The capital requirements for banks based on perceived risk, distort the correct risk pricing that the market might have done.

Sir, Simon Johnson writes about the risk of “Concentrating risk with the laudable goal of reducing opaqueness”… “Chaos is brewing behind the clearing house doors” June 18.

Absolutely, that was precisely what happened when regulators decided to concentrate in the hands of very few human fallible rating agencies, so much of the risk perceptions in the banking system… and look at what happened.

But, when Johnson begins lining up AIG, Fannie Mae and Freddie Mac as causing big distortions in the pricing of risk, I do not agree. The most fundamental distortions in the pricing of risks are the result of the regulators, with their capital requirements for banks based on perceived risk, distorting the correct risk pricing that the market might have done.

Rasputins versus Oligarchs

Sir John Kay in “Beware the bail-out kings and backbench barons”, May 20, refers to “Simon Johnson’s comparison of corporate financiers with Russian oligarchs”. Kay should not forget though that Simon Johnson, as a former chief economist at the International Monetary Fund, is part of that regulatory technocracy which played God and interfered with the risk allocation processes in the financial markets, in the most amazing way, by allowing for a 62.5 to 1 leverages (that in some cases can even reach 179 to 1) all based on some credit rating agencies awarding their triple-As... and helped to cause this mess.

In this respect the Rasputins have now a clear and vested interest in blaming the oligarchs in order to protect themselves. John Kay rightly says “We need to reassert the notion that roles of authority are positions of responsibility rather than declarations of personal merit and routes to personal enrichment.” And that should apply equally to bankers and regulators.

Do not just blame some financial oligarchs but follow the profits instead

Sir Martin Wolf is right in that “Cutting back financial capitalism is America’s big test” April 15, but this has much less to do with cutting back powers of a “financial oligarchy” as argued with an unhealthy dose of populism by the previous IMF chief economist who-said-nothing-then Simon Johnson, and much more with cutting back on the use of some dubious non-market instruments that have helped to tilt the market too much in favour of the financial sector. Follow the profits!

The financial sector first lent to risky clients and then waved that magic wand of the credit rating agencies, which allowed them to generate immense profits reselling those same loans as having much less risks. What on earth does this has to do with oligarchs? It seems much more the fault of lousy regulators (among which we find the IMF) who empowered the credibility of risk surveying so much that even they fell for it and authorized an astonishing 62.5 to 1 leverage for banks when they lent to corporations rated AAA to AA-.

The financing of the consumer and home buyer in the USA lives and dies with the use of some non-transparent credit scores and which allows charging many consumers much higher interest rates in order to compensate for those that should never have been given credit in the first place. What on earth does this has to do with oligarchs? It is a basic fault of the US society that has allowed itself get trapped in a position where sometimes American parents give more importance to their children credit scores than to their school grades.

Desperation is indeed a bad counsel

Sir Peter Boone and Simon Johnson make a proposal for how to re-privatise the de-facto nationalized banks by means of the government receiving and selling warrants which would allow new private equity and shareholders to step in at a more reasonable fiscal cost. To save the banks we must stand up to the bankers, January 27.

That could be, though I remember that one of the reason for the successful Chilean recovery after their bank crisis was that the old shareholders were given a repurchase option, at a price that compensated the government of which I believe many have already been executed.

What I do take exception from is when they express that one of the problems is that the banks would refuse to sell their assets and so “the regulators need to apply without forbearance their existing rules and principles for the marking to market of all illiquid assets. The law must be used against accountants and bank executives who deviate from the rules on capital requirement.” Are they going berserk? Desperation is clearly a bad counsel. Their intention sounds like forcing everyone who owes more on a house than what it is worth to have to walk away from it even if he is willing to stay. Besides, what does market value really signify when markets do not exist?

Actually the truth is that to save our banks we must first stand up to our financial regulators and who are, without doubt, the first to blame for this crisis.