What would the Basel capital requirements have been for a bank to finance Columbus’ voyage to the Americas?

Sir, Ralph Atkins, Philip Stafford and Brooke Masters’ in their analysis of regulations titled “Collateral damage”, October 25, mention about “growing fears that the very actions meant to build stability into the financial system are doing the opposite.” 

Of course, but that should be old news. Have they not looked at all bank assets which created this crisis? These were all perceived as safe, “The Infallible”, and for which banks were given extraordinary incentives to hold, by means of very low capital requirements. The frantic and frankly stupid efforts by regulators to keep the bankers away from “The Risky” led to a dangerous overpopulation of some safe-havens. 

When are regulators going to wake up to the reality that there is nothing like independent safe assets, as most of their safety depends on the existence of a safe economy? What they need to understand is that in order for some assets to become and remain safe, risky assets need also to be financed. 

By the way, since the article refers a lot to IMF, as I have written to you before, I am very skeptical about IMF’s analysis of safe assets. In their “Report on the Global Financial Stability 2012” they listed a total of 74.4 trillion U.S. dollars: 33.2 (45%) in sovereign bonds AAA / AA 5 (7%) in sovereign bonds A / BBB, 16.2 (21%) in securities with special guarantees; 8.2 (11%) in corporate bonds rated investment grade, 3.4 (5%) in other governmental or supranational debt, and 8.4 (11%) in gold. 

Let me assure you that though, for instance, holding both sovereign bonds and gold can be a very safe and risk-adverse strategy, since if something goes seriously wrong you might at least be left with something, 30 years US bonds yielding 3 percent, and gold at $1.715 per ounce, cannot simultaneously both be real safe assets, no matter how much IMF suggests it.

The article is also illustrated with a painting depicting Columbus voyage to the America’s, financed by Queen Isabella and who supposedly pawned her jewelry for that purpose. If Queen Isabella had been a bank, what would you think would be the capital requirements for that loan? Would America have been discovered during a regulatory reign of a risk-adverse Basel Committee? 

Instead, Spanish banks financed "safe" real estate... against very little capital.

It is high time to work on how banks, risk-takers and risk-taking can contribute net to taxpayers

Sir, Manmohan Singh, of the IMF, but in his own name, writes “It’s time to land the levy on risk takers, not taxpayers”, October 18, and he might be right and he might be wrong. Personally I lean towards the second because, if you really do not know what you are taxing might be producing it is hard to avoid any unforeseen consequences.

First of all, what we have to do is not to concentrate blindly on minimizing the direct cost for taxpayers of any financial failure, but instead analyze how to maximize the net result of what the financial sector produced was to the taxpayer. 

In fact one of the saddest aspects of the recent crisis is that the costs of cleaning it up might very well have been surpassed by all that opportunity cost which resulted from regulations that favored bank lending to “The Infallible”, and discriminated against “The Risky”, the small businesses and entrepreneurs. Who can swear that had the bank regulators not done that we could not perhaps have tons of good jobs for all our unemployed youth? 

In this respect I would appreciate regulators, IMF economists, and alike, first define to us with clarity what they believe is purpose of our financial system, and only thereafter opine how his proposal can better help us for that sector to fulfill its purpose. Most often than not, I am sure the answer would be, by not distorting its functioning like for instance with special levies. 

As a taxpayer let me be clear. I do not mind paying plentiful taxes if I am making plentiful income… so please do not try to save taxes by reducing my income. 

That of course does not mean that I would not oppose all the regulatory subsidies that help make some sophisticated bank dealings so sophisticatedly profitable, as these just distort just as much as taxes, sometimes more 

By the way, a reminder, the most severe real losses sustained the last years, have not been in derivatives but in plain vanilla operations, like securities backed with very real but very badly awarded mortgages to the subprime sector and which managed to get an AAA rating, the Spanish real estate sector, or loans to some “infallible sovereigns”.

By the way, a reminder, AIG would never have become a problem, had not the regulators enriched the value of their AAA rating so much.

Who’s really shortchanging who in India?

Sir, David Pilling in “India’s ‘bumble bee’ defies gravity”, February 16, writes: “By selling the licences on the cheap, the telecom ministry is accused of shortchanging the exchequer to the tune of $39bn.” 

Indeed, but, one could just as well argue that if selling the licenses for $39bn more, the exchequer would then be shortchanging the mobile telephone users, to the tune of $39bn plus expected returns more in fees, and over a very long time. 

In other words the $39bn are equal to taxes collected in advance,to be paid by users that are not even aware of it, meaning something which is not an example of transparency. 

In other words the $39bn will have to be repaid at the rate of return required by the telecom investor, rather than at the usually lower interest paid by the government on its public debt, meaning something which is not an example of economic rationality.