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

The Federal Reserve failed by submitting banks to an incomplete stress test.

Sir I refer to Tom Braithwaite, Ben McLannahan and Barney Jopson’s report on the recent stress tests performed by the Federal Reserve ad that that have given the US banks a clean bill of health, “European banks fail US stress tests”, March 12.

It is the Federal Reserve who has really failed the test by only testing for the assets banks have on their balance sheet, and not for the assets that should have been there. In other words, one thing is for banks to have sufficient equity for what they are doing, and another quite different sufficient equity for what they should be doing, if complying with their societal purpose of efficient credit allocation.

Banks have been made dysfunctional by the introduction of distorting credit-risk weighted equity requirements which favors assets perceived as “safe” As a result of this, banks in America (and in Europe) are not giving “risky” SMEs and entrepreneurs a fair and sufficient access to bank credit. For the banks to become functional again all differences in equity requirements against assets need to be eliminated. And to make room for such a leveling, basically all banks must increase their equity.

Our young, in order to have jobs and a decent future, need banks to take risks on “risky” small businesses and entrepreneurs. How many of these borrowers will now not be able to get credit, only because of the dividends and the buy-backs of shares the Federal Reserve’s incomplete stress tests stimulate?

@PerKurowski

The regulators, who foolishly gave in to bank-children’s equity pleas, must as responsible parents now help them out.

Sir, Tom Braithwaite and Martin Arnold write: “Together with regulatory and investor pressure for higher returns, universal banks have lost their luster around the world”, “Regulators test the universal banking model”, January 16.

Of course the minimum minimorum equity banks were required to hold against some assets, 1.6 percent of the AAArisktocracy, and even zero in the case of “infallible” sovereigns, served as a potent growth hormone for the too big to fail banks. No doubt about it.

But, the problem is not that imposing, for instance an 8 percent equity requirement against all assets, would fatally wound big banks, or in this case the universal banking model. The real problem is that the journey from here to there would be extremely difficult. But since it really was the regulator, the supposedly responsible parent, who so foolishly gave in to what the children, the banks screamingly wanted, it really should be the regulator who now must assume his responsibilities to help the banks, the children, to adapt to the new much firmer rules of the house.

If only enough of the QE’s had been invested in bank equity, to make up completely for the equity shortfall caused by new requirements, central banks would probably now be reselling those shares to an avid market. That because, for a bank’s shareholders, it is also the journey from here to there that most frightens them. To have less risky bank shares producing lower returns is no problem whatsoever for any normal shareholder.

To sell such bank equity assistance scheme, could indeed be politically nightmarish… but if we want to put some decent order back in the system, in order to avoid our kids and grandchildren becoming a lost generation,  someone has to do it.

FT, what about at least daring to talk about it?

JP Morgan Chase, Jamie Dimon, welcome to the club! Small businesses and entrepreneurs have been attacked for years!

Sir Tom Braithwaite reports that, because of proliferation of regulators and legal bills, “Dimon says banks ‘under assault’” January 15

Indeed, no question about it, Dimon is absolutely right, but, as I see it, he has to stand in line with his compliant; at least until all those perceived as “risky” have been able to voice theirs, because they have in fact been under attack for much longer.

In those old days when regulators were very chummy with banks, days of Basel II, banks were allowed to hold very little equity against assets perceived as absolutely safe. And that allowed banks to make risk-adjusted returns on equity, on “safe” exposures, we normal citizens could never even dream of. And, in doing so, the regulators de facto removed all incentives for banks to give credit to “risky” small businesses and entrepreneurs. I can almost hear Jamie Dimon asking his Board “Why should we give loans to a “risky” when doing so we can only leverage JPMorgan Chase’s equity 12 to 1, when giving loans to the AAArisktocracy we can leverage 60 times or even more?”

But, that said, the “risky” and the banks do have a mutual complaint they can raise with respect to the fines or the penalties for bank’s misdeeds. Because, were it not for these, banks could have more equity available that could be leveraged with loans to the risky.

Perhaps judges should listen to them and force all bank fines to be placed in special bank equity accounts, available exclusively to be leveraged lending to small businesses and entrepreneurs… and I am sure all unemployed would also support that motion.

If I could decide, this is what I would tell ECB to do with all Europe’s banks… I think

Sir, Tom Braithwaite writes: “Banks have been forced to become safer and more boring. By closing down the casino, regulators have reduced the chances of disasters”, “Investors might yet long for the days of Dimon’s swagger” January 13.

How on earth does Braithwaite know that? Why are we to believe that regulators, who allowed banks to leverage over 60 times to 1 on exposures to the AAArisktocracy, or even more to exposures to infallible sovereigns like Greece, know anything about reducing the chances of disasters?

Let me just start by reminding him that when playing roulette if you bet pennies more on a safe colors than on risky numbers… you are guaranteed to lose more, in the long run.

How does Braithwaite know that disaster is not happening at this very moment, because that small business or that entrepreneur who could save the economy of tomorrows Europe, is denied fair access to credit because these banks are given incentives to play it safe, to play on colors and avoid the numbers?

Braithwaite quotes Stefan Ingves the Chairman of the Basel Committee on Banking Supervision saying “Leverage is an inherent and essential part of modern banking system” and yet Ingves and his regulatory buddies do not understand that by allowing different leverages for different assets they are de facto imposing capital controls which re-directs the flows of credit to the real economy in many dangerous ways.

Sir, the more I see the urgency of correcting for the regulatory distortion imposed by the Basel Committee, and the risk and difficulties of travelling from here to there in terms of required bank equity, the more I believe we need to:

Impose a 10 percent equity requirement on all assets, and then have the ECB offer to subscribe all equity needed to meet those new requirements. ECB should commit not to use the voting rights of that bank equity and to resell 10 percent of it per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Any ECB-QEs before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

Capital (equity) requirements for banks, to be correct, need to be based on the perceived credit risks being incorrect.

Sir, the risk weights in Basel II for an AAA to AA rated sovereign was zero percent; the risk weight for a corporate rated AAA to AA was 20 percent; and the risk weight for an unrated corporate, like a small business was 100 percent… and they still are in Basel III

And so it would be interesting to know where Tom Braithwaite got “the risk weights, which obliges the banks to hold more capital against the riskiest assets, were also made tougher” from, “Fed’s push for safety test the business model at US banks”, December 12.

The only real important difference between Basel II and Basel III has been the introduction of the leverage ratio, which is not risk-weighted.

Unfortunately putting the pressure on banks with the leverage ratio to increase their capital (equity) while keeping the risk-weighting in place only means those weighted as “risky” are being more discriminated against that ever.

And Braithwaite writes: The international Basel II rules required banks to hold 2 percent of common equity against risk-weighted assets. The new Base III standards announced in 2010 requires a 7 percent capital ratio by 2019”.

There are of course differences but, since Basel II established “The total capital ratio to risk weighted assets must be no lower than 8%”, while Basel III states that “Total Capital (Tier 1 plus Tier 2 Capital) must be at least 8% of risk-weighted assets at all time”, and so Braithwaite is in my opinion quite shamelessly glossing up differences that really are not that big.

And though Braithwaite correctly states “Adding more equity depresses ROE and makes it more challenging to satisfy investors” he forgets to include the caveat: [those investors who do not appreciate the commensurate reduction in risk].

Nor does Braithwaite seem able to extrapolate from the above that lending to those borrowers against who the banks are forced to hold more equity, will depress ROE the most… and so unfortunately he does not understand how that distorts the allocation of bank credit.

Sir, again, if the perceived risks were correct, banks would need no capital… and any bank in then problem should just be out of business. And that is why it is so utterly silly to have capital requirements for banks based on these perceived risk being correct.

PS. Do I imply then that those experts in the Basel Committee and the Financial Stability Board and other prominent bank regulators are completely wrong? Yes, 180 degrees! 

The Fed’s regressive bank regulations, makes it a biased source of information

Sir, Tom Braithwaite’s writes that “stock and bond prices for the banks would be more accurate if [the market] knew what the Fed thought about the strength of these banks and their management”, “Smoke needs to clear over Fed supervision of US banking system”, November 17.

Indeed, that sounds extremely rational but, unfortunately, if the views of the Fed are biased, the signals it sends out will of course make it worse for the economy as a whole.

I say this because it is clear that the Fed agrees with regressive regulations which much favors bank lending to the infallible, in detriment of lending to the risky, and so opining based on such mistaken criteria cannot lead to anything good.

Just look at the “Camels” ratings that Braithwaite refers to and that many want to be disclosed. These cover “capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk”; with no indicator for what is most important for the real economy, and thereby implicitly in the medium and long run is also vital for the banks, namely if the bank allocates credit efficiently to the real economy.

And so, even if in the land of the free and the home of the brave, the Fed would rate much higher a bank that exclusively lends to the sovereign and the AAAristocracy, than a bank that dares lending to “risky” citizens and their small businesses. And if that helps anyone, that might be those very elderly in want of short-term safety, and clearly not the young who need banks to take risks in order to have a future.

And what is really hard to understand is when Braithwaite refers to Jose Lopez, an economist at the Federal Reserve Bank of San Francisco, opining in 1999 that the disclosure of Fed’s Camels ratings “could benefit supervisors by improving the pricing of bank securities and increasing the efficiency of the market discipline brought to bear on banks”. Does the Fed need the market to reassure it by reaffirming the Fed’s own biases? Is it not doing enough damage as is?

Fed needs to make up its mind fast, because now it is really creating confusion about the banks.

Sir, I refer to Gina Chon’s and Tom Braithwaite’s “US and European lenders raise fears over ‘living will’ cash reserve demands” November 4.

In it is reported that banks that face a liquidity crunch can currently tap the discount window as part of the Federal Reserve’s lender of last resort programs, but, that in the process of preparing their ‘living-wills’, they have been told not to assume continued access to it.

What? The Fed now allows banks a 5% leverage ratio, which implies a mind-boggling 20 to 1 authorized leverage of equity… and yet now they want to retire their lender of last resort support? It better makes up its mind fast… because now all we others are becoming really confused. If we are not able to count on big strong Fed to help out, then there is no way we small weaklings can allow banks to leverage that much.

Are not living wills for banks’ just a nonsensical show to show off that something is being done?

Sir, Gina Chon and Tom Braithwaite report that Fed and FDIC demand better unwinding plans and are split over possible penalties “US rejects bank’s living wills” August 6.

And FT defines on its site those living wills as “Detailed plans that would enable banks to stipulate in advance how they would raise funds in a crisis and how their operations could be dismantled after a collapse”.

Frankly is not the whole concept of living wills for banks’ designed by the bankers themselves after a collapse just a show to show that the regulators are doing something?

I mean if I was a regulator, and wanted to go down that route, I would at least have a third party to look into what could be done in the case a bank passed away, and now and again confront the managers of the bank with those plans, in order to hear their opinions.

For instance there is a world of difference between a living will where the dead are going to be the own executors of the will, and one in which the dead will be dead and others will take care of the embalming.

And talking about that is it not the Fed or the FDIC that should state what contingent plan they really want… one where the bank is placed on artificial survival mode, and for how long, or one where it is sold in one piece, by pieces or even cremated?

To me it would seem that the Fed and FDIC need to give much clearer instructions about what they want those bankers currently working under the premise the bank will live on forever to do… as I can very much understand them being utterly confused.

How long have our economies got left with our banks having been injected with the venom of cowardice?

Sir, Martin Arnold and Tom Braithwaite report “HSBC’s warns of risk-aversion” August 5.

Of course you know very well that I hold that excessive risk aversion is what most threatens our economies but, to read of banker like HSBC’s Douglas Flint expressing concerns about “a growing danger of disproportionate risk aversion creeping into decision making of our business”, without mentioning the largest source of risk aversion for banks, the risk weighted capital requirements for banks, is maddening.

The disproportionate risk aversion of bank regulators, have banks now earning much higher expected risk adjusted returns on their equity on assets perceived as safe, which they can leverage much more, than on assets perceived as risky. And that has injected into our banks the venom of cowardice…

How long our economies can be sustained without medium and small businesses, entrepreneurs or start-ups having fair access to bank credit is hard to say, but one thing is really sure, if that risk aversion persists, our economies will go down down down.

Douglas Flint, as a banker might very well be doing his fair share of dressing up what is risky as more safe but, as a citizen, as a father, possibly even as a grandfather, and as someone who should understand the meaning of risk taking, he should be ashamed of himself. What is in it for our descendants if our generation refuses to take its proportionate and necessary share of risks required for moving the world forward?

And that, of course, goes also for many of you in FT too.

The awful truth is that risk weighted capital requirements for banks, are robbing our young of their horizons.

OCC, before asking banks to raise their standards of risk management, should stop regulators' distorting parallel risk managing

Sir, Tom Braithwaite and Camilla Hall report that “The Office of the Comptroller of the Currency said it plan to raise the standards it expected for risk management at the largest banks”. “Goldman and City wreck Wall St hopes for escaping doldrums”, January 17.

Before doing that OCC should first consider the distortions the risk-weighted capital requirements for banks cause.

As OCC should know, bankers clear sufficiently well for perceived risks, by means of interest rates, size of exposures and contract terms. But current capital requirements those which the regulators order banks to hold primarily as a buffer against some “unexpected losses”, are based on the same perceptions of “expected losses”.

And so the system now considers twice the “expected losses” and none the “unexpected losses”. And as a result, the regulators have introduced a distortion that makes any high standard risk management that serves a societal purpose absolutely impossible.

And this is especially wrong when the capital requirements are portfolio invariant, because that ignores the benefits of diversification for what is perceived as “risky”, and the dangers of excessive concentration for what is perceived as “safe”.

OCC should understand that it has no problem if banks manage their risks well, only if they don’t, and so it makes absolutely no sense to base the capital requirements for banks, on the same perceptions of risk used by the banks.

OCC should understand that those who most represent “no-expected-losses” are in fact those most liable to produce the largest and most dangerous unexpected losses.

OCC, do the world a favor, throw out the risk-weights a simple straight leverage ratio and allow the bank to be banks again… not credit distributors in accordance with what the risk-weighting which produces different capital requirement tells them.

Sincerely it surprises me that, in the “home of the brave”, with a market that prides itself to be free and to give equal opportunities, OCC allows for capital requirements which allow banks to earn much higher risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky.

The implied discrimination does not seem to be compatible with the Equal Credit Opportunity Act (Regulation B).

My New Year’s wish for FT. Wake up to what the risk-weighted capital requirements for banks really signify.

Sir, if banks could measure and price risks perfectly, then there would be no need for bank capital, as all expected losses and capital cost would be covered. But, since the measuring and pricing of risk is by nature imperfect, there will always be “unexpected losses”, and so regulators need to impose capital requirements for banks.

Unfortunately, the regulators decided that the “unexpected losses” would occur mainly in assets perceived as “risky”, probably because they confuse “unexpected” with ex-ante perceived risk, or because they only concerned themselves with individual banks; while I contend instead that the kind of “unexpected” which could threaten the stability of our whole banking system, is most likely to be found in the “absolutely safe” category.

And, requiring banks to reserve more for “unexpected losses” on “risky” than on “infallible” assets, allows banks to earn much higher risk-adjusted return on equity on the latter.

And, by allowing so, the regulators introduced a distortion that makes it impossible for banks to allocate credit efficiently in the real economy.

Tom Braithwaite ends his December 31 New Year’s “Reasons [for the banks] to be cheerful, despite the threat in the shadows” with “Even as regulators tighten the screws on the banks they seem unsure as to how much they want to police their shadow risks”.

If I could have a New Year’s wish about something that FT could do in 2014, then that would be to notice more how these regulations which discriminate based on ex ante perceived risks, really “tighten the screws” on the access to bank credit for all those ex ante perceived as riskier.

And, consequentially, to notice how that increases inequality, and hinders the banks from taking those risks that could help our young to have a future… those risks that generations before us took through the banks, so that we would all have a future. 

And all for nothing, because at the end of the day, what those regulations guarantees, is that our banks are going to end up gasping for oxygen, in some dangerously overpopulated “safe-havens”.

PS. Reducing the risk of bank failures increases, exponentially, the risk of banking system failure.

God make us daring!

The monstrous distortion in the allocation of bank credit to the real economy that regulators do not know they cause

Sir, Tom Braithwaite reports on “Counting the cost to customers of banking regulations” December 3. And he refers to facts such as regulators tightening the standards of capital requirements for banks, for instance against commitments such as those of letters of credit.

But nowhere does he discuss the cost to some customers, some borrowers, of bank regulations that discriminate among the customers. Might it be that he, like the regulators, has not yet understood it?

Let me explain it all to him again.

If there was no risk weighing of Basel II’s 8 percent capital requirements for banks, then the banks would allocate their credit in the real economy, based on who produces the highest risk-adjusted return on eight units of bank capital for each 100 units of loans.

But there is risk weighing in Basel II, and so banks allocate their credit, for instance to the private sector, in terms of:

For those rated AAA to AA, risk weight of 20%, based on who produces the highest risk-adjusted return on 1.6 units of bank capital for each 100 units of loans.

For those rated A+ to A, risk weight of 50%, based on who produces the highest risk-adjusted return on 4 units of bank capital for each 100 units of loans.

For those rated BBB+ to BB-, and those unrated, risk weight of 100%, based on who produces the highest risk-adjusted return on 8 units of bank capital for each 100 units of loans.

For those rated AAA to AA, risk weight 20%, based on who produces the highest risk-adjusted return on 1.6 units of bank capital, for each 100 units of loans.

And so of course those perceived as safer produce the banks a much higher risk-adjusted return on equity than those perceived as riskier.

And that causes banks to lend more than what they should to those perceived as safe and much less, sometimes nothing, to those perceived as risky… like to medium and small businesses, entrepreneurs and start-ups.

And amazingly… the regulators… xxx… do not even understand they are distorting the economically effective allocation of bank credit in the real economy.

What are we to do with them?

FSB's rule is no deterrence for a bank wanting to become, globally, the most systemically important bank.

Sir, Tom Braithwaite reports “China’s ICBC joins banking risk list”, November 12. It should have been expected, as surely the Chinese government must have complained about not having one bank in the exclusive list of Global Systemically Important Banks.

Also in reference to JP Morgan Chase and HSBC, Braithwaite categorizes the 9.5 percent of capital based on risk-weighted assets as “punitive” and mentions the current empty10.5 percent capital bucket as “a deterrent to any banks that may think of getting bigger or engaging in riskier activities”. He is wrong.

First, as we all should now 9.5 percent or 10.5 percent of capital does not really mean anything if the risk-weights do not mean anything. And second… would a bank stop trying to be the globally most systemically important bank, just because of a risk-weighted capital requirement?

Forget it! If FSB really want to see some serious containment of the too big to fail they should require 9.5 percent of capital on all assets. Frankly the naiveté of FSB trying to frighten the banks with such a feeble bogeyman is just mindboggling.

PS. By the way the list just published is based on 2012 year end data. Does that sound speedy enough?

Why should banks’ willing spirits but weak flesh be able to resist extreme regulatory temptations?

Sir, I refer to Kara Scannell, Tom Braithwaite and Gina Chon’s report on how government is now, seemingly for political reasons, trying to make up for lost time, by laying it hard on those guilty of producing and packaging lousy mortgages into AAA rated securities, “The paper tiger roars”, October 26.

I am a firm believer that those guilty of it should have been fully prosecuted, from day one, but, what most angers me, is how no blame has been placed on those regulators who, by tempting willing spirits but weak flesh too much, caused the whole problem.

Basel II bank regulations, those which the US also signed up on in June 2004, stated that banks, against loans to unrated businesses, were required to hold 8 percent in capital (equity), but, that against AAA rated securities, 1.6 percent sufficed. And that meant that banks were allowed to leverage their equity 50 times more when holding AAA rated securities, than when holding loans to unrated businesses.

How could regulators have expected the banks to resist such extraordinary temptations? Prosecute, as dumb, and have them parade down avenues wearing dunce caps, those regulators who so tempted our banks.

The “convenient myth” which supports current bank regulations, needs to be debunked.

Sir, Tom Braithwaite and Patrick Jenkins, in their analysis “Balance sheet battle”, August 15, refer to bank executives and some [regulatory] officials holding that “not using risk-weights when calculating capital requirements for banks can tempt banks to move towards riskier loans that earn higher returns but are more likely to result in losses.” 

Baloney! That so “convenient” for some banks myth, needs urgently to be debunked.

And for that we need first to understand that any “perceived risk” can be cleared for by bankers by the interest rate they apply, the size of the exposure and other contracting terms. 

And so the truth is that lower capital requirements, permitted for something perceived as “absolutely safe”, and which allows the banks to achieve a higher expected risk-adjusted return on equity on those assets, will only help to push the banks to create excessive exposures, while holding very little capital, to precisely that type of exposures which have caused all the bank crises in history, namely assets which were ex-ante perceived as safe but that ex-post turned out to be risk. And, if in doubt, just try to find one single major bank crisis that has resulted from excessive exposures to what was ex-ante, not ex-post, perceived as risky.

The different capital requirements based on perceived risk which so much favors the access to bank credit of The Infallible and thereby discriminates against The Risky, also completely distorts the allocation of bank credit in the real economy. What would for instance a regulator, in the US or in Europe, answer if asked: Sir, why are the capital requirements for our banks lower when they lend to a foreign sovereign, than when they lend to our national small business and entrepreneurs, those who have never ever set off a major bank crisis?

For the health of our banks, much more important than more capital, is less capital distortion by the regulator

Sir, Tom Braithwaite writes that “Regulators will have to be watchful that banks do not dream up new risky products that evade high charges… but… safer businesses such as advisory work or retail brokerage are being preferred because they are ‘capital light’ and hence good for overall ROE”, “Quest for profit in high-capital world can make bank safer” February 19.

Is advisory work or retail brokerage what our banks should all be about now? What about their vital function of helping to allocate economic resources efficiently? Tom Braithwaite might have a job, for now, but what about those millions of unemployed counting on banks to finance those who could create jobs?

And Braithwaite ignores that dreaming up new risky functions to evade high charges and obtain high ROE has been made a competitive necessity, by the sheer fact that the regulators allow there to be some “capital light” pockets.

I have not read The Bankers New Clothes by Anat Admati and Martin Hellwig, yet, but if it holds that “Bank’s obsession with return on equity is at the root of the problem…this makes the whole system more fragile”, would that not precisely indicate the dangers of capital requirements which, quite arbitrarily, allow some bank bets to make a larger ROE than others? If a regulator I would for instance much prefer banks having diversified exposures to “The Risky” than having to trust the infallibility of some monumentally large exposures to “The Infallible”.

And, if that is not in the book, then I must say that Sir Mervyn King unfortunately still does not understand “what is wrong with banks and what needs to be done to make them safe”. Yes, more capital is needed, but that capital should primarily be required as a result of eliminating differences in capital requirements, and not feeding these.

“There is far more capital in the banking system than there was in 2007” it is written. That could indeed be true, I do not have the figures, but it could also be a very devious half-truth, if the increase in capital is just the result from banks exiting “capital heavy” in order to, quite dangerously, overpopulate some “capital light” pockets.

AIG, instead of suing those who bailed them out, should sue those who got them in problem, namely the bank regulators.

Sir, Tom Braithwaite reports that “AIG considers suing US over bailout terms” January 9, something that sounds indeed a bit surrealistic.

Basel II’s 8 percent basic capital requirement for banks allowed a 12.5 times to 1 leverage of bank equity. But it could be reduced to a minimal 1.6 percent, pushing up the allowed leverage to 62.5 to 1, if the bank exposure could be construed as guaranteed by something possessing an AAA rating.

Therefore, had bank regulators not turned the AAA-rating of AIG into an amazing magical capital requirement for banks shrinking machine; something which created an insatiable demand for AIG's credit default swaps, absolutely nothing bad would have happened, as even the whole 2007-08 financial crisis would have been avoided.

Therefore, if the AIG board absolutely must sue someone, because it feels that is the only way it can discharge its responsibilities, according to current traditions, then instead of suing those who bailed them out, they should sue those who got them in problem, the bank regulators.... and perhaps even the US tax-payers would join them in order to turn it all into a class action.

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!”

“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.