If it looks like a distortion, quacks like a distortion, and walks like a distortion then it probably is a distortion.

Sir, Brooke Masters, Tracy Alloway and Shahien Nasiripour report on how banks use “pricey credit default swaps to cut their capital requirements”, “Watchdog to close Basel loophole over use of pricey credit protection” March 25.

And yet these reporters even confronting the willingness of someone to pay “pricey default swaps” cannot seem to understand that must only be because someone has created a distortion, in this particular case that one introduced by Basel regulations which permit banks to hold some assets against less capital than others.

The unhappy Barings’ Bank trader Nick Leeson writes in his memoirs: “And they never dared ask me any basic questions, since they were afraid of looking stupid about not understanding futures and options.”

And how I would like these three reporters to dare ask the regulators for the reason of having capital requirement based on perceived risks which are already cleared for by other means, and, of course, not settling for that fuzzy explanation of “more-risk-more-capital, less-risk-less-capital, does that not sound logical?”

I repeat, our banks are not moved by some invisible hand of the markets, they are moved by the invisible and completely unauthorized and dumb hand of the Basel Committee.

Sir, where have all the daring journalists gone? Worse, where have all the daring editors gone?

Is this a bad joke?

Sir, Shahien Nasiripour reports “Regulators hindered by diversity of data”, March 20.

Given that regulators substituted the opinions of three credit agencies for the millions of opinions in the market, it is even hard to understand why they are out looking for data diversity.

Is this a joke?

Sir, Shahien Nasiripour reports “Regulators hindered by diversity of data”, March 20. 

Given that regulators substituted the opinions of three credit agencies for the millions of opinions in the market it is even hard to understand why they are out looking for data diversity.

The Basel Committee’s nanny-cartel’s truly colossal bribery of global bank business must be stopped.

Sir I refer to “Banks’ risk tactic under fire” by Shahien Nasiripour, Brooke Masters and Tracy Alloway, February 18.

I sincerely cannot understand how supposedly intelligent people, acting as regulators, can allow themselves to be dragged in by bankers into such silly discussion as to the adequate length of the periods to be used in VAR.

Can’t they get it into their heads that they do not have to concern themselves much with credit risk models, or credit ratings being correct, and concentrate on what to do when these prove to be wrong? This is just like the fire brigade worrying excessively about the quality of the fire detectors installed in homes, while forgetting to maintain the engines of their fire-trucks.

But of course, the real problem with current bank regulators is that they do not understand the magnitude of the distortions they have created. For instance a rule that “could force some banks to increase sharply the amount of capital they hold against trading assets” will immediately make bank capital much scarcer and thereby dramatically impact negatively the lending to what requires higher levels of capital.

The fact that banks were allowed to hold silly little capital for what was ex ante perceived as safe resulted into that, ex post, when some of it turn out to be risky, they had little capital to cover for it. Also let us not forget that whatever capital they had left came mostly from those requirements imposed on them when lending to the "risky". And it all meant then that banks had to retrench from lending to the “risky”, which is what they will now be forced to do even more.

Huw Van Stenis, a Morgan Stanley analyst, is quoted praising the Basel committee “harmonising some inputs makes a lot of sense”, but that of course ignores the fact of life that the greater the harmonization the greater the dangers of a catastrophic systemic risk. 

Sir, you have an editorial today titled “Beating bribery in global business”. Since the Basel Committee’s nanny-cartel fixed the game, bribed the bankers, with their capital requirements based on perceived risk, and got us the crisis it paid for, I sincerely hope Sir you one day accept that is a colossal bribery of global business that must be stopped... and not covered for.

The voice of the borrowing commoners, upon which recovery depends, is never heard in Basel

Sir, Brooke Masters and Shahien Nasiripour in “Basel move aims to stoke recovery”, January 8 quote Mayra Rodriguez Valladares, a regulatory consultant, saying “This latest move shows how it is practically impossible to reform the financial sector when you have so divergent interests among politicians, regulators and bankers of the Basel committee member countries”.

Yes but if we are going to have any real recovery in the real economy then the most important actor to consult should be the small-medium businesses and entrepreneurs who need access to bank credit to ask what they think of the regulations and if these are helpful or not. And by now Basel widening slightly the requisites for belonging to the favored aaaristocracy, they have only made it harder for the excluded commoners to access bank credit.

God help us! These regulators have not the faintest understanding of the damages they are causing to our real economies trying to save the banks.

Now banks do not just search for yields, but for what these yields produce in returns on their equity.

Sir, Tracy Halloway, in “US banks in fresh structured finance spree”, Monday 10, refers to analysts saying “that banks have been snapping up higher-yielding structured securities to offset the effect of low interest rates.”

That is not entirely correct, what banks are searching for is just not higher yields, but higher yields in relation to the bank capital they need to hold. In other words they are searching for the highest possible returns on equity, and that is why unrated borrowers like small businesses and entrepreneurs have such a rough time competing for access to bank credit.

You see even though these “risky” borrowers have never ever really caused a bank crisis, the regulators decided that the banks needed to hold much more capital when lending to them than when investing, for instance, in structured securities sometimes very difficult to understand. Sounds crazy? Yes, it absolutely is!

Caveat emptor, regulators regulating!

Sir, I refer to Shahien Nasiripour and Tom Braithwaite’s report “Credit Suisse faces NY lawsuit” November 20, in order to comment on the temptations that existed (and still exist) for someone doing wrong, when awarding and packaging mortgages to the subprime sector. 

The natural incentive: If you convinced risky 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 Hans 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 the mortgage for $510.000 and pocket immediately a tidy profit of $210.000. 

The regulatory incentive: If banks invested in such AAA rated securities, or lent against it as collateral, then according to Basel II, they needed to hold only 1.6 percent of a very loosely defined capital, which amounted to allowing banks a mind-blowing 62.5 to 1 leverage of its very loosely defined capital. 

And the combination of these two incentives to create “The Infallible” proved too irresistible for many, like for Credit Suisse. Only Europe, over just a couple of years, invested over a trillion dollars in these securities. I am not clearing mortgage originators, mortgage packagers, security credit raters and investment banks of any of their responsibility, but are not those regulators who provided the irresistible temptations also at fault? 

The sad part of the story is that the possible cost of this sort of lawsuits will now have to be paid including by those who bear no blame for the disaster, like “The Risky”, like the small business and entrepreneurs, those with interest earning bank deposits, and taxpayers. 

From now on, besides notices on the door indicating a bank to be insured, we might also need to put up a sign stating “Caveat emptor, regulators regulating!”

When the Senate banking committee of the US, "the Home of the Brave" has hearing on Basel rules, let’s pray “The Risky” get some voice.

Sir, Shahien Nasiripour gives a good account of how “Banks attack Fed’s plans on Basel III accord” in order to defend their interests. November 14. My, how much voice the banking community has when compared to by those most negatively affected by Basel rules, II or III. 

Basel rules determine that banks can lend to those considered not risky, “The Infallibles”, holding much less capital than when lending to those considered “The Risky”’, like unrated small businesses and entrepreneurs. 

That of course translates into to banks being able to earn a much higher expected risk-adjusted return on equity when lending to “The Infallible” than when lending to “The Risky”. And that results in an odious and dangerous regulatory discrimination against those already being naturally discriminated against by the banks, being charged higher interest and receiving smaller loans. 

Nasiripour refers to the US Senate banking committee hearings on the proposed Basel rules, and I just hope that in "the Home of the Brave” “The Risky” will also get some voice. But, seeing for instance how a Financial Times over many years has shown absolutely no interest in that issue, I can’t say I am harboring any major hopes.

“Rigorous capital allocation” currently means banks abandon those officially, ex-ante, perceived as “The Risky”

Sir, Tom Braithwaite and Shahien Nasiripour report “Pandit´s exit restores air of calamity at Citigroup”, October 17. 

In it, in reference to Mike O´Neill, its chairman, they write that people who have worked with him say “he is no nonsense and rigorous about capital allocation, willing to shut underperforming businesses without compunction”. 

I would hope they would try to set that description in the context of regulatory capital requirements for banks based on the ex-ante perceived risk. 

If so they will better understand that the banks, maximizing their returns on equity, will concentrate on those for which the regulators do not require a lot of equity, “The infallible” and, without compunction, ignore those which require holding more equity, “The Risky”, like the small businesses and entrepreneurs. 

And of course, those bankers who dare not to be that rigorous about capital allocation, might soon find themselves out of a job.

Some are waking up to the colossal failings of Basel bank regulations... when will FT?

Sir, Shahien Nasiripour and Tom Braithwaite report “US regulators urged to outdo Basel III rules” October 5. In it they mention that “some like Jeremiah Norton, a director on the FDIC´s five man board, have voiced doubts about the proposed risk-weighting scheme, which links capital levels to assets risk”. Might he have tried to answer some of my wicked questions on bank regulations? Like: 

1st: When do banks most need capital, when the risky turn out risky, or when the “not-risky” turn out risky? 

2nd: If bankers do as Mark Twain says, namely “lend you the umbrella when the sun shines and wanting it back when it rains”; and all bank crisis ever have result from excessive lending to what was perceived as “not risky”; and the perceptions of risk have already been cleared for in the interest rates and the amounts of the loans, then what is the logic behind allowing banks to hold less capital requirements when they engage in what is perceived as “not risky”, as current bank regulations do? 

3rd: What economists can be so dumb not understanding that if you allow banks to leverage 60 times or more their bank equity for some assets and only 12 times for other, producing thereby vastly different returns on equity, you will drastically distort the economic efficient resource allocation that banks are supposed to perform? 

More sooner than later, everyone is going to wake up to the fact that our current bank regulations are built upon absolutely insane foundations. And then of course, the silence of the Financial Times on this issue is going to be a source of immense embarrassment for the paper and especially for those responsible of, notwithstanding its motto, ordering its silence on it, during so many years.

The “risky” borrowers should also complain about discriminatory bank regulations

Sir, Shahien Nasiripour and Tracy Alloway report on the concerns of some large US banks with respect to some new capital rules because these “will hurt them relative to overseas competitors” “Fed set to announce capital proposals”, June 7. 

These banks are of course in the perfect right to object any sort of discrimination, but, when will the Financial Times dedicate one single analysis to the discrimination that many borrowers are subjected to, when their bank borrowings give cause for a higher capital requirement than the borrowing of others? 

Does FT really think that a loan to a small business or an entrepreneur, he who already has to pay a higher interest rate and can only access a smaller loan than those who have officially been declared as “not risky” is correct, and does not create distortions? 

If you only report the complaints of the big banks… you are assisting them in becoming too big. 

If FT had complained in time about the fact that a UK bank was required to have 8 percent in capital lending to the grocery down the corner but only 1.6 percent if lending to Greece then perhaps we would not be in the current mess. Who knows? 

The article also reminds us that Jamie Dimon, chief executive of JPMorgan Chase, has decried the new Basel III rules as “anti American”, or un-American as it is usually expressed. But, again, that begs the question, if the American banks, according to Basel II and III, need to hold more capital when lending to American small businesses or entrepreneurs than when lending to foreign sovereigns or corporations deemed as not risky, is that not equally anti American?