Andrew Bailey, and what about the highly irresponsible conduct of bank regulators?

Sir, I refer to Andrew Bailey’s “Irresponsible conduct carries consequence in British finance” February 23. I agree with all but, what about the regulators?

Bank regulators decided that lending to those perceived as risky, from a credit risk point of view, required banks to hold much more equity than lending to those perceived as safe. That was an extremely irresponsible thing to do.

Not only did it mean that lending to the safe then generated much higher risk adjusted returns on bank equity than lending to the risky; something which completely distorted the allocation of bank credit to the real economy; but it also meant that banks would be standing there naked, with little equity, precisely where all major bank crises have always occurred, namely the terrain of excessive exposures to what ex ante was perceived as “absolutely safe” but that ex post can shows its other real colors.

Do I want to jail these regulators? No! We are living in different times. But I surely do not want to see these failed regulators also hide behind “an accountability firewall”, which permits them to keep on regulating… and sometimes even being promoted.

Let them just parade down our avenues wearing cones of shame.

I am a whistleblower, on lousy bank regulators, and FT, not withstanding its “Without fear and without favours”, also ignores me.

Sir, William D Cohan writes about the travails of “Wall Street whistleblowers”, May 31. In it he writes about “how little the regulators charged with keeping watch over the Wall Street banks seem to care about holding them in any way accountable”. The same can be said about how little those in charge with keeping watch over the regulators, like the Financial Times, seem to care little about holding them in any way accountable.

Since years back I am a whistleblower, on the Basel Committee for Banking Supervision, accusing it for having designed absolutely useless and even dangerous bank regulations. And though very few can demonstratively prove to have alerted from a reasonably high position bureaucratic post about what was wrong, the silence with which FT has met all my comments, has been deafening.

Just as an example, in a written formal statement at the World Bank, as an Executive Director I warned “

We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

And FT itself published one letter, in January 2003, in which wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is”; and another letter, in October 2004, in which I asked “How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?” 

But, just in case, am I arguing that anyone of the regulators has committed and illegal act for which they should be jailed? Of course not! Only that they have been so dumb that we need to parade them all down Wall Street, wearing dunce caps – or cones of shame… in order to increase our chances that the regulators think twice next time they feel as Masters of the Universe… and perhaps they should be joined in the parade by the editor of FT.

PS. Here is the link to my over 1.300 letters to FT on the subject.

PS. One day perhaps there will be a whistleblower within FT willing to explain it all :-)

What is most appropriate, cones of shame or tarring and feathering?

Sir, in “Banks at risk” February 7, notwithstanding that you, at long last, write about the incestuous relations of banks with national government and admit that many countries see banking as an extension of the state, you mention only the taxpayers subsidies to banks, but ignore the immense subsidies governments collect, in terms of more public debt and at lower interest rates that what a free market would allow, as a result of being able to borrow from banks without generating, when compared to other borrowers, as much capital requirement. 

Current bank regulations, produced by our banking central planners, decided that the only thing that matters is that banks do not default, and this set our banks on the course of creating huge excessive exposures to what is officially deemed not risky, and to equally dangerous underexposures to what is deemed as risky. 

That our banks are now at risk? Ha! The whole Western world is at risk 

How are these regulators now best shamed, having them parade down Trafalgar Square wearing cones of shame, or would tarring and feathering be more appropriate.

The financial regulators should parade down 5th Avenue wearing their cones of shame

Sir David Roche writes “Watch out for sovereign black holes in the credit universe” April 1, as if the world should have to be warned now.

When regulators came up with the idea that if the sovereign was rated AAA to AA- then your local bank needed no capital at all when lending to its government, compared to the 8 percent required when lending to your unrated local entrepreneur… the future was there for all to see. Exploding public debt and black holes made up by the lack of bank equity. Just like what happened when banks were only required to have 1.6 percent in capital when lending to a triple-A rated company.

Where were the Financial Times and all other experts when their opinions could really have mattered? What percentage of the regulatory experts, or schemers, had an inkling of what was doomed to happen if they regulated the way they did? Does that not tell us something about the quality of the regulators? Should they, as a bare minimum, not be made to parade down 5th Avenue wearing their cones of shame?