Regulators instructed banks to compete with small savers and insurance companies for whatever was perceived as safe.

Sir, Michael Mackenzie writes “the concern that investors will extend their embrace of riskier assets and of private markets that are far less liquid and transparent, in an effort to boost returns over time.” “Contrarians gain confidence amid fog of future predictions” September 7.

Of course, how can it not be? Small savers and insurance companies face huge new competition for what’s perceived as safe as a consequence of regulators, with risk weighted capital requirements, telling banks to stay away from what’s perceived as “risky”, and to maximize their risk adjusted returns on equity with what’s perceived, or decreed, or concocted, as “safe”. 

Out went the savvy loan officers, in came the equity minimizing financial engineers.

So what’s the threat now? A new crisis resulting from excessive exposures to “the safe”, like some 0% risk weighted Eurozone sovereigns deciding it cannot pay back debt that is not denominated in its own printable currency, or regulators waking up to the fact that what is really dangerous to our bank systems is that which bankers might perceive as safe.

Sir, when in 1988 bank regulators assigned America’s public debt a 0.00% risk weight, its debt was about $2.6 trillion, now it is around $22 trillion and still has a 0.00% risk weight. When do you think it should increase to 0.01%? 

http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

@PerKurowski

Our economies are being serviced with an unrequested euthanasia, courtesy of bank regulators.

Sir, John Authers and Michael Mackenzie contrasts the Yippie Ki-Yay feelings of the bull run market of the late 1990’s, with the subdued feelings of the current one, “Where have the good times gone?” March 2.

And they are right to do so, cause the differences of then and now are the same as those between signing up for a mortgage to buy your family its first house, and the signing of a reverse mortgage to extract the most value of your house to take care of your aging days.

The money pumped into our economies by nervous central bank technocrats is, because of nervous bank regulating technocrats, not allowed to flow to those who build future, like SMEs and entrepreneurs, for the sole amazingly silly reason that these are perceived as more risky from a credit point of view. And so the money pumps up the value of assets that have not shown much more merit than just being there, available. 

One day historians are, amazed, going to look back at these days in order to try to explain how come a small group of regulators were given power so as to be able to service our economies with an unrequested euthanasia.

Europe is caught in a bank regulation trap set up by the Basel Committee and the Financial Stability Board

Sir, I refer to Ralph Atkins’ and Michael Mackenzie’s “Caught in a debt trap” January 29.

They write “Crisis-fighting actions by central banks have not only sent yields on government debt to lows not previously seen in recent history but many of them are negative. Across much of Europe, investors are actually paying for the privilege of lending money to governments in some cases.”

Indeed, but little can be concluded from that without referencing the regulatory trap in which banks have been caught.

In Europe banks represent by far the most important part of how liquidity is transmitted to the real economy. And Europe’s equity scarce banks, because of tightening equity requirements, for instance by means of the leverage ratio, while the risk-weighted equity requirements are still in place, are being forced to take cover, more and more, in what regulators have denominated to be safe havens… with deposits at central banks and debts of “infallible sovereigns” being the safest of those.

And so banks, at gunpoint, are forced to accept negative rates on their deposits with central banks or incest in low yielding sovereigns. And so what we see is not a market expressing its free will, but a market that is competing with banks subject to distorting regulations.

If Mario Draghi had not been the Chairman of the Financial Stability Board, and might therefore be too reluctant to concede how disastrous current bank regulations are, then perhaps the recent stress tests of European banks would have included an analysis of what was not on their balance sheets. And that would have pointed squarely to the lack of lending to the “risky” small businesses and entrepreneurs… those tough risk-takers Europe needs to get going now when the going is tough.

I still believe bank regulators did it all because of sheer group-think derived stupidity but, if not, they should be… well, I leave that to you.

Central banks pushing down government borrowing costs to historic lows. Is it by wooing markets, or is it a shotgun wedding?

Sir, Ralph Atkins and Michael MacKenzie write that “the world’s biggest central banks have this year wooed financial markets, pushing down government borrowing costs to historic lows”, “Central banks take their cue from Sinatra” December 11.

Really, is it by wooing or is it more of a shotgun marriage? Since capital requirements for banks are being increased all around, but the risk-weighting that so much favors the borrowings of the infallible sovereigns remains entrenched, more than of Sinatra’s singing it makes one think of his rumored relations to the mafia.

The Basel Committee giving hints on what to do

Investors driven out of safe investments by bank regulations and QEs, are they yield-hungry or just yield-starved?

Sir, Tracy Alloway and Michael MacKensie write that “Sales of US corporate bonds reflect a worrying lack of ratings differentiation” and they title that “Yield-hungry investors overlook credit risk” September 19.

All Fed’s QE’s, as well as the risk-weighted capital requirements for banks, as well as the upcoming liquidity requirements for banks, as well as much other risk-adverse regulations, only end up crowding out normal investors from what is deemed as “absolutely safe”, that which used to be said belonged to widows and orphans. 

And in that respect I wonder if “yield-hungry” is really the correct description of investors who seem more to have been yield-starved by official governments actions.

But also, let us not forget to ask ourselves… when can the extremely safe havens become so extremely dangerous crowded, so that suddenly the risky waters outside are actually safer?

And, is it not sad to read that increased corporate leverage is not resulting from increased real economic activity but only from “the combination of share buybacks dividend increases and M&A activities? I bet some years from now some authorities will once again try to explain that to us as just the result of “unintended consequences”… let us not be fooled by that… at least to me they are guilty, until they proved beyond any reasonable doubt it was not their intentions… or they plead insanity :-).

Most of the concern with derivatives derives only from the fact that “derivatives” sounds so deliciously sophisticated.

Sir, Tracy Alloway and Michael Mackenzie when reporting on the “Dangers to system from derivatives´ new boom", August 20, might not understand the most important differences between underlying markets and the derivatives traded based on these.

In a derivative, there is a buyer and a seller, and so whatever happens someone wins and someone loses and in essence it’s a wash out… of course as long as all can live up to their commitments.

But, in a real market loss, like that of a lower value of a stock, a lower value of a painting, or a lower value of a real estate, there is at that time only a loser… and no winner… that is unless you count he who might have way back earlier sold the stock.

And in this respect the trading in derivatives will depress much less the market than a depression of the values of the underlying vanilla assets.

The big fuss that is raised around the issue of trading of derivatives, again, besides the possibility of one side of the trade not living up to his commitments, has much more to do with the fact that “derivatives” sounds so deliciously sophisticated.

We must stop building that mountain of dangerous elusive safety that is sure to crumble and fall on us.

Sir, I refer to Tracy Alloway’s and Michael MacKenzie´s “Finance: The FICC and the dead” August 12.

In October 2004, in a formal written statement delivered at the World Bank as an Executive Director, I warned

“I believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

I have of course been much ignored ever since, as it is not considered comme il faut to be too right especially in the company of credited experts.

But Sir, now we are back to that period, and again… and it is not that the waves have disappeared… it is that the wave is building up… Just you wait ´enry ´igggins, just you wait, until it breaks.

When bank regulators with their risk-weighted capital requirements of Basel II basically ordered banks to stay away from what is "risky"… and now make those orders even more imperative with the liquidity requirements in Basel III, and when we now read about asset managers “steering clear of certain bonds, such as asset-backed instruments whose so-called secondary markets are not deep” one thing is clear… and that is… the world is trying to build a more and more, a higher and higher, mountain of safe assets.

Perhaps something on its very top and its very center might survive, but the rest is going to come crumbling down… sooner or later, there is just not enough safety material to go around for that kind of mountain.

They seek it here. They seek it there. Those Basel bank regulators seek it everywhere. Is it in heaven? Is it in hell? That damned elusive bank stability… (which does not even have the decency to rhyme!)

Bernanke’s “close to zero interest while unemployment is high” squares mostly with increased public sector employment

Sir, on your front page of December 13, we read about Ben Bernanke announcing “The US Federal Reserve is expected to keep its rates at close to zero until unemployment falls below 6.5 percent”. 

Excuse me Mr. Bernanke: Interests at close to zero for whom? For those for which banks can lend without holding much capital, “The Infallible”, triple-As and the sovereign, that might be true. But for those banks are required to hold many times more capital against, like all borrowers that do not have a credit rating or do not have a top credit rating, "The Risky", like small and medium businesses and entrepreneurs, some truly important job creators, that is certainly not true. The fact is that the real risk adjusted interest rate differential between “The Infallible” and “The Risky” must be widening by the minute, as bank capital grow scarcer and scarcer, as some of "The Infallible" ex-post join "The Risky"

And since according to the regulators the most infallible of them all, is the Government, and would therefore be the one receiving more and more of these “close to zero interest” funds, it would seem that the only way we will be able to have unemployment to fall below 6.5 percent is by creating public sector employment. Is this the unstated objective? If so, that is not very transparent.

All bank spreads are not alike

Sir, Michael Mackenzie, Ajay Makan and Nicole Bullock write that the spread on US consumer mortgages has widen over the last year when compared to that of Treasuries, “Mortgage rates fillip for banks”, June 4. 

Unfortunately, their analysis is flawed as it fails to take into account that all spreads are not alike, as to earn some require the bank to hold more capital than to earn others, and so in fact the complete opposite conclusion could be the valid one. 

In these days of scarce bank capital, had they run the figures on that which most generate capital requirements for the banks, namely the lending to the “risky” small businesses and entrepreneurs then they would have seen what borrowers are really hurting the most.

It was not the faith based financial institutions who caused it but the “too few to follow”

Sir we know with absolute certainty that had not the regulators empowered some “too few to follow”, the credit rating agencies, and created some perverse incentives that interfered with the risk allocation mechanism of the market, the minimum capital requirements for banks, we could have had another type of crisis, but definitely not this one. In this respect Michael Mackenzie is as right as he can be to argue “It’s a stretch to blame hedge funds for banks collapse”, June 27, and mind you I am not a great fan of these what I call “faith based financial institutions” that charge outlandish fees for their services and keep you mostly in the dark.

And blaming derivatives when the originals, the mortgages to the subprime sector in the US were so badly awarded is just like the robber pointing with his finger down the street and loudly shouting “there he runs that s.o.b!

A wanted safe haven is not the same as a wanted permanent home.

Sir Michael Mackenzie reports on “Concern at size of debt auctions” March 27, and of course they should be very concerned as so much of the current plans of helping the economy recover hinges on the possibilities of finding buyers for the US treasury bonds.

As I have often repeated the danger is that US confounds the eagerness of markets in finding a temporary safe-haven with a willingness of capitals finding a new permanent home in the US and that is as we all should know a totally different animal.

Also there is a clear and present danger in not being able to access the real market signals since the current rates out there have nothing to do with the rates required if the Fed was not doing so much buying. In some ways it is like a bank participating in buying some securities in order to make the harsh mark-to-market truth easier to digest. It only works over a short period of time.

What U.S. risk is FT exactly referring to?

Yesterday, September 10 FT had on its first page a report signed by Krishna Guha Michael Mackenzie and Nicole Bullock that spoke about “the cost of insuring against a US default crept higher” and referencing a price for insuring that “implied that the US was more likely to default on its obligation than” several other countries.

Today, September 11, John Gapper in “Take this weekend off, Hank” apparently also finds a need to mention “that credit rating agencies had to declare to the investors that the Fannie and Freddie bail-out would not affect the country’s triple A sovereign rating.”

Given that US debt is issued in dollars, what exactly does this U.S credit risk insurance that you are talking of cover? The risk that they will run out of paper and ink at the US Bureau of Engraving and Printing?

We need a new batch of bank regulators

Sir these days the credit rating agencies are getting pounded on, as they should be, for instance as described by Joanne Chung and Michael Mackenzie in “SEC sees conflicts of interest at rating agencies” July 8, but the really frightening issue is how on earth we landed ourselves some bank regulators that trusted so much the credit rating agencies.

No matter what you believe the credit rating agencies they do not even intend to look into the future, they just extend the past into the future, and so they do not even purport their ratings to be correct, and besides that they are manned by humans and therefore bound to err.

But all that did not stopped the regulators from assigning to the credit ratings agencies the role as supreme risk overseers and by doing so reinforcing the beliefs of all those who wanted to believe that the future is manageable. And, like lemmings, the market followed the officially endorsed credit rating agencies over a precipice, and will do so over and over again. Is it not high time to get us a new batch of bank regulators, some that are more knowledgeable of the very basic facts of life?

Stripe the credit rating agencies´ powers

Sir “Ratings agencies move to restore the credibility” by Saskia Scholtes, February 7 and “Rating agencies face struggle to make the grade” by Michael Mackenzie, February 9 are but two of thousand of articles that refer to how the credit rating agencies will try to make amend and become better.

Unfortunately, our real underlying structural problem goes into the complete opposite direction. The more the few we have empowered to tell us about where to go get better at it, the more likely we all are to follow them where we should not go.

Allow for credit rating agencies, they are useful, but please stripe them from their artificial powers.

Clarity about what?

Sir Michael Mackenzie and Stacy Marie Ishmael report that “Moody’s offers to change debt rating system” basically substituting a number up to 21 for their current letters, presumably to increase clarity. Clarity about what? Risks? In that case the more confusing the reporting system perhaps the less prone it is to transmit the sense of clarity and exactness that does not exist. In this the current system is more adequately confusing.