Sooner or later redistribution profiteers will meddle with any wealthy sovereign wealth fund.

Sir, with respect to “the world’s largest sovereign wealth fund” Norway’s, Richard Milne writes: “The danger is that one of the few sovereign wealth funds based in a democracy could be weakened by political meddling.” “Wealth fund’s abode at risk of becoming Norway political saga” May 9.

I quote from my book “Voice and Noise” from 2006. “My name was put forward as a candidate for the post of Diversification Manager in the Venezuela Investment Fund that was being created in 1974 to handle the oil income surpluses of the nation. I entered the Fund its very first day, and I left a couple of weeks later the same day my desk arrived, utterly frustrated when the Fund was requested [by the politicians in government] to analyze, and obviously endorse, [in one week] the economic feasibility studies of a 4 billion dollar investment known as the Fourth Plan of SIDOR, the big Venezuelan iron and steel complex. With an “if something goes wrong with this project the Venezuelans might have the right to hang us in Plaza Bolívar, and I’m much too young for that” I slammed the door on the public sector …”

Sir, sometimes politicians (redistribution profiteers) will meddle with a sovereign wealth fund after just two weeks, sometimes it will take decades for that, but sooner or later that will always happen, you can bet on that.

@PerKurowski

To integrate migrants in Sweden might have to begin with helping Swedes valuing their heritage (their Swedness) more.

Sir, Richard Milne’s reports Ulf Kristersson (Moderate party) told the Financial Times that integrating the hundreds of thousands of immigrants in Sweden was a “really tricky thing,”“Swedish poll favourite eyes welfare change to integrate migrants” May 28.

Over the weekend I was in Sweden visiting family. There I had a chance to sit down and chat with the priest of the parish where the cemetery in which my parents are buried. After hearing her lamenting, discreetly, I said: Indeed, if you do not teach your children about the historical importance of the Church for Sweden’s development, it is hard to see them take due interest of it. 

Two years ago, the only girl wearing a typical Swedish national dress in the “folkpark” where we danced around the Midsummer pole, was my Canadian granddaughter. It was sad. Of course, to integrate migrants to something not given sufficient importance is a tricky affair. In Sweden, when it comes to swearing, even the “fan” I knew has been pulverized by the “shit”. 

Perhaps Sweden needs to look at itself more in terms of a cultural profitable business franchise, and have its universities analyze how much Swedes and migrants would be losing if Sweden got rid of its originalities and went neutrally global. To start out they could try calculating what its Swedish heritage has meant to bring cohesion and strength to the marketing strategy of an IKEA.

But perhaps that’s not politically correct. I wonder if a university in UK has dared estimating the added value in pounds to Britain, of the recent Meghan and Harry wedding. Surely many billions! Instead you have a Bank of England giving you the cost of Brexit, £900 per family.

PS. https://subprimeregulations.blogspot.com/2010/10/god-make-us-daring.html

@PerKurowski

On the issue of a Universal Basic Income everyone must take side. You are either with the citizens, or with the redistribution profiteers.

Sir, Richard Milne, with respect to the trial on Universal Basic income in Finland writes: “Ilkka Kaukoranta, chief economist of the SAK trade union confederation, is sceptical of the trial. Unions believe that taking away the conditionality of benefits — the requirement that their recipient has to look for work — would undermine the welfare system, leading to cuts. ‘A conditional safety net is the only way to combine a high level of benefits with a high level of employment,’ he says” “Finland puts ‘money for nothing’ policy to the test” January 29.

Let us be clear the “un-conditionality” of the Universal Basic Income threatens, directly, the franchise value of the redistribution profiteers. And, if this is not made clear, and they are immediately denounced at all time, we citizens do not stand a chance.

Is it going to be a world in which all of us are given some income that would make it easier for us to get out of bed and reach up to the new economy appearing, or is our only chance to survive to master the art of sucking up to the redistributors. 

In my saddened Venezuela, the current government offers, by means of food bags known as “CLAP”, much better chances of survival to those who bow their head and humiliate themselves by supporting it. Is that what you want? 

http://myubi.blogspot.ca/2017/01/my-universal-basic-income.html 

@PerKurowski

Whether Norway Fund should be free to invest without government intrusion is not really the most important question

Sir, I refer to Richard Milne’s discussion of how imposed investment limitations caused the Sovereign investor to miss out on billions of dollars over past decade, “Ethical stance crimps Norway oil fund” March 22.

The real question is: if Norwegians had been allowed to decide on their own per capita share of the net oil revenues, like for instance spending it now or picking their own investment advisors, would they have been better off or not? Long term, I believe they would.

What now exist are some millions of Norwegian expecting to be recipients of whatever the central managed oil revenues can provide them, without having had to take any responsibilities for it. By allowing a Fund to manage it all, Norwegian have missed a great learning opportunity, and have less idea about where all oil revenue came from, and where all oil revenues went.

If something goes wrong with the Fund, something that can always happen, they will show little understanding. Also, the sole existence of a huge amount of centralized savings is something that can attract the attention of dangerous redistribution profiteers/populists.

I recently sent a similar letter, also commenting on the Norwegian Fund. Seemingly that Fund is a fund that shall not be questioned, too much, at least not by FT.

@PerKurowski

Even the best sovereign wealth fund, like Norway’s, will in the long run degenerate. Sorry, but that’s life.

Richard Milne comments that the Norwegian sovereign wealth fund, “has become a more active investor, trying to use its growing heft to influence company behaviour “Norway sovereign wealth fund flexes shareholder muscles” March 8.

Sir, I tell you, there will come day, you can bet on it, when a majority of Norwegians will opine “we would have been much better off managing each one of us his share of the net oil revenues, than handing these over to a sovereign wealth fund”. And they will be right.

How do I know? Well that’s how it goes when too few decide on so much wealth… it goes to their heads, and they start doing things for which they have never really been authorized, and then something happens, and then there is nothing to be done about it.

Do I mean that it was wrong of Norway to set up this fund? Not at all, I even wish Venezuela had done that… which it did… but

In 1974, as a recent young MBA, I became the diversification manager of the first Venezuelan Investment Fund set up to manage the nations fast growing oil revenues. It took me only two weeks to understand that it would not work, and so I resigned.

Norway was much further advanced than Venezuela when, in 1990, it set up its fund, and it has clearly done a lot better. Well-done Norway!

Nonetheless, the degenerative forces imbedded in such a fund are just too powerful, even for Scandinavians. The introduction of new objectives, without a clear explanation of what that could entail in reduced returns, is just one example of such forces.

Why do I make this point? Because in my Venezuela, again I hear the voices of those interested in its management, clamoring for something like the Norwegian Sovereign Wealth Fund. And Sir, I trust a thousand times more the citizens to know what to do with their share, than some few experts with everyone’s share.

@PerKurowski

If we are to avoid Nazi mentalities to take over, citizens need to be able to express their deeper inner concerns

Sir, I refer to Richard Milne’s “Rise of populists poses dilemma for Nordic mainstream” February 14.

As a son of a polish citizen who had to suffer concentration camps for almost five years, I am as far away as can be with sympathizing with Nazis. And of course I see with disgust anyone “pictured with Nazi memorabilia or uttering racist comments”. But Sir, that does not determined them to be, in any way, “uniquely awful”.

To argue so just opens the door to the exercise of dangerous political hypocrisy while closing the door on the possibilities of citizens to express their usually not at all bad meaning, deep concerns.

For a citizen, in a fairly small society like Sweden to be worrying about immigrants does not make him a bad citizen… it makes him just a citizen worrying about immigrants. Is that so hard to understand or is that what some do not want to be understood?

Sir, the repression of citizens’ feeling and worries, is precisely the best fertilizer for movements that can be taken over by Nazi type mentalities. Healthy societies need to be able to discuss, to ventilate, everything that bothers them, not only what’s political correct to discuss. 

A personal PS: My mother was Swedish. 93 years old, she passed away last Friday. On Thursday night, two not at all Swedish looking immigrants, vociferating in a totally foreign language, transported her home. I have rarely met a person more open to treat all without any kind of distinctions than my mother, but had she not the right not to feel totally at ease?

@PerKurowski

Sweden, ask Stefan Ingves a simple question before granting him more powers.

Sir, I refer to Richard Milne’s “Sweden central bank chief [Stefan Ingves] gains forex intervention powers” December 5.

And “Andreas Wallstrom, an economist at lender Nordea, called Mr Ingves’s new powers “truly sad” because currency interventions often failed to bring about the intended result.”

Mr. Ingves, as the current Chair of the Basel Committee, is one of the experts on interventions that fail to bring about the intended results.

Take just the case of regulations that force banks to hold more equity against what is perceived as risky than against what is perceived as safe, and which dangerously distorts the allocation of bank credit.

The result, dangerous bank exposures to AAA rated securities and Greece and equally dangerous lack of exposures to “risky” SMEs and entrepreneurs.

So just ask Mr Ingves the following:

Sir, would you be so kind so as to provide us with one example of a major bank crisis that resulted from excessive bank exposures to assets that were perceived as risky when placed on the balance sheet of banks.

If he cannot answer, should that not be a sufficient indication he might have no idea about what he is doing?

Regulators assigned a 20 percent risk weight to AAA rated private sector bank assets and a 150 pecent risk weight for similar assets rated below BB-. I can think of many instances were bankers were lulled into a false sense of security by good credit ratings, but I cannot for my life imagine bankers building up excessive exposures to something rated below BB-. Sir, can you?

VW & emissions & controls: Fines for allowing itself to be tricked, should not become a revenue source for governments

The more I read about the Volkswagen affair the more convinced I become of that, what really does not bring anything to the table in terms of justice, economic efficiency or even sustainability, is having VW to pay huge fines to a government that hosted such inefficient emission controllers who allowed themselves to be tricked by clearly immoral but also quite ingenious engineering tricks.

On reading Richard Milne’s “Wolfsburg fears fallout from VW scandal” October 12 this is what I would suggest:

Decide on a substantial amount to fine Volkswagen for their misbehavior, but make it pay all that fine by issuing (green) shares in Volkswagen, to all who bought its diesel cars and to all of its employees. That way you do not weaken a company, or a city, while at the same time, presumably, you introduce among VW’s shareholders a wish for a better corporate behavior, so as not having their shareholder participation further diluted.

And then, just how you use hackers to assist you in building safety features for increased cyber-security condemn, all the Volkswagen engineers responsible for the misdeeds, to social work, by developing emission controls that work.

PS. This is somewhat similar to the fines on banks, which directly hurts their lending capacity, precisely when we need it the most.

@PerKurowski ©  J

#1 Macro-prudential rule is never take for granted those in charge, like bank regulators, know what they are doing

Sir, Richard Milne quotes Stefan Ingves with “sailing a small boat on the ocean: it’s good if you know how to sail.”, “Riksbank head warns on tools to tackle crises”, September 14.

But let us not forget that Stefan Ingves is the current chairman of the Basel Committee, and as such, we could presume he agrees entirely with the current risk-weighted capital requirements for banks. In essence that regulation implies the following:

The better things are going for some assets, and so the safer these look (like house mortgages), the less capital are banks required to hold against these, and so the more incentives do banks have to lend, and thereby make these assets look even better yet… that is until the overcrowding of those safe havens become so dangerous that the whole banking system fails.

The worse things are going for some assets, and so the riskier they look (like loans to SMEs), the more capital must banks hold against these, and so the more incentives will banks have to reduce lending, and thereby make these assets look even worse yet… that is until riskier but perhaps more productive bays are left so unexplored that the whole economy fails.

Sir, the first and most important macro-prudential rule is that of never taking for granted that those in charge of sailing the boats know how to sail. And as I have argued for years, current bank regulators, which include Mr. Ingves, have no idea about what happens out there on the real oceans… their experience might be restricted to having played with toy boats in bathtubs.

The second most important macro-prudential rule with respect to banks, and boats, is that instead of by all means trying to stop these from going under, assist these to fail expeditiously, whenever they seems to be insufficiently seaworthy.

If it were up to me, and knowing these are to cover against unexpected losses I would set the capital requirements for banks based of cyber attack or being struck by asteroids, so as not have to spell out these as based on risks of bankers not knowing how to manage perceived risks, and worse, on risks of regulators trying to manage risks.

PS. “Gud gör oss djärva” “God make us daring” is a Swedish psalm. It would do us much good if bank regulators tried to understand its message....perhaps Riskbank would be a more appropriate name than Riksbank for a nation that has prospered thanks to risk-taking and much reasoned audacity.

PS. Axel Oxenstierna, 1648: “An nescis, mi fili, quantilla prudentia mundus regatur?”, “Do you not know, my son, with how little wisdom the world is governed?”, “¿No sabes, hijo mio, con que poca sabiduría el mundo esta gobernado?”, “Vet du inte, min son, med hur litet förstånd världen styrs?” 

@PerKurowski

Pär Boman, at the end of the day, your children and grandchildren, and your nation, are your most important customers

Sir, Andrew Hill refers to that the chief executive of Handelsbanken told the “FT in 2013 that he had studied 5,000 years of credit risk, while the bank draws on minutes of board meetings from the past 140 years to inform its attitude to customer loans and business cycle”, “Creative forces”, “Boldness in business” March 20.

What a splendid occasion that would have been to ask Pär Boman whether in all that information, he had found any sort of evidence supporting that bank regulators should require banks to hold more equity against what is from a credit point of view perceived as risky from, than against what is perceived as absolutely safe.

That as you know Sir, has in my opinion introduced the most serious disruptive distortion in the allocation of bank credit to the real economy.

Unfortunately, in “Customers first”, Richard Milne later reports that Boman opines: “I don’t think it’s our role to have an opinion on whether the democratic system has taken the right or wrong decision. We see regulation more as a signal system from parliament on how we want banks to behave”.

That’s a shame. My opinion is that it is precisely persons like Pär Boman who owe their customers’ society, the duty to speak out if they feel signals provided by regulations could be taking banks down the wrong route.

Richard Milne quotes Boman in that the “main lesson [from] the 140 years of board minutes that lie in the basement… is that about every 17 years there is a financial crisis.”

That could be… but another lesson that should be extracted from that data is when did banks do the most for their nation between crisis and crisis… and I doubt the answer to that would be… “When we took no risks.”

On the web I find that Pär Boman has three kids… and one of this days he might have grandchildren too. He should never forget that, at the end of the day, they and his nation are his most important customers. And I am absolutely sure they do not need regulators like the Basel Committee and the Financial Stability Board to infuse their banks with dumb credit-risk aversion. That is no way how to finance their future. 

And Andrew Hill and Richard Milne, your duty, that is to press Pär Boman and others to speak out.

God make us daring!

@PerKurowski

The problem with the Nordic model is that bank regulators have tampered with it

I refer to Richard Milne’s “Nordic model starts to creak under pressure” November 21.

Sir, suppose you were a development minister of a country like Sweden that has thrived on entrepreneurship, much of it financed by banks.

And then your bank regulator, Stefan Ingves, tells you that, in order to make the Swedish banks safer, he and his colleagues in the Basel Committee, is now going to allow banks to earn much higher risk-adjusted returns on equity when lending to those perceived as “absolutely safe”, than when lending to those perceived as “risky”.

What would you do? What should you do?

You should of course shout: “No! Over my dead body! Favoring in such a way what seems ex ante to be very safe, means that medium and small businesses, entrepreneurs and start-ups, “the risky”, will no longer have fair access to bank credit… and that is too dangerous… even for the banks.”

Unfortunately, those responsible for the economic development of most countries have not yet understood the consequences of the credit risk weighted capital (meaning equity) requirements for banks.

And so before Sweden remembers that risk-taking is the spark that ignites all development and keeps the economy moving forward, it will be stalling and falling.

And that goes of course for all countries that find themselves under the thumb of senseless bank regulators.

God make us daring!

The response to monetary stimulus must be different in totally different banking systems

Sir, we have had two complete different worlds of banking.

One when banks decided to whom they would lend to and at what interest rates and what terms, based on what they perceived the credit risks to be.

The other word, the quite recent one, is one in which regulators intrude and distort the allocation of bank credit by declaring that also the bank capital, meaning equity, banks were required to hold should also be based on perceived credit risks.

And that of course increased the risk-adjusted returns on equity for banks when lending to the “absolutely safe” making lending to the risky, like small businesses and entrepreneurs, something much less attractive.

To think that the economy would respond in the same fashion to various economic stimuli with such different bank systems is quite idiotic.

And Sir, that is why, when reading Richard Milne’s “Stockholm syndrome”, November 20, about the Swedish Riksbank’s crisis-fighting measures, and where there is even a reference to 1937, I find that discussion to be so completely out of context.

It states: “‘Sadomonetarist’ rate rises led to a toxic bout of deflation and criticism from economists.”

If anything, in that respect, what we really have is sadistic risk adverse regulations.

I agree 100 percent with Christian Clausen of Nordea, in his description of 50 percent of the problem with SMEs and bank capital/equity.

Sir, I refer to Richard Milne’s “Tide of regulation has gone so far it means unacceptably high premium for SME borrowers” November 17.

In there Christian Clausen, chief executive of Nordea and president of the European Banking Federation, is quoted saying: “Ever-increasing capital demands of regulators meant banks needed to charge a margin of 6-7 percentage points to small and medium-sized enterprises (SMEs), companies which are often seen as the backbone of the EU economy. Show me an SME that can do a business case on opening a new factory or doing an investment where they can start by absorbing 600-700 basis points on margin. In this environment, it’s not possible."

And Clausen asks: "Don’t you want to allocate risk capital to the young entrepreneurs and the companies that can grow and export and create jobs? We have gone too far. Why on earth as a politician do you want to allocate the limited amount of risk capital in your society more than necessary to the banking sector? Don’t you want to allocate risk capital to the young entrepreneurs and the companies that can grow and export and create jobs? We will not create more jobs by piling up more capital, we will create negative growth because our lending costs will go up.”

Absolutely, Clausen is 100 percent correct, but unfortunately that is only in 50 percent of the story.

The other 50 percent is: Why would bank regulators require banks to have more capital when lending to SME’s, the backbone of the economy, than when lending to for instance those who possess an AAA rating or lending to an “infallible sovereign”.

Is it not so that much of the higher margin banks now need to charge SME is a direct result of the low margins they charge when lending to the “absolutely safe” because these are subsidized by the very low capital requirements that then apply?

My rephrased Clausen questions would be: Why on earth as a politician do you want banks to consume more of the limited amount of bank risk capital in your society when lending to the risky that when lending to the safe? Do you really want to discriminate against the fair access to bank credit of the young entrepreneurs and the companies that can grow and export and create jobs?

​Do you really want your banks financing the riskier future settling instead for refinancing the safer-past?

Sir, for the real economy, a stress test of banks, which analyzes only what is on the banks’ balance sheets, and ignores what should have been on these, is a useless test.

PS. Yesterday in church I was reminded of the “The Parable of the Talents”. It would do us much good if bank regulators read Matthew 25:14-30

Now is not the right time for European banks to make payouts to their shareholders.

Sir, Richard Milne reports “Shareholders press Swedish banks for payouts”, October 25.

According to recent indications from the Basel Committee, banks will have to publish their leverage ratios in January 2015, which means that their un-weighted assets to capital ratios will be seen.

If European bank shareholders only knew how important, for the competitive strength of their banks, it will be to then be able show up strong ratios, in the midst of that market panic that could result from unveiling the scary truths, they would not be asking for any payouts now.

Mr. Anders Borg, what democratic legitimacy has bank regulators to distort and discriminate, and to be so dumb?

Sir, Richard Milne, in “Sweden attacks bloc fiscal union”, February 20, quotes the Swedish finance minister Anders Borg opining with respect to the European Union, “I do think that you’re overstretching the democracy legitimacy when you’re pushing more resources and more powers to Brussels”.

This is a concern I could identify myself with, but, in that respect, much more worrisome is how the bank regulators in the Basel Committee, and the Financial Stability Board, have adjudicated themselves so much powers so as to decide who our banks should lend to. Let me explain.

In a world free of bank regulators, banks and markets would lend to those borrowers who offered them the highest expected net margins of return, after adjusting for differences in perceived risks and transaction costs. That way they maximize the returns of their shareholder’s capital, simultaneously helping to allocate the financial resources in the most equitable an efficient way, so as to help the real economy grow.

But, that is in an ideal world, because now, in this world, loony bank regulators have told banks that if they lend to those qualified as “The Infallible”, then they are allowed to leverage those net expected margins many many times more than what they can do if they lend to “The Risky. And of course, that completely distorts the resource allocation mechanism.

And it is also highly inequitable, because one dollar or one euro paid in interest by a borrower belonging to “The Infallible” will, as it can be leveraged so many times more, then be worth much more than a dollar or an euro paid in interest by a borrower perceived as “risky”.

Mr. Anders Borg, who authorized the regulators to do such thing, you and your ministers of finance colleagues? Do your other Swedish minister colleagues now that? Does your parliament know that? Do the citizens know that?

PS. By the way, besides distorting and being inequitable, those regulations are plain silly. Never ever have “The Risky” detonated a major bank crisis, that dubious honor belongs exclusively to those falsely perceived as members of “The Infallible”, precisely like in the case of the current crisis; and also because those who operate on the margins of the real economy, and might be best suited to get us out of the crisis, and get our young ones their jobs, are quite often “The Risky”.

Some questions on bankers’ doubts

Sir, I refer to Richard Milne’s interview of Pär Boman, the chief executive officer of Handelsbanken titled “The back-to-the-future banker” January 14.

In it Mr. Boman recounts that having been offered some triple-A rated mortgage backed securities by some US investments banks, Handelsbanken executives, led by him, visited the bankers in New York and asked to see the underlying documentation of the mortgages. And when that proved not to be possible, he went to the west coast and visited some of the houses used in the bonds, and from which he reached the conclusion of “it was very clearly nothing for us”.

Yes clearly that was a great job by Mr. Boman and he should be commended for having doubted. But that said it would be very interesting hearing his opinions on the following:

When presented with operations which involve triple-A ratings, at what size of potential exposure and to what extent of additional not recoverable research costs, is a banker supposed to doubt the validity of the credit ratings?

If it is possible to doubt the quality of the ratings what does that say about the quality of the regulators who with Basel II allowed banks to hold those same securities Boman so wisely rejected, against only 1.6 percent in capital, and thereby allowing bank equity to leverage 62.5 times to 1.

And if a bank discovers great reasons to doubt a credit rating, what is their responsibility in terms of communicating their doubts to the market and to the regulators?

And what is a bank to do if the doubting also extends to the supposedly infallible sovereigns... the paymasters of its regulator?

Even the safest haven could become dangerously overcrowded

Sir, Richard Milne’s “Beware of safe havens when seeking next financial crisis” July 28, makes reference to the truth that “Risky assets do not cause crises. It is those perceived as being safe that do” and to the immense regulatory bias in favor of the “not-risky”, especially the good sovereigns and the triple-A rated, and against the risky, like the small businesses and entrepreneurs.

(Mr. Milne must know, because of the emails he has received, that those arguments is part of the criticism that, at no irrelevant personal cost, I have for many years voiced quite lonely about the bank regulations that came out of Basel II. In this respect I must say that I am indeed surprised and disappointed that he makes no reference to that in his article. Had I been a PhD from his own Alma Mater, he would not have dreamt of ignoring me.)

His analysis is quite accurate and so I guess the cat is out of the bag. How on earth can the bank regulators explain what they did pushing dangerous “safe assets” and, especially, how can they defend that they mostly want to insist in doing just the same?

That said the article fails to point out the real fundamental mistake committed by the regulators and which is that they blithely ignored the fact that the markets already clear for the safe-haven perception when it sets the risk adjusted interest rate. And so, when the regulators also based their capital requirements for banks on exactly the same safe-haven perception, they turned what is a natural and reasonable pursuit of a safe haven, into an unnatural and unreasonable stampede in search of a safe and profitable haven… and even the safest haven can turn into mortal traps, if they become overcrowded. Milne mentions “Follow the debt” as to where investors should be looking for trouble. I have since 2003 told regulators “Follow the AAAs” as to where the next bank crisis will be.

Milne quotes Professor Geoffrey Wood of Cass Business School calling the “push by regulators for banks to own sovereign debt” as “premeditated theft”, but in my AAA-Bomb blog I have for a long time called that sheer communism.

Finally what Milne also fails to point out, perhaps because the implications are so frightening is that, given that huge regulatory bias in favor of sovereign debt, we really do not know what the underlying real interest rates of public debt are… and so we are in fact flying blind with dysfunctional instruments.

The “arbiters under fire” should be the bank regulators.

Sir, unfortunately, Aline van Duyn and Richard Milne, in “Arbiters under fire”, July25, fail to clearly identify the reasons why the current bank regulations based on credit ratings are so utterly wrong and make a decoupling such an urgent matter. Those reasons are in short the following: 

1. The market already considers the credit ratings when setting the risk premiums for a borrower which means that also using the same ratings when setting the capital requirements for banks give these ratings an exaggerated weight. Any information, exaggeratedly considered, is made wrong even if originally right. 

2. Regulators do not need to be concerned with credit ratings being right they should only worry about these being wrong. In this respect designing capital requirements for banks that are based on the credit ratings being absolutely right is absolute madness. 

3. Heisenberg´s uncertainty principle coming into play… the more precise you try to measure the creditworthiness of a borrower the more you might affect that same creditworthiness. 

4. The more you try to assure yourself the credit rating agencies perform their duties right, the more you are bound to trust them and consequentially the more fragile will the resulting financial system be. 

I am and have never been a bank regulator, but March 2003, in a published letter to the Financial Times I wrote “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”. Those arbiters who should really be under fire are the bank regulators.

Another FT Special Report on Risk Management in Finance that did not mention the risk of regulations

Sir, you publish a special report titled “Risk Management: Finance” March 22. In it not once do you refer to the fact that the current supreme financial risk managers of the world are the banking supervisors in the Basel Committee, and who so arrogantly assume it is their right to set Ground Zero for the rest of the risk managers.

With their risk-weights in Basel II, these inept nuts, and there really is no other word for them, decided that the banks returns on capital could be dramatically increased, by allowing leverages of more than 60 to 1, as long as they kept doing operations related to an officially confirmed no risk situation, a triple A credit rating.

Paul Davies explains “why there is now a greater understanding that there is little guidance to be found from the past when preparing for the future”. But that is only so because most still refuse to look at the recent past, and understand from it than bank regulators cannot discriminate as they did, and do, by means of capital requirements for banks based on perceived risks, without creating monstrous systemic risk.

Brooke Masters writes “now that regulators have moved to impose tougher capital and liquidity requirements, attention is turning to other systemic risk”, which ignores that it was not the lack of toughness of the capital requirements that mostly caused the disaster but the way how they discriminated. What better evidence is there that the 8 per cent capital requirement in Basel II for what is rated BBB+ to BB- has proven more than sufficient and that it is only in the area covered with AAA to A ratings where problems have surged.

Richard Milne writes “Follow the line of debt to spot the coming crisis” and refers to a possible bubble in the public sector, while not saying one word about the fact that banks can lend to the public sector with infinitesimal capital requirements, as long as these sovereigns are rated AAA to A.

But worst of all, the special report again fails to mention the fact that the market’s risk management already clears for perceived risk of default, which includes of course the credit ratings, by means of deciding the risk premiums to be charged in each case, and making all the alternatives investments equal. And so that when the regulators then come and intrusively layer on their own risk biases on the banks, the only thing they are doing is distorting the financial markets, and becoming themselves the greatest source of systemic risk.

The small businesses are unfairly discriminated against by the regulators

Sir, Richard Milne in “The cogs are clogged” February 16 writes about the difficulties of the smaller enterprises to secure the funding they need but fails to even mention the regulatory discrimination they are exposed to.

One of the banks’ historical responsibilities has been to nurture the small businesses until they’re big enough to enter the capital markets, but that ended when the regulators, acting entirely on their own, decided that the most important role for the banks was to avoid taking risks and to that effect set up a system of capital requirements dependent the risk of defaults as perceived by the credit rating agencies.

In effect a bank when doing business with one of those entities that because of an AAA rating should not even need the assistance of the banks must put up only 1.6 percent in equity while, when doing precisely what it is supposed to do, helping the small businesses, it is required to have 8 percent in equity.

At this moment, when all the faulty AAA ratings ate up all the capital of the banks, those small businesses are discriminated more than ever, by this regulatory double whammy of not only having to pay for the additional risk premium the market ordinarily charges, but also having to pay the costs of the higher bank equity requirements.

That this issue of unjustifiable risk-discrimination is not among the first things currently discussed when considering financial regulatory reform is truly mindboggling to me.