Don’t help bank regulators get away from being held accountable for their mistakes by politicizing the issue.

Sir, Gillian Tett commenting on Ben Bernanke, Henry Paulson and Timothy Geithner comments on the 10-year anniversary of the Lehman Brothers collapse writes:“Critics on the right complain that markets have been hopelessly distorted by government meddling” “European banks still have post-crisis repairs to do” July 20.

Frankly, you do not have to be from “the right” to “complain that markets have been hopelessly distorted by government meddling”

In 1988 bank regulators, based the risk weighted capital requirements for banks they were introducing on the nonsense that what was perceived as risky was more dangerous to our bank system than what was perceived as safe. With that they dangerously distorted the allocation of credit to the economy… and caused the crisis.

Would the Lehman Brothers have suffered the same collapse had not the SEC authorized it in 2004 to follow Basel II rules, and it could therefore (just like the European banks) leverage 62.5 times with securities backed with subprime mortgages, if these counted with an AAA to AA rating issued by human fallible credit rating agencies. Of course no!

But here we are a decade later and this major flaw of current bank regulations is not even discussed. What especially excessive exposures to something perceived decreed or concocted as safe are banks in Europe, America and elsewhere building up only because of especially low capital requirements, and which will guarantee, sooner or later, especially large crises? That should be the concern.

But, come to think of it, it could be that Ben Bernanke, Henry Paulson, Timothy Geithner and Gillian Tett, still believe in the story the Basel Committee told them, perhaps because they want so much to believe that a fairy could make banks safe and still be able to serve the economy. 

@PerKurowski

Though capable Giants could be great at smoothing over a crisis, the not so capable could help more getting over it.

“How lucky could you be that you have a guy who spent his life studying the Great Depression [Bernanke], combined with a guy who’d spent almost his whole life working on every global financial crisis for the previous 20 years and was a genuine markets guy [Geithner], combined with somebody who had been chief executive and chairman of one of the top investment banks in the world [Paulson, in the leadership positions they were in during the biggest financial crisis of the century”

Sir, that is what James Gorman, “the Morgan Stanley boss”, tells Tom Braithwaite during his “Lunch with the FT”, “Banking is sexy, creative and dynamic” May 23. I first wince a little bit about the “genuine markets guy” since we really did not see a lot of genuine market solutions but, what really comes to my mind, is the following.

What if instead of these Giants, there would instead have been some perfectly inept in their government positions? It would clearly have been a much harder and harsher landing… but could it no be that in such case we would have gotten over the crisis faster and more completely? As is the experts might be experts smoothing things out during a crisis but perhaps not in solving it. As is we still live with much overhang in terms of huge government borrowings, QEs to reverse, the permanence of some actors the world could have been better off getting rid of, and the same source of distortion that caused the crisis, the credit risk weighted capital requirements for banks.

In August 2006 FT published a letter I sent it titled “Long-term benefits of a hard landing”, and year after year I find more reasons to argue for that. Sir, had there been a harder landing don’t you think that the system would for instance have cleansed itself more of “$22.5m” CEOs annual pay packages?

The smoothing of a crisis, though nice for some, creates its own victims… Our young, with lousy employment perspectives, could well be the victims of the capable Giant's guiding and smoothing hands. 

http://teawithft.blogspot.com/2006/08/long-term-benefits-of-hard-landing.html

@PerKurowski

What can an insignificant ego like mine, even if absolutely right, do against significant egos, even when these are absolutely wrong?

What is perceived as risky never constitutes much real risk. What most drives a financial doomsday machine is what is perceived as absolutely safe; which is why risk-weighted capital requirements for banks based on perceived risks, which favors bank lending to “the infallible” is so absolutely dumb.

But unfortunately that seems too difficult to comprehend, for instance by Martin Wolf.

When he now begs for to “Disarm our doomsday machine” May 28, Wolf still shows no sign of having understood how dangerous the pillar of our current bank regulations really is. Why do I say so?

Wolf quotes Timothy Geithner saying “The safer the visible financial system is made, the greater the danger that the fragility will emerge somewhere less visible”, and connects that to the need of “preventing such obvious absurdities as the build-up of huge off-balance sheet positions in vital institutions. And though that might have some truth to it, the real fact is that currently it is the visible financial system that has been made dangerous, by trying to make it safe. For instance look at hedge funds and you will see that they never ever can achieve leverages similar to those authorized banks to have by regulators, if keeping to the “absolutely safe”.

No the best way to “disarm our doomsday machine” is to get rid of the distortions produced by risk-weighting, and to follow the simple rule of not procrastinating, meaning solving the problems while they are still small.

In May 2003, as an Executive Director of the World Bank I told bank regulators gathered to discuss Basel II “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises. Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

And though I am still not a regulator I still stand by that.

Mr. Martin Wolf. Currently we still have regulations which guarantee banks holding especially little capital when what is especially dangerous, one of “the infallible”, blows up. Disarm that AAA-bomb! Capisce?

The fact is that big egos can be just as dangerous as the tyranny of William Easterly’s experts.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

Bank regulators don’t dare hold “morbidity and mortality reviews of bank crises”, less these would find them responsible

Sir, Timothy Geithner while lunching with Martin Wolf refers to “Complications: Notes from the life of a young surgeon” by Atul Gawande and states “It was a fascinating book, in part because [Gawande] described how in that profession they do things that in economics we don’t do that well. They have this thing called morbidity and mortality reviews each Friday where they go over mistakes”, “Stresses and messes” May 17. And Wolf agreed with that “central banks don’t like analyzing their past mistakes but should.”

Indeed, how could bank regulators allow banks to hold much less shareholder’s capital against those perceived as “safe”, than against those perceived as “risky”? Could they not understand that allowed banks to earn higher risk adjusted returns on “safe” assets than on “risky” assets; and that this would distort the allocation of bank credit, and doom the banks to end up holding too much “safe” assets and too little “risky” assets.

Because of course, as they all should know, it is when banks hold “too much” of a “safe” asset when an asset could turn into a very risky asset for the banks. Empirically this is something well proven. Never ever has a major bank crisis resulted from excessive exposures to what was perceived ex ante as “risky”, these have all, no exceptions, resulted from excessive exposures to what was ex ante, erroneously perceived as safe... like AAA-rated securities, Greece, etc.

And besides, holding “too little” of the “risky” assets, like loans to medium and small businesses, entrepreneurs and start ups, is very bad for that part of the real economy which thrives on risk-taking, and is therefore, in the medium term and long term, something also very risky for the banks.

So YES! Bank regulators should hold “morbidity and mortality reviews”... but they don’t dare since these would find them the responsible.

And, if they did, I am certain Geithner and Wolf would also have more productive luncheons discussing bank and financial crises.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

Nothing as unethical as bank regulations that unethically discriminate against those perceived to be “risky”

Sir, Neil Barofsky lets his heart all out, when complaining about unethical behavior in banking, and most especially about the lenient judicial treatment of all those many banks and bankers involved in various unethical actions, like for instance in the Libor rate manipulation, “The Geithner doctrine lives on in the Libor scandal” February 8.

And I don’t want to argue against him, but also need to remind him that, when it comes to unethical behavior in banking, nothing is so unethically as when bank regulators decide to impose capital requirements for banks which favor those perceived as not risky, those already favored, and discriminate against those perceived as risky, those already discriminated against.

These besides odious so dumb regulations, helped to create the excessive bank exposures to what was believed to be safe but turned out not to be, which caused the crisis, and stops many of the most important actors in our real economy from having access to bank credit, which keeps us in crisis.

The truth is that the Libor rate manipulation, in terms of unethical behavior, is pure chicken shit when compared with the interest rate manipulations by bank regulators in favor of “The Infallible and against “The Risky”

Getting rid of the regulatory discrimination against the “risky”, that’s what the world most needs to boost growth.

Sir, it is sad indeed when in Timothy Geithner’s “What the world must do to boost growth”, September 9, more than 3 years after the crisis started, we still do not read a word about the importance of eliminating the arbitrary regulatory discrimination against bank lending to job creating small businesses and entrepreneurs, and which is all based on the utterly silly notion that these borrowers are more risky.

The perceived risks are never as dangerous as those not perceived

Sir, according to what Tom Braithwaite reports Tim Geithner has embraced humility concluding that it is not possible “to make a judgment about what’s systemic and what’s not until you know the nature of the shock”, “Geithner queried risk concept” January 14.

Let us hope he can now used that as an intellectual bridge to understand why it is useless and dangerous having the regulators arrogantly playing sophisticated risk managers with their capital requirements based on perceived risks when we know that all bank crisis are caused by risks that have not been perceived.

Timothy Geithner should start by increasing the capital requirements for banks when lending to the government.

Sir Krishna Guha in “Bankers´ pleas on rules rebuffed , October 5, reports that Timothy Geithner said of the banks “These are the institutions that told the world and told the shareholders and told their creditors and told their customers they knew how to manage risk and that they were better at this than their supervisors were ever going to be”.

Does Mr. Geithner really believe that the supervisors will ever be better at managing risks than the banks? Is he suffering from amnesia? Has he already forgotten that it was the minimal capital requirements which the regulators authorized the banks to have whenever the regulator´s own outsourced credit risk supervisors, the credit rating agencies, awarded their AAAs which detonated the crisis?

Of course regulatory overkill is a risk for a recovery which urgently needs risk-taking to awaken. Nonetheless if Mr. Geithner needs to show himself off as a real regulatory macho man why does he not increase the capital requirement for banks when lending to his own government?… it is currently zero!

Or does Mr Geithner also believe that public bureaucrats are better at taking investment decisions than their private counterparts?

Mr Geithner, and the rest of you regulators… you are so wrong.

Sir Timothy Geithner writes that “Stability depends on more capital” September 4, and he is so wrong. Stability depends almost exclusively on getting the right sustainable growth since with the wrong kind of growth you would need 100 per cent of capital and even then you probably only your real stability until you find yourself ten feet under the ground.

The hard truth Geithner needs to understand, and come to terms with, is that even if the credit rating agencies had been absolutely right in their ratings, the end results for the economy would be wrong; because subsidizing risk adverseness and taxing risk-taking, that is something that only a society that has had enough and wants to lie down and die does... and we can’t expect the whole world to be baby-boomers... can we?

Of course the regulators need to increase the current capital requirements for banks, but only for those operations where they decreased them so dramatically, like for instance allowing a 62.5 to 1 leverage when lending to anyone able enough to hustle up an AAA.

Mr Geithner please give us one single reason for why the regulators should specially favour banks lending to clients rated AAA. To me that is a pure senseless discrimination that will not lead us anywhere except over the next subprime cliff.

Please, may we have a small but growing capital charge on governments?

Sir if your bank lends your government 100 pounds then it is not required to have any equity but, if it lends that amount to your unrated neighbour, then it has to put up 8 pounds in equity. That might sound very reasonable to you I do not know your neighbour, but be sure that in the long term it will just mean we will all end up more and more entangled in the web of the government.

In this respect when we read Aline van Duyn and Francesco Guerrera report in “Geithner plan fuels cost fears”, May 19, that “companies face capital charges against hedges” one wonders when they will start imposing some capital charges on what seem runaway governments. A small increasing capital charge on anything to do with governments is probably an essential element to help stimulate the banks into lending more to the private sector again.

Limit and subsidize credit card rates

I heard Geithner in the Congress and I read Martin Wolf’s “Why Obama’s new Tarp will fail to rescue the banks” February 11 and it is clear that they and most of us have entered into a quite unproductive phase of the debate, where we are all threading muddy waters not getting anywhere.

We should all take a break, from discussing solely about banks, and discuss those other participants of the economy we know as the consumers.

The US consumers face incredibly and unexplainably high rates on their credit cards, like 17% if in current status and 26% if in default.

Why does not the US government not limit those rates to 4 and 6% respectively and as an incentive offer to pay the creditor a 3% compensation on any balance financed over the next year? That would only cost a meagre 30 billion dollars per trillion of credit card debt.

Doing that would put real money in the pockets of the real consumers and simultaneous work at solving the next wave of toxic assets soon to hit the markets.

After such fresh air we might take up our current discussion with new energies.

Geithner could be heading onto the wrong direction.

Sir FT reports quite extensively on the confirmation hearings of Timothy Geithner, the Treasury nominee held by the US Senate’s Finance Committee on January 21. Though he did not give away much on what he will do I cannot say that I disagreed with most of what he said… it all sounded so reasonably. But given that we do not live in reasonable times what most interested me was whether he possessed the type of deep-core beliefs or philosophy that helps anyone to stand firm against the storming winds, and I must confess I felt somewhat disappointed.

When Geithner referred to the credit rating agencies he mentioned they were guilty of “systematic failures in judgement” but he did not say a single word about the regulator’s fatal mistake when empowering the credit rating agencies they created the systemic risk bomb that was bound to explode, sooner or later, as it sure did. Anyone who at this moment might be inclined to dig us even further down in the regulatory hole we’re in is someone that I cannot feel truly comfortable with.

We need to avoid monopolies or oligopolies in the market of risk-appraisals.

Sir it is indeed comforting to read the president and chief executive of the Federal Reserve Bank of New York Timothy Geithner admit that “Regulation can distort incentives in ways that make the system less safe”; but also disappointing that in his Op-Ed “We can reduce risk in the financial system”, June 9, there is not a word about how the appointment by the regulators of the credit rating agencies as their delegated risk surveyors, reduced the incentives for the rest of the markets to do their own risk appraisals.

We need to avoid monopolies or oligopolies in the market of risk-appraisals.

Sir it is indeed comforting to read the president and chief executive of the Federal Reserve Bank of New York admit that "Regulation can distort incentives in ways that make the system less safe" but also disappointing that in his Op-Ed "We can reduce risk in the financial system" June 9 there is not a word about how the appointment by the regulators of the credit rating agencies as their delegated risk surveyors, reduced the incentives for the rest of the markets to do their own risk appraisals.