No coroner has asked for a postmortem examination of the global financial crisis to be performed by a truly independent pathologist.

Sir, Nouriel Roubini writes:“As we mark the 10th anniversary of the global financial crisis, there have been plenty of postmortems examining its causes, its consequences and whether the necessary lessons have been learnt” “Policy shifts, trade frictions and frothy prices cloud outlook for 2020” September 12.

Yes, many postmortems but none performed by a truly independent pathologist. 

Had that occurred he would have established that absolutely all assets that caused the crisis were those banks were allowed by their regulator to leverage immensely, because these were perceived, decreed or concocted as safe.

And from that he would have reported, not a lack of regulation but missregulation; and not excessive risk taking but excessive exposures to AAA rated securities, residential mortgages and 0% risk weighted sovereigns, like Greece.

And after such a report it is clear there would have been a total shake up of that group-thinking mutual admiration club known as the Basel Committee for Banking Supervision.

But since that report would have contained so many of truths that shall not be named, it never saw light, and consequentially the lessons have not been learned. 

Therefore the distortions in the allocation of credit have remained; something which has caused all the mindboggling large stimuli, like Tarp, QEs, fiscal deficits, growing personal debts that anticipate demand, and ultralow interests, to only result in kicking the crisis can forward and higher.

Sir, I have never been a bank regulator but from very early on I disliked much of what little I was seeing; and as an Executive Director of the World Bank I formally warned in 2003 against “entities such as the Basel Committee, accounting standard boards and credit rating agencies introducing serious and fatal systemic risks”

When later I discovered aspects like the runaway statism that was reflected into risk weights of 0% the sovereign and 100% the citizen; and the Basel II naiveté of allowing banks to leverage 62.5 times assets only because these had been rated AAA to AA by human fallible credit rating agencies, I could just not believe we had fallen so low.

Now, 10 years after the crisis, sadly, I am still waiting for any important authority to ask the regulators: 

“Why do you want banks to hold more capital against what by being perceived as risky has been made more innocous than against what by being perceived as safe poses so much more dangers to our bank system. Have you not heard about conditional probabilities?”

PS. Here is a somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Bank regulators got it so wrong; that we owe our children a full independent autopsy of how that could have happened.

Sir I refer to Nouriel Roubini’s “Rating agencies still matter — and that is inexcusable”, August 11.

Of course it is inexcusable: In January 2003, then as an Executive Director at the World Bank, FT published a letter in which I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.” And, of course I was referring to the intention of the Basel Committee of using credit risk ratings to set the capital requirements for banks.

And of course we need to get rid of those capital requirements that distort completely the allocation of bank credit to the real economy. That these are based on the same perceived credit risks that are already cleared for by banks with risk premiums and size of exposure, is sort of something mindboggling dumb.

But more than that, much more than that, we need a full detailed autopsy of how it came that basically the whole world’s banks ended up governed by such nonsense. And more than that, much more than that, we must also figure out how we have allowed so much time to go by without correcting what clearly needs to be corrected.

As I have said before, the world faces many problems, but since the solutions to those problems are becoming more and more globalized, their possible unexpected consequences can be so much more serious.

If for instance we allow helping our planet to be more sustainable avoiding global warming to go through the same type of flawed decision processes, we might only make more certain we’ll be toast.

@PerKurowski

Is the economic establishment really dumb or, much worse, playing dumb and conspiring? Draghinomics or Drachulanomics?

Sir when I read “Economists hail birth of ‘Draghinomics” September 7, and see the photo included, I know the establishment is circling the wagons, as all whose members therein referred to are, by defending Mario Draghi, only defending themselves.

The pillar of current bank regulations is, as you should know, the credit risk-weighted capital requirements, which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky. And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main Street.

To therefore speak well of any sort of injection of liquidity in Europe, whether by governments or the ECB, before removing that huge unsurpassable boulder that hinders banks from allocating credit efficiently to the economy, is pure dangerous nonsense.

Yes, the establishment dutifully speaks about needed “structural reforms”, but it never includes a reference to the above, to what the economy most needs.

I do not know really know whether the Establishment is truly dumb and doesn’t get it, or is just making out to be dumb. For their sake I pray it is the first, because the second option would make them co-conspirators against the chances of our young ones being able to access the new generation of jobs, which only the financing with reasoned audacity, or intelligent risk-taking, can provide for.

With respect to the future being sucked out by regulatory risk aversion, and remembering that Mario Draghi was for years the chair of the Financial Stability Board, we might perhaps better talk about “Drachulanomics”.

Europe! Stop your regulators from playing risk managers… that is too risky

Sir, Niall Ferguson and Nouriel Roubini, in “Germany is failing to learn the lessons of the 1930s…” June 9, also fail themselves when not including the necessity of dismantling bank regulations that had the regulators playing risk managers handing out discriminating risk-weights which determined the final capital requirements for banks.

Had for instance a German bank, when lending to Greece, been required to hold the same 8 percent in capital it needed when lending to a German unrated small business, instead of a paltry 1.6 percent, implying an authorized leverage of 62.5 to 1, you can be sure that Greece would never have been able to borrow as much as it did.

How sad Europe is still being analyzed by looking at the facts using the wrong hypothesis… and therefore its crisis has not yet been fully understood.

It is only by following the capital requirements for banks and the Potemkin ratings that you can understand our current predicament.

Sir Nouriel Roubini and Arnab Das evidence with their “Solutions for a crisis in its sovereign stage” June 1, that though experts, they are not sufficiently aware of what has really been going on in the area of sovereign finance.

I say this because in the area for “radical reform of finance” though they mention correctly the problem with the too large institutions, they fail completely to make reference to the much larger problem of how the financial regulators, in a non-transparent way and behind the backs of us citizens, are arbitrarily subsidizing sovereign finance by requiring the banks to hold lower capital requirements when lending to governments than when lending to their natural clients the small businesses and entrepreneurs.

Back in 2004 in the Financial Times I wrote: “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector... banks are up to the hilt in public credits.”

In this respect one of the most important information the Financial Times could provide its readers is the following table:

It is only be reading this table that you get to understand why there was a stampede after AAA rated private securities, even when these came with Potemkin ratings, and why there was so much lending to sovereigns… for instance to Greece which because of its ratings over between mid 2000 and December 2009 required the banks only to hold a paltry 1.6 percent.

You can’t explode a bubble and have it too

Sir are we in the future going to have to read Nouriel Roubini’s “The mother of all carry trades faces an inevitable bust” November 2, as another example of how we were warned about the risks? I hope not. First because it does not contain a single word about the what-to-do and also because it ignores that all traders, though aware that yesterday’s results has little to do with tomorrows, just in order to make a living, need to keep the dancing halls open and the public dancing.

In comparison, Wolfgang Münchau’s “We must not be too late with starting the Big Exit”, and which calls for starting to increase the interest rates in the US, is a more valiant effort to face the sad truth that you can’t explode a bubble and have it too.

Greed comes in many shapes and forms

Sir in “more comment online”, “Roubini cameo” we read about a documentary Oliver Stone is preparing on bankers and greed. September 11. Well greed comes in many shapes and forms, not just pecuniary but also ideological. Oliver Stone has for instance recently shown much ideological greed (who knows, perhaps pecuniary greed too) filming a documentary on Hugo Chavez, “South of the Border” where he does not even mention such facts that Chavez cheats the poor of Venezuela, to the tune of about 10% of GDP, by selling petrol at about two US dollar cents per litre (gas at 10 cents per gallon)

What quality-of-spending rating do the bureaucrats merit…an AAA?

If a banker lends to someone who wants to risk his money on for example an environmentally sound project but has no credit rating, then the bank has to put up 8 percent in capital. If instead it lends that same money to the Government and it is the Congressmen who decide which are the environmentally sound projects to be financed, the bank does not have to put up any equity at all.

If the world is going to keep assigning so much importance to the credit ratings then it must complement this with some quality-of-spending ratings, since the risk for the society in any financing is not only getting its money back but, even more importantly, that it is well spent.

Nouriel Roubini in “The risk of a double-dip recession” Augusts 24 gives about ten reasons for ongoing economic problems, but he does not even mention the above ongoing regulatory mindlessness; and he also writes in relation to the “risks associated with exit strategies from the massive monetary and fiscal easing; policy makers are damned if they do and damned if they don’t”. Mr Roubini, honestly, when was the last time you saw a really damned policy maker? As I see it they are all having the time of their life!

Do not undercut in any way the disciplinarian role of the market

Sir as an Executive Director at the World Bank 2002-2004 and as member of its Audit Committee I remember as one of my biggest frustrations continuously warning about counterparty risks and always ending up being answered along the lines of... “What counterparty risks? Don’t you know that a triple-A is a triple-A is a triple-A?”

This is why I take strong exception when Matthew Richardson and Nouriel Roubini in “Insolvent banks should feel market discipline”, May 7, though correctly advocating more of Schumpeterian creative destruction, are surprisingly lenient in the case of counterparty risk. They even write “But unlike with Lehman, the government can stand behind any counterparty transaction”. No!

What is counterparty risk? The risk that for example the insurance company you have insured yourself with cannot pay up when it should. This risk is clearly not a risk that an ordinary citizen should have to bear but for the financial system’s overall health it is an absolute must that all the qualified institutional participants bear with the full consequences of it.

In fact, in case they have not read it, current third pillar of the otherwise so discredited bank regulations from Basel – named the market discipline, “aims to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes, and hence the capital adequacy of the institution.” And that of course means the evaluation and the taking of counterparty risks.

And by the way, just as the markets would benefit from more creative destruction, let me also remind you that so would our financial regulators

Anything you can rate I can rate better!

We have just been served proof of how dangerous systemic risk are was when the regulators induced the world to follow the advice of some few credit rating agencies; and millions will lose their life savings and millions could even die as a direct consequence; and now Lasse Pedersen and Nouriel Roubini propose to dig us even further in the hole we are in with their “A proposal to prevent wholesale financial failure” January 30; where they suggest to adjust the capital requirements of the banks by rating their systemic risk. What Gods do they think they are, believing they can fully understand systemic risks and that their interference on a lower level would not alter the system and produce even much more advanced and dangerous systemic risk?

From the start I was opposed to the bank regulations emanating from Basel suspecting that these could easier lead us to something bad than to something good, but on this proposal I just know it to be so. Please… can we go in the other direction of simplifying how we regulate, so that we all understand more what we are doing?

A proposal for a reasonable regulatory forbearance

Sir Martin Wolf in “America’s economy risks the mother of all meltdowns” February 20 quotes Nouriel Roubini mentioning as one of the reasons that the Fed finds it so hard to head the danger off is that “regulators cannot find a good middle way between transparency over losses and regulatory forbearance”. I do not agree. It might not be perfect but a good way to start doing that would be to give the banks a longer time to adjust their capital requirements to the down ratings produced by the credit rating agencies on credits that should never have received good credit ratings to begin with.

I mean what is the need to compound the misery of the banks by forcing them to raise new capital immediately? To do so amounts almost to extortion that could only cause banks having to raise unnecessary expensive capital; which would do no one but some vultures any good. It is like the doctor suddenly informing a person that he has gained hundred pounds over the last two years and forcing him to shed that weight before next Tuesday. A scalpel?

If I were a bank president I would be raving mad with the regulators. First they tell me I have to raise capital in accordance with what their outsourced credit rating agents tell me and then when these go madly wrong they make me pay for it immediately.