglossian left, has been disgracefully silent about Venezuela’s crisis for too long. The country is all but a failed state. As a drug-trafficking hub and the source of a huge exodus, it is already an exporter of instability.”

And I must ask when is the world going to stop referring to those who help finance regimes that are notoriously inept or/and commits awful violation of human rights as “investors”, and not as the lowly and dirty financiers they are?

Is for instance financing the smuggling of drugs more morally reprehensible than financing a regime like Maduro’s? Would you ever dream of introducing to your family and friends one who had helped finance the construction of Auschwitz, as an investor?

Yes, credit ratings might be needed, but more does the world need ethic ratings. It is way past time the world begins to understand that most odious debt there is, has its origin in odious credits, and that we need a Sovereign Debt Restructuring Mechanism that takes that in consideration.

http://unsustainabledebtsustainability.blogspot.com

@PerKurowski

Though we cannot fine bank regulators, we should at least shame them, for the mother of all bank-credit markets riggings.

Sir, I refer to FT’s front-page report by Gina Chon, Caroline Binham and Laura Noonan “Six big banks fined $5.6bn over rigging of forex markets”, May 20.

Andrew McCabe, FBI’s assistant director is quoted saying “The activities undermined transparent market-based exchange rates that serve as a critical benchmark to the economy.”

Undoubtedly, the rigging of foreign exchange rates, and of the Libor rate, needs to be condemned in the strongest way… But, for that to really happen, it must be through mechanisms that does as a minimum not cause Lex describe these in terms of being “astonishingly opaque”… and commenting in “Bank fines: the wrong reaction” that “how the agencies decide what fines to impose is a mystery to everyone, the banks included”.

But, that said, in terms of the real consequences to the real economy, all that fraudulent market rigging is peanuts when compared to the mother of all market riggings, that which bank regulators, probably unwittingly, did to how bank credits were allocated.

I mean let’s look at Basel I, II and III. For the purpose of deciding how much equity a bank has to hold against a credit they establish: Sovereigns = 0% risk weight; Citizens = 100% risk weight. Really, is that not as big as market riggings come?

How much more bank credit at low rates did not governments, the regulators’ bosses, receive because of that? How much less bank credit did not all the SMEs, entrepreneurs and start-ups around the world, receive because of that.

Of course we cannot fine regulators (unless we can prove bad intentions… like ideological manipulation)… but should we not shame them at least?

@PerKurowski

Here’s another reminder of how scary our current bank regulators really are.

Sir, the Lex Column writes about “Nigerian banks: wrong concentrations” March 27.

I just thought it would be a good opportunity to remind everyone that we have put our banks into the hands of regulators who, on their own, have decided to impose “portfolio invariant” equity requirements for banks. And that means the regulators do not consider the benefits of diversification, nor the dangers of concentration.

By their own admittance, to do otherwise, would be too hard work for them.

Scary eh?

@PerKurowski

Banks’ RoRWAs is like allowing kids to grade themselves. Shareholders could, at their own risk do so. Regulators should not!

Sir, The Lex Column makes several statements about banks’ RoRWA, the return on risk-weighted bank assets, January 13.

In essence RoRWA is like allowing kids to grade themselves, and their parents, as their shareholders, believing it. And though it does not sound very wise, that is ok since parents, at their own risk, are absolutely free to do so.

But, when teachers, or bank regulators, start using the kids’ own grading system, or the banks’ own risk-weights, then something is bound to go wrong. More sooner than later the whole system will overdoses on the kids and bankers biased perceptions, as these all have a lot of vested interest in having good grades or good RoRWA.

Barclay’s has and projects leveraging its equity 45-35 to 1 times. Would not 10-15 to 1 be sufficient?

Sir, I refer to Patrick Jenkins and Daniel Schäfer’s “European banks move to bolster equity level”, as well as to The Lex Column note on Barclays, July 31.

Both mention the current leverage ratio of 2.2 percent of Barclay and the recent goal of 3 percent established by global regulators.

Those leverage ratios, translated to usual historic equity leverage indicators, those used in the pre-risk weighting days of the Basel Committee, would be 45 to 1 and 33 to 1 respectively.

Sincerely, do you not believe these leverages to be somewhat on the high side? Would not leverages between 10 and 15 be more than sufficient?

Lex holds that having to move from 2.2 percent leverage ratio to 3 percent “has delayed the date when Barclay’s return on equity will beat its 11.5 per cent cost of equity by a year to 2016.”

And that also begs the question whether shareholder would not be happy with a lower return of equity, if that came hand in hand with much lower assets to equity ratio?

Lex, explain why you consider a straight leverage ratio inferior to a risk-weighted assets ratio?

Current capital requirements for banks based on perceived risks using risk-weights allow banks to leverage more the risk adjusted margins when lending to “The Infallible” than when lending to “The Risky”; which means making a higher expected return on assets when lending to “The Infallible” than when lending to “The Risky”; which means that “The Infallible”, those already favored by markets and banks will be even more favored, while “The Risky”, those already discriminated against by banks and markets, precisely because they are perceived as “risky”, will be even more discriminated against.

And that of course creates the danger of excessive exposures to those of “The Infallible” who do not turn out to be really infallible, precisely those who have caused all major bank crises in history, as of course “The Risky” have never ever done that; in this case aggravated by the fact that bank then will have extremely little capital.

And that of course impedes the banks completely to perform their social function of helping us to allocate economic resources as efficiently as possible.

And so LEX, please explain to us why, in your column of February 27, you consider a straight leverage ratio inferior to a risk-weighted assets ratio?

And if you absolutely want to risk-weighed, because you cannot refrain from interfering, then why would not the capital requirements for banks for exposures to “The Infallible” be slightly higher than for exposures to “The Risky”, as all empirical data suggests?

Basel is now only increasing the regulatory discrimination of “The Excluded Risky”

Sir, imagine a father with five sons who has declared he just loves the oldest one. Clearly the other four are not happy about that. But now the father declares that he also loves the second son. Will the three remaining unloved sons feel better or worse?

That is the question you have to answer when trying to interpret the meaning of the announced relaxation of the Basel liquidity rules for banks.

Lex in “Basel tov”, January 7, believes that this relaxation should make it “less likely do deter financing of activity in the real economy”. 

Not so! The distortions in the markets in favor of “The Infallible” and against the excluded “The Risky”, will increase. And that could only worsen the conditions in the real economy, as those who represent the least risks for banks, are not necessarily the most important actors on the margin of that economy.

Let me phrase it like this: In the real economy the existence of favorable conditions is much more important for “The Risky” than for “The Infallible”

Lex woke up!

Sir the Lex Column "Basel Denominators" September 16 ends with: “Historically, true crisis are caused by assets perceived as low-risk that aren´t.”

That as you all must be aware of by now, has been one of the two main reasons for my criticism against the current regulatory paradigm that has been imposed by the Basel Committee on the banks… that of higher capital requirements on what is perceived as risky and lower for what is perceived as not risky, and that goes against everything that financial history teaches us.

Since realizing the above makes of course current bank regulations completely nonsensical it will be interesting to see how FT handles this issue from now on.

On my second reason for criticizing Basel you might want to go to the last post of Dominique Strauss-Kahn on the IMF blog. http://blog-imfdirect.imf.org/2010/09/14/saving-the-lost-generation/#comment-2762

We need to decrease the credibility asymmetry that exists in the credit information market

Sir I refer to The Lex Column writing about the religion credit rating agencies bring to the markets, with their implied aura of infallibility May 15.

One of the problems with credit ratings is that they are never sufficiently publicly debated, unless when it is too late, and when that happens then it is mostly the case of a small questioner against the mother of all father authorities in the markets.

Too often have I heard bankers ask me “Per, how on earth do you think I could convince my colleagues on the Board that the credit rating agencies were getting it so extraordinarily wrong that we should exit from what seemed to be an extraordinarily good business for us?”

In our efforts to solve the asymmetry in information we have increased the asymmetry of the credibility with respect to financial information, making it now almost impossible for divergent opinions to nudge the markets on the margin, and being only considered when the causes for the divergence become much too apparent, which is of course then much too late.

The first thing that should happen is that the credit rating agencies should be required to post, real time, all the questions and answers received with respect to every particular ratings, so to allow the market to express their viewpoints and to allow configure the necessary opinion majorities that could force the credit rating agencies to revise what they are doing.

If that Bank Director friend of mine could have referred to a public online forum where those same suspicions were uttered by others, then he would stand a much better chance of being heard.