What good is it to celebrate the euro’s first 20 years if, as is, it won’t make the next 20?

Sir I refer to Martin Wolf’s “Marking the euro at 20: the eurozone is doomed to succeed” January 16.

November 1998 in an Op-Ed titled “Burning the Bridges in Europe” I wrote: 

“As participants in a globalized world in which Europe has an important role, we must naturally wish all members luck, no matter what worries we might secretly harbor.

The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. The Dollar is backed by a solidly unified political entity, the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. 

Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.”

Sir, twenty years later those observations are still valid, and way too little has been done to solve the challenges.

Now add to that the fact that even though Eurozone sovereigns take on debt in a currency not denominated in their own domestic printable one, EU authorities have assigned a risk weight of 0% to all of them. That all points to that it will end badly.

So Sir, though Martin Wolf raises many more or less valid alerts and gives some recommendations worth heeding, he should also be thinking about how to get the euro out from that “0% risk” death-trap corner into which it has been painted.

@PerKurowski

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

Should bank shareholders really want lower capital requirements for what’s perceived as “safe” than for what’s “risky”?

Sir, Simon Samuels writes, “it may soon be time for shareholders to place their bets on how they like their banks — skinny on capital but with a ton of rules designed to cramp their riskier activities, or fat on capital with the freedom to take more risks… should [bank] shareholders celebrate or fear more lenient regulators?”, “Shareholders’ dilemma on financial regulation” April 17.

That is a faulty or at least incomplete description of the problem.

Current capital requirements are lenient for what is perceived, decreed or concocted as safe, and more severe for what is ex-ante perceived as risky. And that means, in one word, DISTORTION.

As a consequence banks will not be allocating credit efficiently, so the real economy will stall and fall, something that has severe consequences, at least for the bank shareholders’ grandchildren.

Also, though low equity against assets perceived as safe might in the interim produce high risk adjusted returns o equity, sooner or later the bank will, GUARANTEED, end up holding dangerously large exposures to something ex ante perceived as safe but that ex post suddenly turns out to be very risky.

I can understand some bank managers going for maximizing their bonuses in the short run, at whatever cost, they don’t have to give back their bonuses when shit hits the fan; but I cannot understand a bank shareholder who, aware of the regulatory distortions, find this acceptable.

Samuels ends with “shareholders should focus less on the rules the regulators set and more on how managers navigate their business. To quote Warren Buffett: “Banking is a very good business, if you don’t do anything dumb.”

On the contrary, as is, the regulators must focus on the rules the regulators set because these rules, this interference, is the greatest source of dangers for their banks and for everyone’s economy.

Sir, what good does a great run on bank profits do you if at the end of the day you find yourself standing on top of some worthless rubbles?

PS. Sir, do not forget that, amazingly, these risk weighted capital requirements are portfolio invariant.

PS. THE QUESTIONS

@PerKurowski

President Trump. Bankers have already way too much representation. Give the much-needed “risky” borrowers more voice

Sir, I refer to Sam Fleming’s and Alistair Gray’s “Bank’s president is latest alumnus to be tapped for a senior White House job” December 10.

Current bank regulations overtly favor banks earning much higher expected risk adjusted returns on equity when lending to something perceived as safe, than when lending to something perceived as risky, like to SMEs and entrepreneurs.

That of course delights bankers but the other side of the coin, is that the real economy is not getting its credit needs efficiently satisfied.

Therefore Trump would do a lot better assuring the perspective of “borrowers” is more represented in his government, than the clearly overrepresented perspective of bank lenders.

PS. I would love for Trump to convene the regulators and ask them a set of questions that they refuse to answer to someone as powerless as me… that is unless perhaps I threaten them with going on a hunger-strike.

@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 ©

If you fine a bank, request payment in shares, not in cash against their equity, which is societal masochism.

Sir, you write: “The modern dependence upon credit for growth is too great for the capital that supports it to be treated casually”, “Shareholders punished for the sins of the trader” May 22. I am glad to see that you now at long last warn about the negative should-be-expected-unexpected consequences that fines can have. I have written to you several letters on this but, as usual, as your policy, these have been ignored.

I hope you now recommend what I have been recommending for quite sometime, namely the option for the authorities to collect those fines in newly issued bank shares, and which could then be resold some years later to the markets.

To collect fines from banks, in cash, against their equity, is basically societal masochism.

http://teawithft.blogspot.com/search?q=fines

@PerKurowski

With capital buffers thin, European Banks can’t handle the higher capital requirements for small business lending.

Sir, I refer to Lex’s note on the lack demand for ECB’s TLTRO funds, “Eurozone banks: horsing around” December 12.

It holds: “You can lead a horse to water. You can put water in a tall glass, add ice, a wedge of lemon and a cute little paper umbrella. You can bring the bendy straw right up to the horse’s lips. But if the horse is not thirsty, it will not drink.”… And so “Reluctance to take cheap money gives credence to the bank’s claims that low business lending is down to a lack of demand”.

BUT, “An alternative explanation, advanced by RBS, is that the low take up highlights the bank’s lack of capital. With capital buffers thin they do not want the risk of small business lending”.

CLOSE, but not really so. The truth is that “with capital buffers thin” they cannot handle those much higher capital requirements that comes associated with the supposedly risky “small business lending”.

How many times have I explained to FT over the last few years that the current risk-weighted capital requirements for banks impede the banks to efficiently allocate bank credit? Hundreds!

PS. In my homeland, Venezuela, after 15 years of being a columnist in its most important daily newspaper, I was among the four first to be expelled without thanks, when government agents purchased that paper. That’s how it is, in a country where the government receives directly 97 percent of all the nations exports.

But how does it work in Britain? Can an editor or some other influential person, order those working in a paper, for instance in FT, to ignore the arguments of someone… for whatever reason?

$100bn in legal settlements for banks also means $2tn less in bank lending capacity

Sir Richard McGregor and Aaron Stanley write on FT’s first page “Banks hit by $100bn in US legal settlements since crisis” March 26.

If I was a medium or a small business, an entrepreneur or a start-up, starved for bank credit, and if I multiplied that bank capital gone in legal settlements by the allowed leverage implied by in a 5% leverage ratio, 20 times, I would know it means I am $2tn in bank credit capacity further away from having my fund needs satisfied.

If in Europe, with its Basel III 3% leverage ratio, 33 times, I would find myself an even more distant $3.3tn from it.

Current bank fines seem to be neo-medieval indulgences, not paid by the sinners

Sir, in “The regulatory cost of being JPMorgan” you hold “Fines – however large seem an ineffective stick with which to beat miscreants”, January 11.

Absolutely! These bank fines seem to be medieval indulgences, in this case not even paid by the sinners, but by shareholders, tax savings and less credit to the real economy.

FT, with respect to ECB and any new LTRO, dare not to withhold the most important advice

Sir, in “ECB’s next steps”, September 27, you write that “Providing cheap loans to the banks is no guarantee that the money will find its way to families and businesses”. Of course not! Banks now suffer a tremendous lack capital, and since lending to “The Risky” requires the most of it, there will be no such lending.

And then you conclude “Putting the stability of Europe’s banking system beyond doubt is arguably more important than a new round of cheap loans”. But No! Hold it there! That’s is exactly what got Europe in trouble in the first place.

Precisely because of searching for bank stability, so fanatically that no consideration was given to how bank credit was allocated in the real economy, the regulators allowed banks to hold much much less capital for whatever exposures were ex ante perceived as “absolutely safe” than for exposures perceived as “risky”. And so, as was doomed to happen, the banks ended up with huge exposures to the absolutely-safe-gone-very-risky, all aggravated by the fact of also having little capital.

Of course “new long term financing operation should not come at the expense of capital” but much much more important than that, is that no new LTRO should be made available, before getting rid of the so distorting risk-weighted bank capital requirements.

And FT, if you are to be true to your motto, “Without fear and without favour”, you should not withhold such recommendations only because one of the responsible for this regulatory stupidity is Mario Draghi, a former chairman of the Financial Stability Board, who now happens to be the president of ECB.

The world is much better off thinking that the risky are less risky than we think them to be, than that the safe are as safe as we think.

But, Luke Johnson, how do we get the Basel Committee to understand it has hit regulatory rock bottom?

Sir, the Basel Committee’s bank regulators, by allowing Cypriot and other banks to lend to Greece against only 1.6 percent in capital, which basically means allowing for a 62.5 to 1 debt to equity leverage, helped to cause both Cyprus and Greece to hit bottom.

But, in Luke Johnson’s “How to find some value in hitting rock bottom” September 18, we find no clue about how we could make sure that the Basel Committee understands and acknowledges it has hit regulatory rock bottom?

I mean these comfy regulators do not pay or suffer much direct impact from the damages they produce. In fact, after their Basel II flop they have even been authorized to follow up with a Basel III, using the same script of capital requirements based on ex-ante perceived risk. Hell, neither Hollywood nor Bollywod would allow something so dumb.

Much of our nations’ “desire and dreams” were killed in the laboratories of bank regulators

Sir, Luke Johnson quotes Professor Edmund Burke, from his book “Mass Flourishing” believing “that the ‘glorious history of desire and dreams’ has run out of steam”, “The small start-ups are as vital as the starts” August 28.

Of course it has. How could it not, with bank regulators who allow banks to finance the “absolutely infallible”, the AAAristocracy, against much less capital than when lending to the small risky start-ups… and which means that the banks will earn a much higher risk adjusted return on equity when lending to the former, than when to the latter.

As I had the opportunity to do in a letter yesterday I would also suggest Luke Johnson to compare today’s banking with how, in Mary Poppins, Mr. Banks and his colleagues describe their Fidelity Fiduciary Bank

If you invest your tuppence, wisely in the bank, safe and sound

Soon that tuppence, safely invested in the bank, will compound

And you'll achieve that sense of conquest, as your affluence expands

In the hands of the directors, who invest as propriety demands

You see, my friend. You'll be part of railways through Africa.

Dams across the Nile. Fleets of ocean greyhounds.

Majestic, self-amortizing canals. Plantations of ripening tea

All from tuppence, prudently, fruitfully, frugally invested.

We used to pray for in our churches “God make us daring!” Clearly our bank regulators never attended mass.

What does Martin Wolf know we don’t? It would seem very important to know

Sir, Martin Wolf holds that the Fed, and especially Bernanke, must be much more careful because “Careless talk may cost the economy” June 26. He is correct, but perhaps we should remember that careless actions might cost the economy even more, but, then again Wolf seems to know something that I, and may I say we don’t.

For instance, banks can lose fortunes by investing in fixed rate long term bonds when interest rates go up (just look at the chart he provides us with) but, in Martin Wolf’s opinion, “This is purely market-risk, not credit risk. That can be managed by a mix of lower leverage and, if necessary, regulatory forbearance.” And at least I just don’t get it.

Also Wolf holds that “It is unlikely that markets would cease to fund systemically significant financial institutions that have only mark–to market losses on safe haven government bonds”… and which must also mean he believes that the market would go on financing those banks at the previous low rates. And again, I don’t get this either.

And, just in case the market would not want to cooperate with the banks, Wolf argues that “the authorities will need to have plans to address such an eventuality”. What plans? To help banks unload all this I don’t could be worthless paper on some others? Or a Quantitative Easing II, the Fed buying those bonds from banks at way above market value? And so again, I am sorry, but I just don’t get this either.

But when Wolf writes “the likely result of a credible exit [of the US quantitative easing program] will be a shift towards assets in the recovering high-income economies”, that I do understand, even though that would normally go under the name of inflation, and that would most likely also be the result of a not-credible exit or even just a “tapering” down.

Since Martin Wolf seems to know so much more at least I would much appreciate if he were to provide us with further clarifications.

By the way, should not someone who can influence opinions as much as Martin Wolf, need to make a disclosure of his own investment portfolio? Perhaps that information could also help to enlighten us all.

How can I help free FT from its current severe bout of Stockholm syndrome?

Sir, in your “The self-defeating Greek rescue policy”, November 3 you write again about the need to have “banks recapitalized” But again, for the umpteenth time, over soon a decade now, you refuse to approach the question of “Capitalized in order to do what?”. 

The fact is that capitalizing the banks, for these to keep on doing what they did, namely lending or investing excessively in “The Infallible”, because there was where regulators allowed them to earn the highest ex ante risk adjusted returns, and to avoid excessively lending to “The Risky”, like to small businesses and entrepreneurs, because there the overly sissy nanny regulators did not want them to go, then no recapitalization of banks can lead to any sustainable good result, and these will all be just other examples of kicking the can down the road.

It is clear that FT has been hijacked by bank regulators, like Mario Draghi, and is suffering from a severe bout of the Stockholm syndrome that impedes it to criticize what needs to be criticized in harsh terms. How can I help you to free yourself from it?

I sure have tried a lot!

It is not a pernicious link, it is a pernicious circle.

Sir, Wolfgang Münchau writes about bank recapitalizations to end what IMF calls “the pernicious link between banks and sovereigns”, “A monumental project, but not an end to the crisis”, October 22.

But both Münchau and the IMF seem to think that pernicious link goes only in one direction, that of sovereigns guaranteeing their banks, while ignoring that so much of the current troubles have been caused by banks being allowed to lend to sovereigns on extremely favorable conditions, with respect to the capital they must hold thereto.

Make a bank need to hold as much capital when lending to a small business or an entrepreneur than when lending to the sovereign, and watch what will happen to the interest rates on sovereign debt.

I am not giving up on making the thick as a-brick-bank-regulatory-establishment understand, and that goes for FT experts too.

If a new QE is politically mistimed I do not know, but it sure is still economically mistimed

Sir, I refer to your “Bernanke’s latest round of easing”, September 16, where you comment on Romney arguing on Bernanke bailing politically out Obama. 

I do not know if this latest QE is mistimed because of political reason, I do not really care about that, but what I do know, is that not only the latest but the all the former QEs, and fiscal stimulus too, have been mistimed because of economic reasons. 

Having had frequent experiences in workouts, I know you do not inject any fresh funds into any failed project, until you at least believe you have made the changes required for its success. And, as far as I know, central banks and governments, confronting the crisis begun in 2007, have been wasting away immense monetary and fiscal spaces, like if there was no tomorrow, without imposing any sort of changes in then economy. 

As an absolute minimum, central banks and governments should have eliminated those ridicule regulations that make it so hard and expensive for those perceived as “risky” to access bank credit, like the small businesses and entrepreneurs… precisely those who generates the jobs that Bernanke now says he cares so much about.

We need more widows and orphans as shareholders of our banks

Sir, the capital of my homeland (Caracas, Venezuela), used to, for over a hundred years, have its electricity needs well serviced by a private company run by electrical engineers, and its shareholders were mostly widows and orphans. But then came the financial engineers and took it over, and leveraged it to the tilt, and the consumers were not longer its prime focus of interest, the speculative shareholders were. How we wish we could have the old company back. In this particular case that seems impossible because it has since then been taken over by the Petrostate. 

I mention this because John Gapper, though mentioning “the targets for returns on equity” leaves aside the issue that different shareholders might have different targets, “The financial incentives to behave badly will endure” September 13. For instance, if capital requirements for banks were substantially increased, that would of course diminish the returns on bank equity, but that could also help to make banks safer investments, and with that attract the widows and orphans who could be happy with lower but safer returns. 

As a client of any utility, whether electricity or banking, I would like its shareholders to be widows and orphans, and so should the regulators.

What was “not-risky” turned into risky because it was allowed to earn too high returns on bank equity.

Sir, I much appreciate Martin Wolf mentioning that I have reminded him regularly that “crises occur when what was thought to be low risk turns out to be very high risk”, arguing that “For this reason, unweighted leverage matters”, “Seven ways to clean up our banking ‘cesspit’” July 13. 

This is true, but what I have mostly tried to remind and explain to everyone, with less success, is about the dangerous distortion regulatory risk-weighting produces. 

For instance, Robert Jenkins, Member of the Financial Policy Committee, Bank of England, in a recent speech said: “The successful investor is not interested in promises of short-term return on equity; he is interested in achieving attractive risk-adjusted returns. The higher the perceived risk, the higher the return required. The lower the perceived risk, the lower the return expected. Capital will flow with either combination but its price will be different” 

What Mr. Jenkins, has not fully realized yet is that when regulators decide to allow banks to leverage their equity much more when something is perceived as risky than when something is perceived as not risky, they completely distort the system, producing the opposite; the higher the perceived risk the lower return on equity and the lower risk the higher the return. 

And this distortion is sheer lunacy, as it assassinates the risk-taking a society needs in order to move forward; and also dooms our banks to end up gasping for profits and capital on some beach that was perceived as very safe, but was not, when it became overcrowded

Credit rating agencies are just only other weathermen

Sir, imagine the old Mark Twain banker, he who wants to lend you the umbrella when the sun shines but wants to take it back as soon as it seems like it is going to rain. That banker would clearly be taking notice of what the weathermen had to say, to set the interest rates, the amounts of the loan and the other terms.

But what would happen if the regulators also told the banker that if the weatherman spoke of sun his bank was required to hold little capital but, if of rain, it had to hold more capital?

Obviously that would doom the Twain banker to choke on sunny expectations (AAAs and infallible sovereigns), and avoid possible rains (small business and entrepreneurs) like the pest… only to find out, too late, that weather reports are not always accurate.

Patrick Jenkins writes “Rating agencies still so relevant they need regulating” June 26. If he had understood the horrible consequences of the excessive and outright unmerited relevance given to the credit ratings, when deciding the capital requirements for banks, he would not be arguing for regulating these agencies but on reducing their relevance. Is the weathermen regulated?

PleaseFT, read the letter I wrote and that you published January 11, 2003

Even the most perfect monetary union would not withstand what attacked the Europe and the Euro

Sir, Steve Rattner holds with respect to Europe that “today’s crisis is structural… stemming from the euro’s flawed design. “Look to America for lessons in sharing currency” October 21.

The same week the euro was launched, in an Op-Ed, I predicted all the problems that could arise, with one notable exception. What I did not predict was the possibility of having bank regulators allowing the banks to leverage 62 times, at least, when lending to the European Sovereigns. And that my friends, is an attack that not even the most perfect monetary union could have defended itself against. 

To honestly recognize that is a must, in order for Europe to understand that it was not really the Euro or Europe which failed, to avoid the self-doubts, so as to be able to regain the confidence necessary to move the Euro and Europe forward.