What does the Financial Times’ motto “Without fear and without favour” really signify?

Over many years I have written letters to FT mentioning for instance that the Occupy Wall Street movement, though correct in many ways, was completely wrong about the location. What they should have occupied is Basel with its Basel Committee for Banking Supervision. 

It was the Basel Committee which, with its capital requirements for banks based on ex ante perceived risk, as perceived by credit rating agencies, favored those already favored, “The Infallible”, like the AAA rated and sovereigns, and discriminated against those already being discriminated against, “The Risky”, which members include small businesses and entrepreneurs. 

I also explained to FT, in so many ways that those capital requirements, besides representing an important driver of inequality, were one of the most economic distortive factors ever, and completely impeded the banks to perform efficiently their role of allocating economic resources.

If for instance a German bank, lent to Greece, rated as one of “The semi-Infallible” Greece was just a couple of years ago then, according to Basel II, if it could make a 1 percent net after perceived risk and cost margin, then it could aspire to earn 62.5 percent on its equity. But, if instead it lent to a small German or Greek unrated business and earn the same net margin, then it was only allowed to achieve 12.5 percent return on equity. Does this nonsense makes sense to FT? I cannot believe so. Yet, what am I to think?

You can find my soon 900 letters to The Financial Times on this issue, for over soon a decade now, here:

And though I have received many letters from some of FT’s journalists and experts agreeing on my points, though I admit a couple of them have been conspicuously silent and never responded to one of my comments on their pieces, my arguments have not been allowed to fully surface. 

Now, little by little my arguments are gaining traction, although yet in an incomplete way, among others by the recent comments made by Andrew Haldane, and to which FT’s Editor refers in “Haldane occupies a strange platform”, October 31. 

I argue that if the Financial Times had given support to my arguments earlier, a lot of sufferings, and a lot of travelling on the mistaken road of Basel III, could have been avoided. 

And so I must wonder if not the Financial Times’ motto “Without fear and without favour” for more transparency should add: “Applicable to those who do suck up to us and do not hurt our egos”. 

Am I a bit upset? Yes, why not? You would be too! It is hard enough to fight the Regulatory Establishment on your own for you to also be encumbered by the uncooperativeness of a powerful media which wants to favour other arguments and other arguers. 

But, I was given a voice in the Financial Times? Yes! 15 letters published from 2003 until 2006 and only one thereafter. Whose ego did I trample on?

Then of course Martin Wolf generously permitted me in his Economist’s Forum in October 2009 to publish my “Free us from imprudent risk-aversion”. 

Do I have sufficient credentials to aspire having more voice? I truly believe so but you can judge yourself. 

That said, now and again I have found voice in other media… like for instance this letter in the Washington Post. 

But, since I am sure that I am correct in my arguments, and these will win the day, sooner or later, the Financial Times will have to acknowledge their mistake. I do not believe they will even try to hide the fact that these were my arguments… or them being capable of such un-ethical behavior as endorsing these to someone else they want to favour.

Has FT just turned into an Occupy Wall-Street extremist?

Or are you just expressing pent-up jealousy about banker’s bonuses? 

In “Restoring faith in the banking system” December 29 you write “Prior to the crisis, bankers garnered great fortunes by loading individuals and companies with excessive and unnecessary debt, or by churning investment portfolios to extract transaction fees.” Frankly, what on earth does that have to do with causing the current crisis? 

We are not in a mess because of the banker having made to much money on that! We are in a mess exclusively because the bankers built up excessive exposures to what was ex-ante officially perceived as not risky, like triple-A rated securities and “infallible” sovereigns; and that happened exclusively because silly regulators allowed the banks to do so against very little or no bank capital at all. If you want to search for the source of income which originated immense bankers’ bonuses, then look no further than to the outrageous leverages allowed for some assets. 

How on earth will the Western World be able to restore its faith in the banking system with editorials like this which seem to indicate that our only possibility is to sit down and wait for the new good bankers?… like waiting for a New Soviet Man. 

Want to restore faith in the banking system? Throw out those who produced Basel I and II, instead of allowing them to concoct an even more dangerous Basel III. 

PS. You write “The asymmetry of risk and rewards in banks has led to poor outcomes for society” and I must ask, what about the information asymmetry powers you exercise in favor of the opinions of those you want to favor? Do we have to occupy FT too? 

The Western World is in a freefall, and no one is discussing the reason why

Simplified, if the cost of funds for a German bank was 2 percent; if it wanted to earn a 1.5 percent margin; if the cost of analyzing the credit worthiness of a German small business was 1 percent; and if the risk that the borrower would default was perceived as 3 percent, then the German bank would charge the German small business an interest of 7.5 percent. 

And if the cost of funds for a German bank was the same 2 percent; if it wanted to earn the same 1.5 percent margin; if the cost of analyzing the credit worthiness of Greece was zero, because that is paid by Greece to the credit rating agencies to do; and if the risk that Greece would default was perceived as 1 percent, then the German bank would charge Greece an interest of 4.5 percent. 

If the German bank was required to have about 8 percent in capital against any loan, and could therefore leverage its capital about 12 times, the bank could expect to earn 18 percent on its capital when lending to a German small business or when lending to Greece. 

But that was before the bank regulators of the Basel Committee intervened and messed it all up. 

These regulators, ignoring the empirical evidence that bank crisis never occur because of excessive exposures to what was considered risky but only because of excessive exposures to what was considered as absolutely not risky, with their Basel II, told the banks “You German bank, if you lend to a “risky” German small business you need 8 percent in capital, but if you lend to an infallible Greece you only need to have 1.6 percent in capital”. 

And because that 1.6 percent allowed for a leverage of more than 60 times when lending to Greece, the German bank, though it still could earn a decent 18 percent on its capital when lending to a German small business, suddenly could expect to earn 90 percent on its capital when lending to Greece. Hell, the German Bank could even afford to lower the interest rate it charged Greece and still earn more when lending to Greece than when lending to a German small business. 

And of course the German bank, as did all banks in the Western world, started running to the officially perceived safe-havens of Greece, Italy, Spain, triple-A rated securities and others, where they could earn much more; and of course the governments of the safe havens could not resist the temptations of cheap and abundant loans, and all these safe-havens became dangerously overcrowded… while the small German business found it harder and much more expensive to access any bank credit… and while the too big to fail banks grew even bigger.

And, many years into a crisis that has the Western World in a freefall, this issue is not even discussed, and the same failed bank regulators are allowed to work on Basel III, using the same failed loony and distorting ex-ante perceived risk of default based capital requirement discrimination principle.

Hell, even the Financial Times has decided to ignore the hundreds of letter I sent them about it, and this even when they know they published two letters of mine that clearly warned about what was going to happen. In January 2003, “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds” and, in October 2004, “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. 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 (sovereigns)? 

Occupy Wall Street? No! Occupy Basel! (Perhaps occupy the Financial Times too!)

PS. This post was made before I realized that the reality was even so much worse because, instead of applying to Greece the 20% risk weights Basel II would have ordered EU authorities assigned Greece a 0% risk weights and so European banks, when lending to Greece did not have to hold any capital. How crazy is that?

PS. At the end of the day the EU authorities kept total silence about their mistake and blamed Greece for it all. No solidarity. What a Banana European Union.