Compared to regulators’ manipulation of bank credit, Libor manipulation is as peanuts as peanuts come

Sir, I refer to Katie Martin’s “Scrapping of Libor benchmark leaves $500bn of bond contracts in limbo”, October 11.

I repeat what I’ve written you many times before.

I’ve been on both sides of Libor, as a lender and as a borrower. I have never thought it a precise instrument, but good enough, sometimes you lose, sometimes you win, especially when any implied manipulation is done by speculators who are indifferent to whether Libor is too high or too low. What matters to them is their position in Libor futures, at any time. 

In the long run, for all other Libor dependent, its manipulation ends up in a big wash.

The big hullaballoo around it, and forced search for substitutes, are just a big distraction from the real dangerous manipulations. 

Current credit-risk weighted capital requirements for banks pushes credit towards dangerous excessive exposures to the safer present, and away from what is required by the riskier future. Sir, for both borrowers and lenders, that is an extremely costly manipulation. As less capital allows for larger bonuses, only bankers win.

PS. Here is the current summary of why I know the risk weighted capital requirements for banks, is utter dangerous nonsense.

@PerKurowski

The access to bank credit manipulation costs us infinitely more than Libor and all other manipulations put together

Sir, Michael Skapinker, referencing a traders working conditions, gives a well reasoned and heartfelt explanation of why he feels sorry for at least one of those recently found responsible for manipulating the Libor rate. I sure hope it will be read before any sentencing, “The Libor trial and how to deal with a bullying, dishonest boss” July 7.

But let me add to that the following:

I am absolutely convinced that the risk weighted capital requirements for banks, introduced by the Basel Committee in 1988 signifies an outright manipulation of the access to bank credit. By favoring what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential housing, these sectors have received way too much bank credit on way too easy terms. And, as a consequence, those perceived as risky, like SMEs and entrepreneurs, those upon much of the future economic growth and job creation depends, have received way too little credit, in way too harsh relative terms.

If we add the costs of having dangerously overpopulated safe havens like AAA rated securities and Greece, and around the world hindered millions of small loans to be given to those who most needed it, the costs of this distortion for the society are mind-blowing. These exceed thousand fold whatever damages might have been produced by all other recent manipulations put together.

And what has happened to the bank credit access manipulators? Absolutely nothing, in many ways they have even been promoted.

And what has happened to whistle blowers like me. Not much, except for having to suffer seeing my arguments ignored, while being sure this will affect negatively the future of my own constituency, my children and grandchildren; as well as the future of those of the baby-boomer generation about to retire.

The costs of a Libor manipulation, winners and losers, these net out.

The costs of distorting the access to bank credit do, medium and long term, only produce losers, and so they are boundless.

And even though all that access or bank credit manipulation implies absolutely no criminal act, I believe it was done unwittingly and with only good intentions, and only pure innocent stupidity prevailed, it sure help to put all other manipulations in a different perspective. 

@PerKurowski ©

The Banking Standards Board should also require bank regulators to uphold higher ethical standards

Sir, Patrick Jenkins’ discusses what the Banking Standards Board can do influencing the ethics of banks. “Banks gain help on the scandal-strewn road to better behaviour” March 8.

If I were the BSB then, in the case of the fatidical mis-sold mortgage-backed securities, I would come out swinging against the regulators stating:

How on earth did you allow us banks to buy AAA to AA rated securities against only 1.6 percent in capital, meaning we could leverage our bank equity 62.5 times to 1 with that kind of paper? Don’t you know there are very few human bankers able to resist such temptation because, if they did, they would find other banks earning much higher expected risk adjusted returns on equity, leaving them as the dumb kids of the block, or as those who refused to dance while the music was playing?

And now, should those who created the temptations, the devils in the play, be able to go free, while we who fell for the temptations, the weak in flesh, shall bear all guilt? No! That’s not acceptable!

And, if I were accused of the manipulation of Libor, I would at least declare in my defense that such manipulation was really quite harmless when compared to the regulators’ manipulation of the allocation of bank credit to the real economy. That manipulation, which regulators committed with their risk weighted capital requirements for banks, was and is also something completely unethical.

@PerKurowski ©

“The time it takes to react to a 'misdemeanor', will be in inverse proportion to its seriousness" Parkinson dixit

Sir, Matthew Vincent writes of the much speedier reactions to small time misbehaviors, like catching a ride on the corporate jet, compared to much more egregious behavior, like the manipulation of the Libor “Lessons from the Swedes on accountability" August 15.

It reminds us of Parkinson’s law that states: “The time spent on any item of the agenda will be in inverse proportion to the sum [of money] involved."

Look for instance at how fast the case against the Libor manipulators proceeded when compared to the immensely larger and more serious case with bank regulations. By means of risk weighted capital requirements, the regulators manipulated the allocation of bank credit on a global scale… and the experts have not yet given signs they have even detected their misbehavior… not even in Sweden, whose Stefan Ingves currently chairs the Basel Committee for Banking Supervision.

PS. 

http://subprimeregulations.blogspot.com/2014/02/mr-stefan-ingves-i-do-seriously.html

http://subprimeregulations.blogspot.com/2015/02/en-fraga-till-herr-stefan-ingves-som.html

@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

FT, I just can’t believe you believe we need regulators, like Michel Barnier, to save us from Libor scandals

On September 3 you wrote “Barnier’s revolution”, in which you held that Brussels is right to end self-regulations”, like in the case of setting the Libor benchmarks.

Please read carefully your own reporters “Court papers reveal Libor broker called banks ‘sheep’” September 26, and tell us: Now that the market knows what happened, what good can come from having a regulator, perhaps Mr. Michel Barnier himself, overseeing the setting of Libor?

Regulators, you can even let Libor be the result of a raffle, but please stop distorting and subsidizing the risk-free rate

Sir, I refer to Tom Braithwaite’s and Brooke Masters’ “Regulators urge speed in replacing the Libor rate” April 26.

By allowing banks to hold much less capital when lending to the “infallible” sovereigns than when lending to “risky” citizens, regulators have completely distorted what is probably the most important reference rate, the borrowing rates of the most solid sovereigns, one of these usually the proxy for the risk-free rate.

And that is why I am amazed about how much attention regulators give to the Libor rate, a rate that really, for its small relative importance, could just as well be the result of a raffle among some quotes, after eliminating some outliers. One day, the winning Libor could be somewhat higher than its true rate, and on that day, Libor based borrowers would pay somewhat more, and investors earn somewhat more; other days the picked Libor could be somewhat lower than its true value and the opposite would hold. But, in the long run, no one is really much harmed.

Could it be that regulators are ashamed of what they have done and are using the Libor incident as a distraction?

Stop the foolish and immoral flogging of “The Risky” bank borrowers

Sir, Alex Barker and Caroline Binham report on how “Brussels turns up pressure over Libor-rigging scandal”, February 22, They write “a bank implicated in all three investigations could, for example, face fines of up to 30 percent of revenues”.

Has the European Commission no idea of whom, at the end of the day, somehow somewhere, is going to have to pay these fines?

Just for a starter, depending on whether the borrowers are perceived as risky or not, since paying the fine will result in less bank capital, the guilty bank will have to shrink its lending between 10 and 50 times the amount of the fine. And of course the issuing of fresh bank capital that is so needed will be more expensive as a result of these fine-risks. And of course the margins charged by the guilty bank on its lending business will have to increase.

And those who will suffer the most, are the bank borrowers who because they are perceived as “risky”, by order of the bank regulators, currently generate higher capital requirements for banks, like small and medium businesses and entrepreneurs.

Fines and other sentences should be applied directly to the bankers responsible for misbehaviors, but, if they insist on the fines being paid by the banks, the least they should do is to require these to be paid, for example, through the issuance and delivery of new bank shares for the amount of the fine at market prices.

Please, we must stop this foolish and immoral flogging of “The Risky” bank borrowers, as if it were not already hard enough on them to be perceived as “risky” having to pay higher risk-premiums, getting smaller loans and often having to accept other harsh terms. When the going gets tough, that is when we most need “The Risky” to get going.

And please, bank regulator, wake up to the reality that “The Risky” has never ever been the root of your problems, that dubious honor belongs exclusively to the “Potemkin Infallible”

And now, let’s find and publish the trail of all sophisticatedly mistaken bank regulator talk

Sir, Kara Scannell and Brooke Masters quote some of the shameless exchanges that took place among traders with respect to the manipulation of Libor, Tibor and what have you. “Trail of casual trader talk comes back to haunt RBS”, February 7

I wish they would be equally willing to find and publish the certainly much more sophisticated sounding arguments which led bank regulators to allow banks for instance to hold securities with an AAA to AA rating, or lend to Greece, against only 1.6 percent in capital, meaning authorizing a 62.5 to 1 leverage on those exposures.

It would also be interesting reading how they defended a concept like that when a German bank lent to a German entrepreneur it needed to hold 8 percent in capital, but when lending to the German government it could do so against zero capital.

I ask all this because, without the slightest doubt, this most certainly totally unwitting interest rate manipulation carried out by the bank regulators, has de facto caused immensely more damages than all other scandalous interest rate manipulations we have been reading about lately, put together.

Bank regulators need also to reinvigorate urgently their moral mojos.

Sir, I cannot but express amazement with the abundant and detailed coverage given to of UBS and The Libor Affair by the Financial Times, for instance on December 20, when compared to the so little information given out on what the Basel II bank regulations really was about, The Basel Affair.

For instance, just the simple publication of the tables of risk weights corresponding to “Claims on sovereigns, page 19 and “Claims on corporates”, page 23 and that appears in the June 2006 document that compiles Basel II, with an explanation of what that entailed in authorized leverages to banks when holding different assets, would have enlightened your readers of a problem a thousand-fold more significant than the absolutely illegal Libor incident.

In fact Jonathan Guthrie’s assertion that “Big banks must reinvigorate their moral mojos” should apply as much or even more to the regulators. Here we have public servants deciding, for no other reason than to satisfy their boudoir dreams of a world with no bank failures, that those perceived as risky must pay even higher interest rates to the banks than they would ordinarily have to pay, and those perceived as absolutely safe less, and that, besides being plain stupid, is also plain immoral.

And when Caroline Binham reports on how “Lowball [Libor] tenders aimed to paint a rosy pictures of health [of UBS]” this seems so innocent when compared to the so low capital ratios reported by the banks, because of the risk-weighting of assets, and which really confounded all, including all FT’s experts.

Libor manipulators are duly named and shamed, but about "The Basel Affair", the greatest interest rate manipulation ever, not a word.

There used to be a financial market where securities and loans were traded based on the risk and cost of transactions adjusted yields that all of the participants perceived should be applied. In other words, a world where all the risk and cost of transaction adjusted net margins were worth the same. 

Not any longer. As a result of the capital requirements for banks based on perceived risk imposed by the regulators, especially in Basel II, banks now need to use risk and cost of transactions adjusted yields, and also adjusted for the capital required. 

And that means that the risk and cost of transaction adjusted net margin paid by someone officially considered one of “The Infallible”, and that therefore can be leveraged much more on bank equity, is worth much more to a bank than that same margin when paid by one of “The Risky”, and which must be much less leveraged by the banks. 

And this means that “The Infallible” with respect to their bank operation get more access to bank credit and need to pay much less than what they would ordinary have to pay, and “The Risky” get much less credit and have to pay much more for it, than what they would get and pay without these regulations. 

And this what I now call "The Basel Affair", and which amounts to the greatest of all interest rate manipulations ever, has send the world, primarily Europe and America into turmoil; by creating dangerously excessive bank exposures to “The Infallible” backed with little or no equity, while at the same time stopping the world from getting out of its misery, by severely constraining bank credit to “The Risky”, to those not rated or not having a top credit rating. 

And of course the Libor rate manipulators should be arrested, and shamed with their names published on the front pages, like for instance FT’s on December 12, and this even though the consequences of their manipulations are quite unclear and seem to have affected mostly their fellow traders and speculators. 

But we have not yet even seen the names of those guilty in The Basel Affair, on the contrary, from what we see some of them have been promoted and others put in charge of preparing the next set of regulations, Basel III. 

And from what we see of Basel III, the regulatory manipulators have not repented, on the contrary they are set on manipulating even more, since now besides the capital requirements, they are also ordering liquidity requirements based on the same perceived risk, again mostly as perceived by their official risk perceivers, the credit rating agencies. 

And, let me be very clear about it, the greatest ever interest rate manipulation, produced by those of The Basel Affair, has and will produce incredible suffering, as just for a starter it is much responsible from keeping much of our youth from getting their first jobs, or some from getting jobs at all during their lifetime. 

And those who keep silent about The Basel Affair, the  greatest interest rate manipulation ever, are accomplices of it, some unwitting and some quite conscious. 

PS. Example 

Q. “Can you give me a specific example of what you mean with an interest rate manipulation carried out in The Basel Affair? 

A. Easy. Do you believe sovereigns like US, UK, Germany would be paying the same interest rate they currently pay on its public debt if banks had to hold as much capital against that debt as they need to hold when lending to an unrated citizen? No? Well that is an example of interest rate manipulation!

And the whole Libor Affair, is perhaps just an example of a very clever distraction maneuver carried out by those regulators guilty of The Basel Affair. 

PS. My 2019 letter to the Financial Stability Board (FSB)

The mother of all (official) interest rates manipulation.

Sir, capital requirements for banks are larger when these lend to something perceived as risky and lower when to something perceived as not risky. It is an utterly absurd proposition, because what is perceived as risky has never caused a major bank crisis. But, much worse, it also signifies that those perceived as risky must pay higher interest rates and those perceived as not risky lower interest rates, than would have been the case absent these regulations. And this amounts to an extraordinarily large official interest rate manipulation… and its effect is way more than some few basis points… and the widening of the spread between risky and not risky according to my calculations is way over hundred basis points. 

So let’s see what all those perceived as risky, usually correlated with the have-nots, who already pay higher interest rates, would have to say about regulations that made them pay one percent more in additional interest on all their bank loans, while those perceived as not-risky, usually correlated with the haves, who already pay lower rates, had to pay one percent less. 

I have now at least registered a general complaint at the Consumer Financial Protection Bureau CFPB, established in the Dodd-Frank Act, indicating that this odious discrimination against the “risky” does not seem to be allowed under the Equal Credit Opportunity Act (Regulation B).

And with respect to the intellectual capture of FT, where does the buck stop?

Sir, of course, Barclays´ fiddling with Libor affair is a scandal, and you are entirely correct to question whether its Chairman´s resignation based, on a the buck stops here, suffices, “Barclays scandal” July 3. 

But much more scandalous than that, at least with respect to its implications, is how the buck, of how regulators, fiddling with risk weights, manipulated the interest rates in favor of those perceived as not risky and against those perceived as risky, and that does not even appear on the radar-screen. 

It will be interesting to see in the future, where in FT the buck for withholding the analysis that places the largest blame for the crisis in the lap of regulators stops. 

Really, how did you allow yourself to become so intellectually captured by that so dangerous nonsense of capital requirements for banks which discriminate based on perceived risks elsewhere already discriminate for? 

As is, in my mind, FT is in part responsible for the fact that our banks might all end up gasping for oxygen and capital on the last safest shores, which at this moment would seem to be the US Treasury and the Bundesbank.

And what about conceit in journalism?

Sir, Gillian Tett writes correctly that “Libor affair exposes big conceit at the heart of banking” June 29, but there might equally be some big conceit going on at the heart of journalism. 

Two questions: What is the most important dollar reference rate… the risk free US Treasury rate or Libor? And, who has effectively manipulated those rates the most, Barclays the Libor rate, or the bank regulators the US Treasury rate by means of allowing the banks to hold these instruments with less capital than other assets? 

Clearly, in terms of its significance, the manipulation of the US Treasury “risk free” rate has been much more significant than whatever Barclays can have done to Libor but that, Gillian and her colleagues at FT decided to ignore, with much conceit.


Should not an anthropologist be about the most humble of all professionals?