Are those who impose regulations that create generous incentives for these to be gamed entirely without blame?

Sir, Brooke Master while discussing regulations for carmakers and banks refers to “mis-sold mortgage-backed securities and payment protection insurance” “The diesel scandal echoes bankers’ woes” July 27.

The regulators, with Basel II of 2004, allowed banks to leverage 62.5 times if a AAA to AA rating was present… while for instance only 12.5 times if there was no credit rating. That temptation set up the banks to, sooner or later fall into a trap. Are these regulators innocent?

In the same vein carbon emission controllers set up procedures that evidently could easily be cheated on. Are these controllers also entirely innocent?

I ask these questions because from what we have seen neither regulators nor controllers have been demoted, on the contrary, at least with respect to banks many, like Mario Draghi and Stefan Ingves, have been promoted.

Had the credit-rated-risk-weighted capital requirements for banks that distort the allocation of credit to the real economy not been introduced, the 2007/08 crisis and the ensuing slow growth would not have happened.

If a country decides to impose a 1.000% tax on liquor, does it not have any responsibility in that its citizens (including its legislators and tax collectors) start smuggling liquor?

@PerKurowski

Regulatory easing, if done right, could make risk managers of banks care about real risks, not just about capital reductions.

Sir, Laura Noonan reports that risk models have more uses than assessing capital levels “Regulatory easing will not kill off the model makers” March 13.

What kinds of easing? Because of the risk weighted capital requirements for banks, risk managers have lately been operating with one single mandate… namely that of reducing the capital needed, so as to help maximize the allowed leverage, so as to be able to produce truly large risk adjusted returns on equity.

In essence that has signified that banks, if compared to Volkswagen, have been able to control their own emissions, with the emission managers having been instructed to maximize these. Crazy? Yes!

So if the easing signifies the elimination of different capital requirements for banks, then risk managers could begin to serve a real purpose instead of a regulatory one.

Then SMEs and entrepreneurs would be able to compete on level ground for access to bank credit with sovereigns, AAA rated or residential mortgages, as they have been able to do during around 600 years, before the Basel Committee messed it all up for them. 

But Sir, I am not sure that is the kind of regulatory easing banks are after.

@PerKurowski

There must be serious consequences for regulators and controllers who fail or allow themselves to be cheated

Sir, Tim Harford writes “In the case of VW, transparency was the enemy: regulators should have been vaguer about the emissions test to prevent cheating” “How do you catch a cheat?” February 19.

What? That seems like the absolutely most certain way to produce a cheat. Or is it that Harford believes regulators and emission controllers are a different set of humans with angel like qualities? Does he not understand what kind of temptations that would create?

Sir, the greatest problem with Volkswagen cheating on US emissions tests, is that the failed emission controllers who allowed themselves to be cheated have not been publicly shamed and sent packing home. Just like the extremely failed bank regulators of the Basel Committee for Banking Supervision have not been. In fact, the latter are still working on tweaking their fundamentally wrong regulations.

If creating regulations and controlling what’s being regulated carries no consequence when failing or being cheated, things are only bound to get worse. So, should we parade Paul Volcker, Alan Greenspan, Mario Draghi, Stefan Ingves and all their other bank regulating colleagues down our avenues wearing dunce caps? Why not? Do we not owe at least that to all who have suffered and will be suffering the consequences? Sincerely that seems like a very minor and gentle reprimand for all the societal damages they have caused with their risk weighted capital requirements for banks.

Sir, Harford correctly concludes though with “The truth is that the world can be messy place. When our response is a tidy structure of targets and checkboxes, the problems really begin”. Precisely! It reminds me of an Op-Ed I wrote in 1998 titled “Regulations as enemies of bank missions”

PS. Sir you might ask why I here mention Paul Volcker. The truth is that he was one of the responsible for the genesis of what with time will be considered one of the greatest statist regulatory failures ever. 

@PerKurowski

If VW were a pupil in the European Boarding School… whom would we blame, VW or the headmaster of that school?

Sir, Richard Milne at the end of his report of Volkswagen’s woes writes: VW makes about the same number of cars as Toyota – but has almost double the number of workers – 593.000 to 344.000”, I guess then that 249.000 workers would not be in total agreement with the titling of the report: “System failure” November 5. You just cannot have the cake and eat it too.

It must be quite clear that to overcome such a competitive disadvantage, VW had to resort to other means… in this case clearly not so elegant or legal means. Do I condone it? Of course not, but let's keep the debate real. The trade off between carbon emissions and jobs is very much out there in the real world.

But let us now also suppose VW was a pupil in the European Boarding School. If it had acted this way, blatantly infringing regulations during years… whom would we blame, VW or the headmaster of that school?

Or should 249.000 potential Toyota workers want Toyota bosses to cheat on the headmaster too?

@PerKurowski ©

Is it not dumb to kill the goose that lays the golden eggs just because it laid a bad one?

Sir, John Kay asks correctly: What purpose is achieved when taxpayers, by fining state-funded hospitals, in effect fine themselves? “It is natural but wrong to blame executives” October 21.

I would go further still by asking: What is the reason to fine corporation that generate jobs in such a way that it weakens them? Instead of in cash, is it not better to have those fines paid in shares… the current shareholders may not like to get diluted, but it is always better to dilute the wealth of the owner of the goose that lays golden eggs than the goose itself.

And of course, if you need clarification, the goose here stands for banks and for Volkswagen.

@PerKurowski ©

Berlin, are there no more urgent sustainability needs to serve in Europe than having Volkswagen recall 8.5m diesel cars?

Sir, Jeevan Vasagar and Chris Bryant report “Berlin forces VW into mandatory recall of up to 8.5m diesel cars across Europe” October 16. Why on earth would Berlin do a dumb thing like that?

What will that cost? Are there no more urgent needs to serve in Europe than recalling diesel cars?

Is it because the hurt inept emissions controllers who were cheated now want revenge? A lover’s spat?

How does the world benefit from forcing VW into mandatory recall of up to 8.5m diesel cars across Europe?

What will that cost? Is Europe really so buoyant that it can pay for an 8.5m diesel cars recall across Europe?

Is recalling these cars the most effective way to cut emissions that pollute, and to help the earth’s sustainability?

How much useful research could not be funded with what is to be wasted on the recall of 8.5m diesel cars?

Frankly if you want to punish Volkswagen without punishing other don’t recall cars give the diesel car owners, or other, some Volkswagen shares instead.

Sir, as a reminder, here is a previous letter on that.

@PerKurowski ©

To avoid collateral damages, the fines of those who create and finance jobs should be paid in new shares and not in cash.

Sir, I refer to Henry Foy’s and James Politi’s “Volkswagen scandal fuels fears for jobs across Europe” October 13.

Again it points to reasons why the world should not impose fines payable in cash on those who misbehave and deserve punishment, but who generate jobs, or credit. That would only weaken them and thereby cause many casualties among the civilians who are not responsible.

Have them instead to pay all fines by issuing new shares to be delivered to whomever a judge feels should get these.

The dilution of existent shareholders is more than enough punishment to guarantee that management will be more careful.

And this is especially valid when regulators, by their incompetence or any other reasons, have helped to induce the misbehavior. 

http://teawithft.blogspot.com/2015/10/vw-emissions-controls-fines-for.html

http://teawithft.blogspot.com/2015/10/bank-fines-should-be-paid-with-bank.html

@PerKurowski © J

VW & emissions & controls: Fines for allowing itself to be tricked, should not become a revenue source for governments

The more I read about the Volkswagen affair the more convinced I become of that, what really does not bring anything to the table in terms of justice, economic efficiency or even sustainability, is having VW to pay huge fines to a government that hosted such inefficient emission controllers who allowed themselves to be tricked by clearly immoral but also quite ingenious engineering tricks.

On reading Richard Milne’s “Wolfsburg fears fallout from VW scandal” October 12 this is what I would suggest:

Decide on a substantial amount to fine Volkswagen for their misbehavior, but make it pay all that fine by issuing (green) shares in Volkswagen, to all who bought its diesel cars and to all of its employees. That way you do not weaken a company, or a city, while at the same time, presumably, you introduce among VW’s shareholders a wish for a better corporate behavior, so as not having their shareholder participation further diluted.

And then, just how you use hackers to assist you in building safety features for increased cyber-security condemn, all the Volkswagen engineers responsible for the misdeeds, to social work, by developing emission controls that work.

PS. This is somewhat similar to the fines on banks, which directly hurts their lending capacity, precisely when we need it the most.

@PerKurowski ©  J

World/Germany: Don’t fine Volkswagen for the benefit of those who should have controlled emissions better. Be smarter.

Sir, I refer to Chris Bryant’s “New VW chief signals cost cuts to pay for emissions bill” October 7.

If I were Volkswagen’s new chief executive, I would not accept, laying down, to “slash costs to help to foot the bill for the diesel emission scandal” No way! I would strengthen Volkswagen by making a counteroffer the world could not resists… because of its implications.

I would offer the authorities, in lieu of any fines related to The Scandal, to give to each of VW’s 600.000 employees, and to each of 11.000.000 of VW’s diesel car buyers, for example €1.000 in Volkswagen preferred "green" shares, convertible into ordinary VW shares.

And, if the offer was accepted, I would not waste one € correcting wrongdoings on the past, but instead duplicate the € 11,5bn research budget of last year.  But, that’s just me.

I dare you to find one environmentally concerned, who is not a statist, who would not agree with me.

PS. Volkswagen, don't delay your answer... the faster the better.

@PerKurowski ©  J

When Volkswagen is fined, as it should be, let all its diesel car buyers get some VW shares, instead of cash.

Sir, Wolfgang Münchau writes about “Volkswagen’s threat to the German model” October 5. Of course, that would be the case, if Volkswagen is forced to “a fire sale of assets in order to pay damages and fines [that] could easily add up to more than €100bn.”

But that would just be a typical stupidity of our days, like when our banks are fined, and then we find their lending capacity utterly diminished.

I am not a German, but if I were, I would urge the government to see that each Euro Volkswagen had to pay in fines because of its truly shameful “manipulation of emission tests”, was to be paid in shares issued at current market prices to the owners of diesel cars... those concerned about pollution. 

That would not weaken Volkswagen, much the contrary it could strengthen it. If our successful companies do wrong, there’s nothing in it for us to be vengeful, on the contrary there is a great opportunity to be constructive. Never weaken the strong to make them work better… strengthen them… but, then again, that’s just little me thinking.

@PerKurowski ©

When paid by Volkswagen, the fines should go to patent free research of better diesel engines… and emission controls

Sir, Brooke Masters write “Drivers who bought VW’s “clean diesel” engines are now faced with technical fixes that could well reduce both fuel efficiency and power. Their communities have much dirtier than anticipated air” “Lawsuit on behalf of 1m $1 investors is something to fear. Somebody ought to sue” October 3.

Indeed but when suing make sure that if you win it can make a difference, not just make up for something secondary.

Many Volkswagen’s diesel engine buyers, who said they bought it out of environmental concern, many of them just green show-offs, now have a legitimate grievance being left out hanging like fools. But, if they are going to sue, they should at least request that, if successful, all fines paid by VW should go to finance the development of patent free better diesel motors.

Brooke Master’s also writes: “There are many frivolous [and not non frivolous] law suites were the attorneys on both sides walked away with millions of dollars in fees”. And with that she reminds me of that, at least in the case of banks being sued, all lawyers should be paid their fees in bank shares… I mean so that we do not hurt the lending capacity of banks and with that of ten thousands of innocent bystanders borrowers… the sort of civilian casualties.

Perhaps if we start looking into the issue of where compensation payments and fees go to, and how it is paid, then perhaps we will start looking at tort reform from a much more productive angle.

@PerKurowski

Those creating regulations that can be cheated provide the cheaters competitive advantages.

Sir, Michael Skapinker writes: “Devising a system to detect when a car is being tested surely required planning, expertise and a specific decision. It must have required forethought. It is not something you can drift into through incrementally deteriorating behavior”, “Volkswagen, its software and the psychology of cheating” October 1.

Indeed and we must blast Volkswagen for doing that. But, is it not also the responsibility of regulators to make absolutely certain that cheating cannot happen? Otherwise they will be providing the cheaters with a competitive advantage to win over those who do not cheat. At the end of the day, though Volkswagen needs to be punished, severely, let us not forget that it all happened thanks to lazy regulators who thought it was enough to regulate and no would cheat or game it.

Exactly the same happened when bank regulators allowed banks to hold very little capital against what was perceived as absolutely safe, and the securities backed with lousy mortgages to the subprime sector were dressed to the nines, wearing false AAA ratings.

@PerKurowski

Is Ermotti suggesting UBS tinkers with risk measuring, like Volkswagen tinkered with pollution emissions measuring?

Sir, I refer to your most important editorial in over a decade, “Banking cannot prosper within a culture of fear”, September 24.  A more correct title would be: “Our economies cannot prosper when bank regulators have been overtaken by a culture of senseless fear”.

You, who proudly proclaims a “Without fear”, seem to at long last have to come to grips with the fact that risk-taking is much needed in order to avoid even worse risks. Sadly, you should at the latest, have written that in June 2004 when Basel II was announced.

Then silly risk adverse regulators, who clearly had never read The Parable of the Talents, imposed a culture of fear of “The Risky” by excessively embracing “The Safe”. Its risk-weighted capital requirements, clearly instructed banks to avoid taking risk on The Risky, by giving them permission to leverage incredibly, much riskier, with what is perceived ex antes as safe.

And you write: “Sergio Ermotti, the chief executive of UBS, has been so bold as to urge his staff to embrace risk-taking again”. Great, and of course I agree full heartedly with him. That is our responsibility towards those coming after us. God make us daring!

Unfortunately, Ermotti can urge his staff to embrace-risk taking as much as he wants, that will still not happen, not as long as the credit-risk weighted capital requirements remain in place. That is of course unless Ermotti is now suggesting that UBS tinkers with risk measuring, along the way Volkswagen tinkered with emissions measuring.

PS. On a personal note I wish of course you would have had the decency to at least acknowledged that this, Basel’s dangerous regulatory risk aversion, has been the leitmotiv in the over thousand of letters I sent you, which you preferred to ignore. The letters though are still all out there on my http://teawithft.blogspot.com, for the world to see.

PS. When bankers grow old and begin to fade away... what would they regret the most, the risk they took or the ones they did not dare to take?

PS. Here I have a brief YouTube explanation, in red and blue, of our crazy bank regulations.

@PerKurowski

Perhaps Paris should have a little tête-à-tête with Volkswagen about what to do about embarrassing pollution ratings.

Sir, Adam Thomson discusses the embarrassment to Paris its lousy environmental readings could cause when, for a UN conference in November, “some 40,000 politicians, delegates, scientists and environment experts will descend on Paris to discuss what is billed by many as humanity’s last hope of saving the planet from irreversible climate change”. “Dark and dirty days in the city of light” September 23.

Perhaps Paris should have a little tête-à-tête with Volkswagen to see if it has any ideas about what could be done.

Or, in these days when Volkswagen has so utterly destroyed the credibility of emission controllers, Paris could perhaps just discreetly let out something like: “Our emission readings are sincere”

Oops… should those who have responsibility for supporting tourism in big cities also need to have tête-à-têtes with App developers like Plume?

http://ourpiedaterre.blogspot.com/2015/09/the-vw-volkswagen-emission-control.html

@PerKurowski