Bank regulators insist on feeding the systemic risk of credit ratings, even after it became tragically evident.

Sir, Kate Allen writes “Funds that allocate capital based on instruments’ investment grades and index weighting may look as if they are playing it safe but they are, in fact, taking a gamble, creating towers of risk, any floor of which could prove unstable… do not look to the canaries in the financial markets’ coal mines to sound an early warning. By the time the downgrades come, it will be too late” “Tail Risk” February 28.

Indeed by the “time issuers’ credit ratings were downgraded, [banks] were already staring the worst-case scenario in the face.

Basel II’s standardized risk weights for the risk weighted bank capital requirements:

AAA to AA rated = 20%; allowed leverage 62.5 times to 1.

Below BB- rated = 150%; allowed leverage 8.3 times to 1

Absolute lunacy! With the same risk weight banks would anyway build up much more exposure to what they ex ante perceived as very safe, than against what they perceived as very risky.

As is, that regulation dooms our bank systems to especially large crisis, resulting from especially large exposures, to what is perceived as especially safe, against especially little capital. 

Allen observes: “An investment structure that is revealed to have done a bad job only when disaster arrives, as in the financial crisis”. Unfortunately no. Bank regulators blamed the credit rating agencies, and not themselves for betting too much on these, and so that so faulty regulations that should have been eliminated with a big “Sorry!” is still very well active. 

PS. In FT January 2003: “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. Friends, please consider that the world is tough enough as it is.”

PS. At World Bank: April 2003: "Market or authorities have decided to delegate the evaluation of risk into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"

@PerKurowski

A world obsessed with Best Practices may calcify its structure and break with any small wind.

Sir, Nicholas Dorn in his letter “Drive for global banking conformity increases systemic risk” of September 18, refers to your leader article, “Waning co-operation will make the next financial crisis worse”, and MEP Molly Scott Cato’s letter “Global finance can work if rulemakers co-operate”, September 14. Dorn writes:

“Converging international financial regulation encourages similar business models and greater homogeneity of finance, raising systemic risk”.

“No one knows where the next crisis is going to come from. The more useful question is how the propagation of crises through the system can be minimised”

“The plain implication is the need for greater variation in finance, so that such risks as do arise cannot so easily ripple through the global ensemble. What is desperately needed, therefore, is not bland global conformity but more variation between important regulatory regimes.”

I could not agree more. In April 2003, as an Executive Director of the World Bank, I made the following formal statements at the Board, which relate directly to those fundamental points Dorn raises.

"A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

“Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.”

What else can I say? Well perhaps that that statement also included:

“Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth”

Sadly Sir, as I have written to you umpteenth times, a different purpose for banks than just being a safe place where to stash away cash (and implicit to help fund the sovereign) is nowhere to be found in all the voluminous official writings about bank regulation.

Was I able to get my message thru? No! I guess the attraction of that with risk weighted capital requirements the regulators would be able to make our banks safer, was such that not even FT was (is) able to resist the songs of Basel Committee’s sirens. 

@PerKurowski

Indeed, reforming the credit rating market is an urgent necessity. Indeed, shame on the regulators

Sir, Arturo Cifuentes concludes, “Reforming the credit rating market is an urgent necessity. Shame on the regulators” “Few lessons have been heeded 10 years after Lehman collapse” August 23.

Yes shame on the regulators! But also for some other reasons than those Cifuentes mentions.

Just for a starter, the credit rating agencies would never ever have caused so much damage had their opinions not been leveraged immensely by the risk weighted capital requirements for banks. Imagine, Basel II, 2004, allowed banks to leverage 62.5 times if only a human fallible credit rating agency assigned an asset an AAA rating. 

It should have been crystal clear that with that the regulators were introducing a huge systemic risk in the banking sector. That I mentioned for instance in a letter published by FT in January 2003; and I loudly explained and protested it while an Executive Director in the World Bank during those Basel II preparation days.

In Europe, the EU authorities even overrode the credit rating agencies opinions and assigned Greece a 0% risk weight, which of course doomed it to its current tragic condition. 

Then, let us mention the mother of all regulatory mistakes; for their risk weighted bank capital requirements, initiated in 1988 with Basel I, the regulators used the perceived risk of assets instead of the risks of those assets conditioned on how their risks are perceived? How loony, how sad, what a distortion, what a recipe for disaster was not that? And still, 30 years later, they do not even acknowledge their mistake.

By the way, when Cifuentes denounces that Solvency II, with its myopic risk view, will discourage insurance companies, the natural holders of illiquid assets, to hold these investments, and it will therefore increase the systemic risk by making their portfolios less diversified, I could not agree more.

Sir, you know that for over more than a decade I have written to Financial Times 2.787 letters objecting to the “subprime banking regulations”, this one not included. Galileo could indeed be accused for being obsessed with his theories, but, could those doing their utmost to silence his objections, the inquisitors, not be accused of the same?

PS. Cifuentes mentions “Olivier Blanchard’s 2016 admission that incorporating the financial sector in macro models would be a good idea”, I might have had something to do with that.

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

When huge mistakes that hurt all of us are made, but no one is even publicly ashamed for these, what does that hold for our future?

Sir, John Authers writes about “The power unwittingly vested in ratings agencies. Regulations steered fund managers into credits with a certain minimum quality. Banks knew the capital they had to hold as a buffer depended on the rating the agency gave credits they held. The result was fund managers left judgment on credit quality to the agencies, while trying to bamboozle agencies into granting higher ratings than many securities deserved.” “Consultants’ claims and the evasion of responsibility” July 20.

“Unwittingly”? Meaning …without being aware; unintentionally? 

No! John Authers should allow the regulators to get away with that!

One needed not to be an expert on bank regulations to know that assigning so much power into the credit rating agencies was (is) simply wrong.

A letter I wrote to the Financial Times that was published in January 2003, stated: “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. Friends, please consider that the world is tough enough as it is.”

And as an Executive Director of the World Bank, in a workshop for regulators who in May 2003 were discussing Basel II, I opined: “I simply cannot understand how a world that preaches the value of the invisible hand of millions of market agents can then go out and delegate so much regulatory power to a limited number of human and very fallible credit-rating agencies. This sure must be setting us up for the mother of all systemic errors.”

And in a formal statement at the Executive Board of the World Bank in March 2003 I prayed: “The sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies will introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them”.

So unwittingly it was not! And, really, if it was, then the more reasons to get rid of all those regulators fast.

Authers writes: “The problem is that when nobody takes responsibility, bad decisions can flourish”. Indeed, it is seriously critical for all of us that those who make serious mistakes are held accountable for it. 

So let me ask Sir: How many regulators have been fired or at least been publicly ashamed for this issue of the excessive importance to credit ratings, or for that matter for the much larger and serious issue of the utterly faulty risk weighted capital requirements for banks? Not a single one?

Could that partly be because you Sir, and too many of your colleagues, for whatever reasons of your own, have treated these regulators with the softest of the soft kid gloves?

Sir, as far as I know, you have not even been able to ask the regulators why they think that what is perceived as risky is more dangerous to our bank system than what is perceived safe.

Could it be because “Without fear and without favors” does not want or dare to hear the answer, or ask friends that question?

@PerKurowski

Instead of Andreas Georgiou, Greek courts should prosecute those who assigned Greece a 0% risk weight

Sir, Ulrich Baumgartner, Eduard Brau, Warren Coats and otherformer senior staff of the IMF launch a spirited defense of Mr Andreas Georgiou. They write that Georgiou, a respected authority in statistics, has been pursued relentlessly during seven years with lawsuit after lawsuit, for “bringing harm to Greece and dereliction of duty by refusing to falsify the figures.” “Greece should not hound man who refused to falsify the figures” June 7.

What “Georgiou and his Greek staff, helped by international experts” did was to produce corrections, “which showed a much bleaker picture than the earlier data, were vetted by Eurostat and accepted by the European Central Bank, the EU and the IMF as the basis for major financing.”

Amazing! If anything the courts should prosecute all those European central bankers and regulators who, for the purpose of their risk weighted capital requirements for banks, and knowing it did not merit it, assigned a 0% risk weight to Greece. Had it not been for that the governments of Greece would not have been able to build up that gargantuan level of public debt that was the primary cause of its crisis.

Since IMF, with its silence on it, has de facto endorsed that 0% risk weight, perhaps those here defending Mr Andreas Georgiou should start with a mea culpa. The world would very much appreciate that. It is way overdue.

To underestimate the strength of a nation causes its debt to cost more but, to overestimate it, causes excessive debts, which in my mind, as a citizen, is more dangerous.

Just imagine what would happen to a credit-rating agency if it was proven that it had knowingly assigned an undeserved an AAA rating?

What if a credit rating agency had knowingly assigned an undeserved AAA rating? European central bankers assigned an even worse 0% risk weight to Greece, which doomed Greece to excessive public debt… and they have yet not been held accountable for it in the slightest.

PS. And in the case of Greece EU violated a fundamental principle of a Union... solidarity.

PS. Even though none of these sovereigns can print euros on its own will, EU authorities assigned to all Eurozone sovereigns’ debts, a 0% risk weight.

@PerKurowski

Beware, the more you trust data, the more you have to be absolutely sure about how to interpret it, and about what to do with it.

Sir, John Thornhill writes: “In his Alan Turing Institute lecture, MIT professor Sandy Pentland outlined the massive gains that could result from trusted data… the explosion of such information would give us the capability to understand our world in far more detail than ever before”, “Trustworthy data will transform the world” March 6.

Indeed, but that also leads to other bigger dangers, not only because we might trust that trusted data too much, but also because we might not know how to interpret or what to do with that trusted data.

Like for instance the regulators with their current risk weighted capital requirements for banks. These establish that the riskier an asset is perceived the larger the capital a bank has to hold against it. Does that make sense? Absolutely not!

It is not if the perceived risk is correct, meaning the ex ante risk perceived ends up being the real ex post risk, that poses any major danger for our banking system. It is if the risk perceived is incorrect, that the real big dangers arise. And, of course, the safer an asset is perceived, and the more bankers trust that perception to be right, the longer and the faster it can travel down the dangerous lane of wrong perceived risks.

What detonated the most the 2007 crisis? The securities backed with mortgages to the subprime sector rated AAA by “trustworthy” credit rating agencies, in fact so trusted that the Basel Committee, with Basel II, allowed banks to leverage 62.5 times their equity with such “safe” assets.

@PerKurowski

Systemic risks in the financial sector keep growing. Yesterday risk weighted capital requirements and credit rating agencies. Today artificial intelligence

I refer to Izabella Kaminska’s discussion of a report published by FSB on the financial stability implications of artificial intelligence and machine learning in financial services. “When AI becomes too big to fail”, FT Alphaville, November 1 

1: “This warrants a societal discussion on the desired extent of risk sharing, how the algorithms are conceived, and which information are admissible.”

That is a discussion that should also have taken place before regulators, with their risk weighted capital requirements, created incentives for our banks, one societal prime risk-takers, to avoid all what is perceived as risky, like SMEs and entrepreneurs, and concentrate exclusively on what is perceived, decreed or concocted as safe. 

2:“Fintech and AI are being aggressively marketed as our best and only opportunity to diminish the concentrated power of the banks. The terms “new entrants”, “disruption”, “fragmentation” and “open access” form the foundations of the movement. And yet… none of these clever systems, if the FSB is to be believed, are necessarily clever enough to fend off the forces of consolidation that bring about systemic risks.”

What can I say except to repeat what I as an Executive Director of the World Bank opined when in 2003 I learned that the Basel Committee was going to put so much power in the hands of some few human fallible rating agencies… and now we are to switch into some, or one, hackable AI?

“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.” 

“A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

Do subprime borrowers or investors in mortgages benefit from securitization? No, now all profits go to intermediaries

Sir, Ben McLannahan, with respect to securitization of subprime mortgages quotes Julian Hebron, head of sales at RPM Mortgage with: “Making credit available to borrowers who are subprime is national policy and it is an important part of economic growth” “Financial crisis: 10 years on: The return of subprime” September 2.

Q. Do the subprime borrowers get any interest reduction from having their mortgages securitized, such reduction that could make these mortgage a safer investments for those investor who acquires these at lower rates? A. No!

Convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years, packaging it in a security, and then with a little help from the credit rating agencies convincing risk-adverse Fred that this mortgage is so safe that a six percent return is adequate, allows that mortgage to be sold for $510.000.

The $210.000 profit is now shared in it entirety by those originating the subprime mortgage, those packaging it, and those obtaining the excellent credit rating for the resulting security.

If that is “an important part of economic growth” that merits being part of a national policy, I don’t get it. Do you Sir?

If for instance 70% of those profits were paid back to those borrowers who lived up to their obligations, that would indeed imply a different and much more positive incentive structure.

Is that not something like for which cooperatives are often intended but not always achieve?

@PerKurowski

Eliminating bank failures by means of risk-weighted capital requirements, just sounded too good to be questioned.

Tim Harford discussing statistics writes: “We often pay attention to the wrong thing, scrutinising the numbers with a forensic eye without asking about what those numbers really describe. Sometimes there is no intent to deceive; there doesn’t need to be… We deceive ourselves… If we don’t understand the definition there is little point in looking at the numbers. We have fooled ourselves before we have begun.” “Where the truth lies with statistics” May 13.

Indeed and one of the reasons we fool ourselves is that what those statistics are supposed to offer us, sound so attractive that we ignore to look to closely at them.

Basel I and II offered: “In order to make your banks safe we are going to require these to hold capital based on the risks they take”. Who would say no to such an offer? It sounded so attractive that all were willing to overlook that the formulas and calculations provided had nothing to do with the failure of banks, but all to do with the failure of the clients of the banks, which of course is pas la meme chose.

The Basel II offer also included: “And if you order now, we also throw in, for free, those few experts that can expertly decide for all of us what’s risky or not, namely the credit rating agencies”

Basel III now offers: “And if you order now, we also throw in, for free, some liquidity weighted assets requirements holdings that will guarantee banks have the money available to repay when asked”

In short, because regulators offered the moon, the world was gladly disposed to accept anything, even if it would be something like going back to a geocentrically view of the world.

As long as bank regulators, even in the face of failures, are capable with such straight faces insist in that they can make our banks safe, it seems we can’t refrain from believing them. Sir, we are indeed a sorry bunch.

PS. Here are some questions that seemingly are not to be made less we must abandon our hopes that regulators know what they are doing.

@PerKurowski

Why do bank regulators still allow few human fallible credit rating agencies to have so much regulatory influence?

Sir, I refer to Tim Harford’s “When forecasters get it wrong” and Gillian Tett’s “‘Shy’ voters: the secret of Trump’s success” November 26

What would have been the results if the election had been decided by a couple of polls or some forecasters?

I ask because bank regulators have still not been able to move away from that huge systemic risk of assigning so much importance to some few human fallible credit rating agencies.

In 2003 in a letter FT published I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough”

And as an Executive Director of the World Bank, while Basel II was discussed, time and time again I tried to alert to this systemic risk, all to no avail.

Sir, just imagine if the AAA rated securities backed with mortgages to the subprime sector had been able to continue for one year more before their gigantic faults were unveiled?

And again, why should some with an AAA rating and that because of that is already favorably treated by the market, have to be favored by regulators too? Is it so hard to understand that excessive favoring is dangerous too?

@PerKurowski

With respect to realizing bank regulators do not know what they’re doing, FT has clearly not reached maturity.

Sir, Janan Ganesh writes: “Maturity is the realisation that adults do not know what they are doing. Grown-ups are not omniscient, just fallible humans trying their best in a difficult world.” “The markets hold more sway than May” October 18.

Indeed that is why in a letter you published in January 2003, before I became de facto censored by FT, I wrote: “Everyone knows that, sooner or later, the ratings issued by the [human fallible] credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds.”

Here is the shorter version of the generally unknown lunacy of the current risk weighted capital requirements for banks:

1. If you allow banks to leverage their equity, or the support they receive from society, more with some assets than with other, then you will dengerously distort the allocation of credit to the real economy.

2. And all that distortion for nothing. What is dangerous for bank systems, is never what is ex ante perceived as risky, but always either some unexpected event, or the build-up of dangerous excessive exposures to something that ex ante was perceived as safe but that ex post turned out not to be.

You all in FT, grow up, mature, understand that current bank regulators haven’t the faintest on what they’re doing.

PS. Here again is a somewhat more extensive aide memoire on the monstrous mistakes of the current capital requirements for banks.

@PerKurowski Janan

For the good of the real economy, let’s pray the day of the so much needed bank regulatory enlightenment arrives soon.

Sir, Caroline Binham and Laura Noonan informs that “The Basel Committee on Banking Supervision said yesterday it had dropped a plan to ban banks from relying on rating agencies when they calculate risks in their portfolio” And with that “The banking lobby has beaten back a global reform plan that it claimed would result in a “substantial” increase in capital”, “Lenders win Basel U-turn on assessing risk” December 11.

I am not sure because the Basel Committee recently issued a Consultative Document on the issue and we should wait what could come out of it.

Anyhow, what is completely missed is that banks already look at credit ratings when setting their risk premiums and the amounts of exposure. And so when also having to use the same credit rating to set their capital requirements, means that the credit risk info contained in those ratings is excessively considered. And any risk, even if perfectly perceived, causes the wrong actions if excessively considered.

The day the Basel Committee wakes up to the dangers of distorting the allocation of bank credit to the real economy based on credit risks, something that has not one iota to do with whether borrowers pursue objectives that deserves fair access to bank credit, that day everything will change.

For the good of the real economy and of the perspectives for our young to find good jobs in the future, let us pray that day of regulatory enlightenment arrives soon.

http://subprimeregulations.blogspot.com/2015/12/the-basel-committee-insists-in-not.html

@PerKurowski ©

Gillian Tett, Anthony Bourdain and Selena Gomez might not explain it all in the “The Big Short”

Sir, I refer to Gillian Tett’s discussion of “The Big Short”, a film based on Michael Lewis’s bestselling book. “Finance gets the Hollywood treatment” November 28.

Tett writes: “We have Anthony Bourdain, the famous chef, standing in a kitchen, describing how a CDO is similar to fish stew (bankers resold old mortgages by mixing them up into fresh broth, just as chefs conceal old fish by turning it into soup). We also see the actress Selena Gomez elaborating the principles of synthetic derivatives while sitting in a casino, placing chips on a table, as groupies mimic her bets.”

I have not seen the film yet but, if Anthony Bourdain did not include mentioning the fact that the quality of the fish stew was to be determined by some very few fish-stew rating agencies; and that the casino in which Selena Gomez placed bets had abandoned the traditional payout scheme in which all bets have exactly the same expected economic value, in favor of one where the safer bets, black or red, pay more than the risky bets, a number, then the film does not fully explain what happened.

Gillian Tett writes “a decade ago [she] was alarmed by the bubble brewing in complex finance…” and indeed in January 2007 she wrote “The unease bubbling in today’s brave new world”

Myself, as an Executive Director of the World Bank, in a formal statement I delivered in October 2004, have also done my fair share of warning writing: “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 in January 2003 in FT I had warned about allowing credit ratings to become a systemic risk.

@PerKurowski ©

Mifid 2 could be creating dangerous risks promoting Systemic Important Research Institutions

Sir I refer to Laura Noonan’s “Deadline looms for banks to get their research arms in order” November 17.

We read “European rules, known as Mifid 2, will reshape the way analysts report on companies and how the research can be priced and circulated to investors… going from quantity to quality… banks to become more selective in the sectors they deal within an environment where clients will no longer support the 60-70 research teams that cover each major European industry… number of analysts publishing Emea research for the 12 top banks fell 17 per cent from 2007 to 2014.”

What are these busybody regulators doing? Don’t they understand what systemic risk is all about? And now they are pushing for Systemic Important Research Institutions, SIRIs.

Don’t they understand that going from quantity to quality often just entails going from the open market into even less transparent small mutual admiration clubs? Did they not learn about the systemic risks of giving information power to few like when they gave it to the credit rating agencies?

Quality? Quality is a result of the diversity that includes many “un-qualified” players but who could suddenly bring forward fresh perspectives, or be making those insolent questions required for having a chance at sustainable quality.

Did they not do enough damage to financial research when they subordinated the importance for banks of getting the risk premiums right, to getting the equity required low?

The more I read about what arrogant and hubristic regulators are up to, the more I feel we have to put faith in shadow organizations to be able to help our grandchildren to a livable future.

@PerKurowski ©

“Wishful thinking” should not be used to make unforgivable dumb thinking more socially acceptable.

Sir, Tim Harford discusses several experiments on how wishful thinking can influence the outcome. In most of these the sufferer of wishful thinking consequences is the wishful thinking himself. But, when Harford mentions: “Perhaps a belligerent politician or union leader would find his or her position strengthened by a strike. A general might desire a war. Lawyers might profit from urging their clients to go to court.” he is clearly referring to bad wishful thinking, “When wishful thinking becomes wasteful”, November 7.

So let me ask? How wishful was it not of regulators to think that by interfering with some capital requirements based on credit risk they could stop banks from failing without distorting the allocation of bank credit to the real economy? Or, if it was not wishful thinking, was it pure dumb unforgivably irresponsible thinking?

How wishful was it not of regulators to think that they did not need to look back at history to see what caused bank crises because it sufficed to look at the ex ante perceived credit risk of the assets? Or, if it was not wishful thinking, was it pure dumb unforgivably irresponsible thinking?

How wishful was it not for regulators to think they could empower some very few human fallible credit rating agencies, to decide how much capital banks needed to hold, and that these were not going to be captured? Or, if it was not wishful thinking, was it pure dumb unforgivably irresponsible thinking?

Whenever the concept of wishful thinking might be used to sort of make unpardonable dumb thinking more socially acceptable, I have a problem with it.  

@PerKurowski ©

Beware of excessive information. (Blissful) ignorance is a potent driver of financial markets and of human activities.

Sir, Tracy Alloway describes the possibility of adding on, as you go along, new pieces of information that will enhance the knowledge of the risks, for instance in securities backed with residential mortgages, “New mutations beckon for system that shares DNA of each loan’s risk” January 3.

And Alloway quotes David Walker of Marketcore saying “This could be very disruptive, because not everybody is for transparency and accountability. Even if they say they are publicly, they may not be privately.”

It is worse than that! If risks were perfectly known, the price of the securities would reflect this and so there would be little profits to be made trading these, and so perhaps there would be no Wall Street. It is imperfect information that has prices zigzagging, which induces market participant to get out of bed in order to sell the not-too-well-perceived risks and buy the not-so-real-safeties.

In other words, ignorance is one of the most potent drivers of financial markets and human activities; and is therefore quite often characterized as quite blissful… at least by the winners.

But the worst that can happen with excessive information, that is when we, because of it, become convinced that we know it all. Like when bank regulators caused our banks to follow excessively the credit risk perceptions issued by some few human fallible credit rating agencies. Clearly some more information (and humility) about our ignorance would have come in handy.

Currently both bankers and regulators are driving the bank cars simultaneously, using the same instruments and data.

Sir Tim Harford discusses the future of driverless cars in “Pity the robot drivers snarled in a human moral maze” August 2. And he left out some angles that I would have liked him to have explored.

For instance, when he talks of hiccups, human guided cars or computer guided cars accidents would we be talking about the same type of accidents… could not it be foreseeable that a computer glitch resulting accident could cause horrors way beyond what the worst pile up crashes often produced by bad weather conditions do? I mean something like the pile up bank assets crashes caused by having banks following the opinions of only a few credit rating agencies… in this case of agencies that on top of it all are humanly fallible?

And how does Harford´s reference to a person “being so arrogant as to think he could drive without an autopilot”, stand up against the constant badmouthing of bankers who did little but to trust their autopilot installed by their regulators?

But Harford is indeed right on the spot when he ends by mentioning “the question of what we fear and why we fear it remains profoundly, quirkily human” Is not a great example of that the fact that bank regulators who should in all logic fear the most what bankers do not fear, decided to base their fears on exactly the same ex ante perceptions of risks… and concocted their risk-weighted capital requirements?

In fact taking the analogy of driving a car to banking, what we now have is perhaps the worst of all worlds, namely bankers and regulators driving simultaneously using the same instruments and the same data... Can at least somebody please make up his mind about who is in charge, so that it is clear who or what we should blame in case of an accident?

FT, How can you allow such a blatant misrepresentation of financial history?

Sir, Alice Ross reporting on the Landesbanks in Germany refers to “the disastrous lead in to the financial crisis that saw ill advised investments in US mortgage backed securities”, and it is just another monstrous example how financial history is being miswritten, “Bank balance” July 31.

And we are also told of how former or current board members… went to trial accused of failing to disclose the risks involved in buying certain asset-backed securities in 2005.

If I had been the defense lawyer at that trial, I would just have called one of any German bank regulators who had been involved with the approval of Basel II in June 2004, and asked the following questions.

Q. Is it not so that a bank was authorized to acquire AAA rated securities against only 1.6% in capital meaning they could leverage their equity 62.5 times to 1.

A. Yes

Q. Is it not so that allowing such a monstrously high leverage signified that the regulators trusted almost unlimited the capacity of the credit rating agencies?

A. Yes.

Q. Would it have been reasonable for a German bank to travel to US and go through the AAA rated securities in detail knowing that the credit rating agencies which the regulators so much trusted had already done so?

A. No.

Q. If those securities had turned out to be worthy of the AAA rating but the directors of one bank had foregone the opportunity to earn its shareholders huge returns on equity while other banks were doing so, would the shareholders not have thought of firing these directors?

A. Yes.

Your honor, for the bank to under those circumstances have purchased those AAA rated securities was not in any way shape or form an ill advised investment. What was though clearly ill advised, were these bank regulations. I rest my case.

Who is going to prosecute the bank regulators?

PS. It was absolutely clear something like this had to happen… You yourself published a letter of mine in January 2003, in which I 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.”

Globally concentrating on the knowledge of the knowledgeable, renouncing to knowledge diversity, represents a huge systemic risk.

Sir, I refer to Gillian Tett “Chess in cyberspace: a smart move?” July 26. I am not a chess player, and I have not really been impacted by Fischer and Spassky playing chess on TV, or by “Deep Blue” beating Kasparov... and so I might be out on a limb here.

I agree with Tett that it is sad that globalization of competition has dramatically reduced the possibilities like singing Queen’s “We are the Champions” with true emotion, as clearly “We are the local champions” does not have the same ring to it.

But, it is when Gillian Tett describes how “parents are tapping the most brilliant brains in places such as India, Bulgaria or Moscow, to deliver online tutorials for their offspring via Skype”, that I get most concerned, because it is another example of a global concentration on the knowledge of the knowledgeable, which could in the end lead us to miss out on some really important knowledge diversity.

And frankly let us look at what has happened in the area of bank regulations since someone (not me), decided we should concentrate the most brilliant regulatory brains in the Basel Committee, and these most brilliant brains with too much hubris decided they could act as risk managers for the world, and on top of that decided to delegate much of that role into some few brilliant brains of some few credit rating agencies. As had to be expected, catastrophe ensued!

And now our banks are becoming riskier by the day, as their balances become more packed up with fewer and fewer assets deemed as absolutely safe, and without them being allowed the benefits of diversifying among the risky.

A decade ago, I told my colleague Executive Directors at the World Bank that if, by lottery, they would substitute for one of us with a plumber or a registered nurse, also picked by lottery we would be a much wiser Board. Of course that, in a mutual admiration club, was not too well received… but I still hold it to be true… even to become truer by the day.

Sometimes it is very hard to collect the money you win betting on where your mouth is

Sir, I refer to Tim Harford’s “Money where your mouth is” June 21. Suppose I had place money where my mouth was with the following:

“We have bank regulations that though requiring banks to hold 8 percent in capital when lending to businesses without credit ratings, allow banks to hold only 1.6 percent capital when lending to someone who has ex ante an AAA rating. And so I bet $1.000 on that, within the next decade, banks will lend much too much to some borrower ex ante rated as absolutely safe, but who ex post turns out to be very risky… and that this, aggravated by the fact that for that against that exposure banks had to hold little capital, will result in a major bank crisis.”

What would you had said about a bank regulator betting against me? And, if he had done so, would the current crisis not mean that I had won the bet, long before the decade ran out? But tell me…how would I collect my winnings?

I say this because banks regulators actually bet the whole banking system against my theoretical proposition, and I have not seen anyone paying up! On the contrary they have mostly been promoted. Like Mario Draghi, the former Chair of the Financial Stability Board, promoted to President of the European Central Bank. Like Jaime Caruana, the former chairman of the Basel Committee on Banking Supervision, promoted to General Manager of Bank for International Settlements.

Yes Tim Harford, “a world full of confident forecasts that nobody [including FT] never bothers to verify… is intolerable”. And so I would agree that “the world needs more wagers between pundits” but, before we start the betting, let us be sure there is a decent clearing house where these debts could be settled.