What if Robert Smith had asked the college and its professors for some assistance in paying off the student debts?

Sir, I refer Andrew Edgecliffe-Johnson story on billionaire Robert Smith announcing during a graduation ceremony that he would pay off the for many students enormous debt. “Philanthropist with a gift for surprise” May 25

Indeed, it was a great initiative, at least for the fortunate students but, to evaluate its full significance, you would have to know what assets Smith had to sell, or what services he could not buy, in order to pay off those debts.

But, that said, had Robert Smith said he’d pay off 85% of all graduating Morehouse College’s students’ debts, if only their professors and that college, those who got all the money from that student debt, paid off the other 15%, that could really have been a game changer. 

PS. http://perkurowski.blogspot.com/2007/01/should-not-higher-education-be-more-of.html

@PerKurowski

Which bonds, the high-yield or the low-yield, cause the most sufferings when things go wrong?

Sir, Robert Smith quotes Inge Edvardsen, head of fixed income sales at Pareto Securities with “High-yield bonds offer high returns with associated risks but it is of course unfortunate when our clients suffer losses”, “Dreams turns to Sweden for high-yield deal as UK retailing debt feels strain” November 23.

Similarly Edvardsen could have said “Low-yield bonds offer low returns with associated risks but it is of course unfortunate when our clients suffer losses” 

So let me ask you Sir, which of the bonds, the high-yield or the low-yield, do you associate with clients suffering the most when things go wrong?

I have no doubt; it is the low-yield-low-perceived-risk ones, because these usually attract the highest portfolio exposures at the lowest risk compensation premiums.

But, our bank regulators, they think differently; they think the high-yield-high-perceived bonds cause more sufferings, because those would be the bonds against which they would require banks to hold more capital.

It’s all so dangerously loony to me. Our current bank regulators have clearly confused ex ante risks with ex post dangers, and they have not the slightest idea about what conditional probabilities mean.

Sir, it sure surprises me that you seem to agree with the regulators.

@PerKurowski

So now European small businesses are being exploited like "subprime" buyers of houses were

Sir, Robert Smith writes: “‘It’s not quite 2006, but it does feel a bit like we’ve heard this script before’” “Europe looks to repackage bank debt: Return of securitisation coincides with concerns over slipping standards”

He sure has, or should have heard it! That because the incentive structure in the process of securitizations is as bad as they come.

If you take very good credits, let us say A+ rated, and you package it so it comes out an AAA rated security, you might have done a good job but it will not earn you much.

If on the other hand you manage to package a lot of substandard BB- loans into an AAA rated security, then you will make fabulous commissions when selling these into the market.

It was precisely that which originated the AAA rated securities backed with mortgages to the subprime sector in the USA, and which caused the 2007/08 crisis.

The worse and higher paying interest mortgages you cant put into these securities the better for the whole team was the rallying cry. In the end those buying their homes with these mortgages and those investing in these securities, they were all defrauded by a wrong set of incentives. 

So now the small businesses and entrepreneurs in Europe, those who are risk weighted by the regulators at 100%, will be packaged into securities for which “double-A credit ratings were most likely” and thereby seeing their risk weight magically reduced to 20%.

Will this in any way shape or form really benefit European SMEs and entrepreneurs? The answer is if so, certainly very few of them.

What Europe needs is to get rid of the risk weighted capital requirements for banks, those that have so profoundly distorted the allocation of bank credit to the real economy. Then your bankers will be forced to become bankers again; maximizing their returns on equity by normal lending, to all, and not by minimizing their capital requirements.

PS. Here’s some numbers on the prime subprime deal! If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the Joe mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy and instantaneous profit of $210.000

@PerKurowski