Mr Grainger has regulators who did not lose their pensions to thank for losing his life savings with Northern Rock

Sir, Emma Dunkley writes about how Dennis Grainger, a one-time Northern Rock manager, lost his savings when the bank collapsed. “10 Years On: The victim: ‘It’s left a nasty taste in our mouths’” September 2.

One sad part of the story is that it will most often be retold by ex-post/Monday quarterbacking besserwissers, in terms of Mr Grainger taking excessive risks, something that no matter his wife’s concerns, he was not doing in any for him comprehensible way. And what’s wrong with one man putting all his eggs in the same basket in a crazy world in which regulators give banks huge incentives to put all their eggs in the same “very safe” basket?

That of allowing banks to leverage their equity (capital) 60 times or more with the net margins obtained from what was perceived, decreed or concocted as safe, like AAA rated and sovereigns, that was what in a huge way contributed to bring Mr Grainger’s “safe” Northern Rock down.

Did regulators lose their pensions because of that? No, they even got promoted. Many of them are even hailed as heroes when with QEs and ultra low interests they are kicking the crisis can over to next generations. It is truly an unfair world. It leaves indeed a very bad taste in my mouth.

PS. That FT, in its “10 years on”, is unable to pinpoint the main causes for the crisis, does only worsen that bad taste in my mouth.

@PerKurowski

We need to rewrite bank regulation from scratch before accidents are unmanageable

Sir Martin Wolf asks “how do banks get away with holding so little capital that they make the most debt-laden of private equity deals in other industries look well capitalized?”, “Why banking remains an accident waiting to happen”, November 28.

Mr Wolf could do well reading carefully the minimum bank capital requirements that have been imposed on the banks by their regulators. There he would see that if the banks lend to the public sector, or to creditors qualified as utterly safe by the credit rating agencies, such as securities backed by subprime mortgages, they need very little capital. If, on the contrary they would want to give credit to an unknown and not to well capital endowed entrepreneur, who might help to create those decent jobs the society needs, then the bank has to put up a lot of capital. With this incentive structure guess which route the banks are taking?

Wolf also mentions Henry Kaufmann’s suggestion to submit to special intense scrutiny banks that are deemed “to big to fail”. As the failure of any of this to big to fail banks would clearly have much worse consequences for the world than a little Northern Rock has, I have always suggested that the best way to insure us against the putting all the eggs into the same basket risk, is a small progressive tax on the size of banks. We might lose out on some of the economies of scale, but then again we have always been told that you can’t have the cake and eat it too.

We need to look further than the usual suspects

Sir, I absolutely agree with Martin Wolf when in "Big lessons from Northern Rock" November 16, he answers with an unqualified yes the question "Would it no be better to let mismanaged institutions go under, while protecting small depositors effectively?

Nevertheless, that forces us to define mismanagement and though I agree that management should be the first usual suspects we round up, in this case I would loath to let go, without further investigation, all those bank regulators who by inventing the current structure of the minimum capital requirements for the banks, and appointing the credit rating agencies as their commissars, could ultimately prove to be the real intellectual perpetuators of this mess.

On some dangerous impreciseness

Sir Martin Wolf in “The Bank loses a game of chicken” September 21 mentions that “the banks both created the radioactive securitised obligations and set up special investment vehicles (off-balance sheets banks) that they must now rescue at the expense of lending to everybody else” but this contains some impreciseness that is dangerous when we have to act very clearheaded.

First, yes the banks played a role in designing the securitised obligations but what really gave these the radioactive qualities were the prime ratings given to them by the regulator sponsored credit rating agencies. Second, the setting up of special investment vehicles was much a response to the bank regulations coming out from Basel, a response that as the bank regulators let it pass seemed to have been blessed, officially or by ignorance. Third the rescue at the expense of lending would only be true if bank regulators, as they should, since at this moment they serve no real purpose, do not waive some of their minimum capital requirements and thereby do not force the banks to allocate too much capital to harbour the homecoming lost sons.

As a minimum make sure that no one forces you to trust the existence of gold in California

Sir, Philip Stevens ends his “Modern-day parable of the run on Northern Rock” on September 21 questioning “Why should we trust anyone?” though a far more precise question would be why should we should be forced to trust anyone? Describing how “the squall became a hurricane because the risks of subprime lending had been carefully concealed in the mortgage securitisation market and then scattered to the winds” he should have remembered that what allowed that to happen were the prime ratings awarded to these instruments by the credit rating agencies.

Stevens, the doubter, even mentions almost with sadness that “it is too late, even if we wanted to, to roll back the frontiers of financial innovation” but of course that is not needed when all that is called for is some more scepticism with regard to the gold in California.

Start dismantling any forced use of the credit rating agencies, now! If the markets want their services let them say so but do not have the regulators do their marketing for them.

Unfortunately Northern Rock is not the war, it is just a war incident and on top of it only a minor one.

Sir Martin Wolf in “From a bank run to the nationalization of deposits” September 19 takes a Polaroid photo (if anyone in this digital world remembers what they were) and that tells little of the story. Not only because the events that lead up to this Northern Rock moment have been in the pipeline for a very long time but also because, unfortunately, we are still very far away from where we could be able to discern the end of the story and in fact we should all count our blessings if this all stays as the “Northern Rock” moment. Wolf is of course aware of this when he answers his own question on whether this is the end of the story with “a far from it”

The fact then that Wolf raises so early the questions of whether the disaster could have been prevented, whether the crisis could have been better handled and finally on what to do about it in the future can only be explained in terms of a very human desire of wanting to believe its over, looking to numb those fears that Wolf and so many of us share and that make us “tremble at what may happen”.

Wolf sees the events as an “unwinding of past excesses” sort of like shedding some kilos, while I having been much more sceptical of what has been in the doings see the need to unwind much more than that, among other a bank regulatory system that has placed us on the clear course of fewer and fewer bigger banks, until we hit the very biggest final bank bang. For a brief look ahead, read Saskia Scholtes “Credit turmoil set to benefit big banks”, September 19, where you can read on how central banks are already in despair outsourcing their responsibilities to the banks... while naturally crossing themselves.