In banking, by means of its regulations, the governments are the biggest receivers of crony capitalism gifts.

Sir, I fully agree with Martyn Roetter in that “An honest economics profession should help defend against crony capitalism, not act as an apologist by obfuscating its reality and denying its existence.” “Fighting the cronies calls for honest economists” October 21.

And when looking for the crony relations in banking, all you need to do is to follow that which has been awarded the regulatory blessing of lesser capital requirements. Clearly, since that would be the sovereign, awarded an amazing zero percent risk weight, the governments are de facto in that sector, the biggest exponents and beneficiaries of crony capitalism.

Requiring more bank capital for some exposures than for other clearly distorts the allocation of bank credit to the real economy. And so an honest economics profession should also be denouncing that… but most economists keep mum on it… perhaps because they do not even understand it.

Financial Times, for unexplained reasons, has been extremely reluctant to report on such crony bank regulatory relations… would this be crony journalism going hand in hand with crony capitalism? 

@PerKurowski ©

FT, John Plender, it was FIVE years ago that I told you “Simplicity in banking should always take precedence”

Sir, John Plender writes that Deutsche Bank’s net equity in 2007 amounted to just under 2 percent of total asset, meaning an over 50 to 1 leverage, while “its tier one core capital under the Basel weighted capital was 8.6 percent” which implies a lower than 12 to 1 leverage, “Simplicity in banking should always take precedence” December 7. 

As a consequence of not reading up sufficiently on what Basel II really was about you were duped. On my TeawithFT blog you can find hundreds of letters that tried to explain the Basel distorted bank leverages to you. You ignored these and even kept on again and again comparing the Basel risk-weighted bank leverages with the historic un-weighted bank leverages. 

And this amounts to a quite sloppy journalistic job and a general lack of questioning capacity in FT. 

And now on “simplicity” 

On December 19, 2007, John Plender, in “Investors pray for acts of God but even they come at a cost”, asked, what is the right level of capital for today´s financial world? 

And here is the answer to that that I wrote to FT, and to John Plender, five years ago: 

“Since it is in fact impossible to calculate the right capital then the best thing would be to be humble about it and require one single capital requirement on assets, instead of arrogantly trying to outwit the market as the regulators did when they created their current minimum capital requirements that differentiates based on how risks are perceived, primarily by the credit rating agencies. 

It is when the regulators themselves start acting like God that they really set us up for the big systemic disasters.” 

Does FT really have the "without fear and without favour" in it itself to recognize those who have been right all the time, even though these do not belong to FT’s own crony intimate circle?

Should I have been more careful my comments were more palatable to FT’s senior egos?

Sir, in “BoE’s self-criticism” November 11, you quote Bill Winters “gently” saying “[while junior staff] are often willing to challenge their superiors… there appears to be some tendency for them to filter recommendations in such a way as to maximize the likelihood that senior staff will find the recommendation palatable”. 

What is your own take on that? I myself have sent many recommendations and comments to you over the years and though I believe many of these were important different and should not have been ignored, but they were. Did I give too much credence to your motto “Without fear and without favour”? Should I have been more careful my letters and comments were more palatable to your senior egos and their friends? Do the egos have the right of blackballing? 

I mean should not FT’s commitment to truth be the same as the Bank of England’s? I mean, as a specialized media with a lot of readers, is not FT’s voice on critical issues as important or even more than BoE’s?

What does the Financial Times’ motto “Without fear and without favour” really signify?

Over many years I have written letters to FT mentioning for instance that the Occupy Wall Street movement, though correct in many ways, was completely wrong about the location. What they should have occupied is Basel with its Basel Committee for Banking Supervision. 

It was the Basel Committee which, with its capital requirements for banks based on ex ante perceived risk, as perceived by credit rating agencies, favored those already favored, “The Infallible”, like the AAA rated and sovereigns, and discriminated against those already being discriminated against, “The Risky”, which members include small businesses and entrepreneurs. 

I also explained to FT, in so many ways that those capital requirements, besides representing an important driver of inequality, were one of the most economic distortive factors ever, and completely impeded the banks to perform efficiently their role of allocating economic resources.

If for instance a German bank, lent to Greece, rated as one of “The semi-Infallible” Greece was just a couple of years ago then, according to Basel II, if it could make a 1 percent net after perceived risk and cost margin, then it could aspire to earn 62.5 percent on its equity. But, if instead it lent to a small German or Greek unrated business and earn the same net margin, then it was only allowed to achieve 12.5 percent return on equity. Does this nonsense makes sense to FT? I cannot believe so. Yet, what am I to think?

You can find my soon 900 letters to The Financial Times on this issue, for over soon a decade now, here:

And though I have received many letters from some of FT’s journalists and experts agreeing on my points, though I admit a couple of them have been conspicuously silent and never responded to one of my comments on their pieces, my arguments have not been allowed to fully surface. 

Now, little by little my arguments are gaining traction, although yet in an incomplete way, among others by the recent comments made by Andrew Haldane, and to which FT’s Editor refers in “Haldane occupies a strange platform”, October 31. 

I argue that if the Financial Times had given support to my arguments earlier, a lot of sufferings, and a lot of travelling on the mistaken road of Basel III, could have been avoided. 

And so I must wonder if not the Financial Times’ motto “Without fear and without favour” for more transparency should add: “Applicable to those who do suck up to us and do not hurt our egos”. 

Am I a bit upset? Yes, why not? You would be too! It is hard enough to fight the Regulatory Establishment on your own for you to also be encumbered by the uncooperativeness of a powerful media which wants to favour other arguments and other arguers. 

But, I was given a voice in the Financial Times? Yes! 15 letters published from 2003 until 2006 and only one thereafter. Whose ego did I trample on?

Then of course Martin Wolf generously permitted me in his Economist’s Forum in October 2009 to publish my “Free us from imprudent risk-aversion”. 

Do I have sufficient credentials to aspire having more voice? I truly believe so but you can judge yourself. 

That said, now and again I have found voice in other media… like for instance this letter in the Washington Post. 

But, since I am sure that I am correct in my arguments, and these will win the day, sooner or later, the Financial Times will have to acknowledge their mistake. I do not believe they will even try to hide the fact that these were my arguments… or them being capable of such un-ethical behavior as endorsing these to someone else they want to favour.

We should also strip the Financial Times of its honorable motto

Stripping someone of his honorific title does seem to be a quite civilized way to shame those who seemingly have done society wrong… and society really needs to recover, urgently, some serious shaming powers. 

That said, in order for shaming to really work, it should not be seen as singling out someone to shame, like in the case of Fred Goodwin, especially when it is well known that others should be on the list.

Independently of what regulators say, the banks and the markets consider the perceived risk of default, such as that information contained in the credit ratings, when it sets the interest rates, the amounts and the other terms of a financial exposure. 

That is why, when the regulators decided to use the same information for setting the capital requirements for banks, they guaranteed an excessive bank exposure to what is officially perceived ex-ante as not risky, like the triple-A rated securities and infallible sovereigns, and an underexposure to what is officially perceived as risky, like lending to small businesses and entrepreneurs… and that was the primary cause of this systemic financial and bank crisis.

I have written literarily hundreds of letters to the Financial Times during the last seven years about this almost unbelievable mistake committed by the bank regulators, and these have all been ignored. Now, if truth is silenced, we should not be surprised to see many pseudo-truths prosper, which is one reason that banker bashing has achieved its current levels of popularity and why regulators have not even come close to being held to any real account.

Therefore I am of course in total agreement with Martin Dickson´s “The burn-a-banker frenzy is tempting – but wrong”, February 4, when he reminds us of perhaps also burning “those meant to police the credit system”. 

But, to that, I would also add the need of stripping the Financial Times of its honorable motto “Without fear and without favour”, since obviously its silence, can only be explained in terms of journalistic or media cronyism... which is a public bad.

http://www.teawithft.blogspot.com/search/label/subprime%20banking%20regulations

Crony journalism is also a public bad

Sir, in “The world’s hunger for public goods”, January 25, Martin Wolf holds that extreme financial instability is a public bad; and which presumably has to mean that correctly understanding the reason for it, should be a public good. 

Nonetheless, over many years now, the explanation that I give for the current crisis, as an individual who provided some of the clear and earliest documented warnings, even in FT, and which I thought I could make public through sending letters to FT, has been silenced. For what reasons, I do not know… but it could perhaps be explained in terms of crony journalism. 

Nonetheless, here is an explanation again, for the umpteenth time. 

If a banker after analyzing a borrower’s creditworthiness decides to limit the amount of the loan, and charge higher interests to compensate for the perceived risks, the borrower might try to renegotiate better terms, but he would not consider it unfair, as it would be the result of natural market discrimination. 

But, when bank regulators also force the bankers to further limit their loan to the borrower, and increase even more the interest rate charged, all because they require the bank to hold more capital when the officially perceived risks are higher than when they are low, as they do, then we enter into the world of the nannies, the world of artificial regulatory risk discrimination; which only leads to the kind of unfairness that exasperates the inequalities. 

As a result of this regulatory risk discrimination we now have a crisis of financial instability that threatens to take the Western world down; all because of excessive bank exposures to what is officially perceived ex-ante as not risky – for instance, triple-A rated mortgage-backed securities or “infallible” sovereigns and a growing bank underexposure to what is officially perceived as risky – for instance, lending to small businesses and entrepreneurs. 

The parents need to discuss this issue urgently with their financial nannies, before it is too late and the economy has turned terminally sissy and terminally unfair. 

PS. Occupy Basel! http://bit.ly/dFRiMs

PS. http://www.cityam.com/forum/holy-moly-banks-were-drugged-basel-s-rulebook