FT, you have a fake understanding on what is wrong with current bank regulations, and you have silenced my real one

Sir, Gillian Tett, your US Managing Editor, referring to the responses to an article by her titled “Why a divided America has united against the media”, July 14, strangely published only in that FT Weekend Magazine I do not receive here in Washington D.C. writes: “Readers and viewers say they want the media to be “less biased” and to “focus on the facts” but the problem of how to finance and organise serious non-partisan journalism for the mass market remains largely unsolved. The trouble is that partisan social media is free – and readers seem to be hungry for this. So how can we support real news when most voters keep flocking to entertaining stories that are (at best) partisan and (at worst) deliberately fake?” “Want to change the media? Don’t get mad – get even”, also solely in FT Weekend Magazine, July 22. 

The following is a very brief version of my relation with FT, as an opinionated subscriber.

FT and its columnists, with relation to banks’ crisis and regulations, have consistently written about deregulation and excessive risk-taking.

I on the other hand and in that respect, have with over 2.500 letters to FT consistently written to FT about misregulation and excessive risk-aversion; which results in dangerous excessive exposures against too little capital to what is ex ante perceived as safe, like sovereigns, the AAArisktocracy and residential housing, but could ex-post be very risky; and too little exposures to what is ex ante perceived as risky, like SMEs and entrepreneurs.

As one of the frontlines on this issue of the risk-weighted capital requirements for banks we find that in Basel II regulators assigned a risk-weight of only 20% to what is rated AAA to AA, and that which therefore could be very dangerous, and 150% to what is rated below BB- and that by just that fact alone is ex-ante made so innocuous to the banking system.

In one sentence, regulators regulate the banks based on the ex ante perceived risk of the banks assets, and not based on the risk ex post of the assets for the banking system.

And my criticisms have included many other aspects… like for instance the runaway statism present in the risk weights of Sovereign 0% and citizens 100%.

But for soon a decade, my arguments have been met with absolute silence, because as one of you informed me, I was just obsessed with the issue. Sir, I am reporting on a regulatory bomb that is destroying the future economy for our grandchildren, and you really don’t want me to be obsessed?

Now Tett, one of the frequent recipients of my comments writes: “the next time you complain about the media, ask yourself how you expect “fair” mass-market journalism to be funded and run – and if you are willing to pay for it. That question doesn’t let journalists off the hook: we writers need to dignify our craft. But building a better media is a task that involves journalists and non-journalists alike. Being angry is not enough; we need solutions.”

Sir, it is quite worrisome to read “Without fear and without favour” FT’s Tett confessing to “commercial pressures that are increasingly encouraging private sector media outlets to be more partisan”. Have you informed your shareholders about this? I would see it the other way, the more fakes and partisanship there is in the media, the more valuable do bastions of truth and diversity become. Or not?

Shaming out fakes and partisans must also be part of societies responsibility. For instance I have started to look for a collaborator to write a book tentatively titled “Me, Subprime Banking Regulations and FT”

@PerKurowski

It is truly incredible how many dare to ascertain things they can have no real idea of. Fake-opinions?

Sir, Chris Giles refers to that Theresa May ended a conversation with a brusque: “You can have all the evidence in the world, but headteachers have told me grammar schools are good for disadvantaged pupils.” But he similarly says: “Regulators have made the global financial system more resilient by major regulatory reforms. Banks now have much bigger capital and liquidity buffers.” “Evidence beats anecdote in politics as well as economics” May 26.

That is also pure anecdote. Giles can really have no real evidence for what he is opining. During the last years banks might very well have accumulated excessive exposures to what ex ante is perceived as very safe, but that equally could ex post turn out to be very risky. Building up that kind of dangerous exposures, against the least required capital, is precisely what regulators’ risk weighted capital requirements for banks do.

“Labour governments favoured ‘light touch’ regulation of the financial sector” “Light-touch? Nonsense! Fake-fact! Sir, I ask, would you call distorting the vital allocation of bank credit to the real economy to be “light touch” regulation?

@PerKurowski

Martin Wolf. When the Basel Committee introduced irresponsible financial miss-de-regulation, why did you keep mum?

Sir, Martin Wolf writes of the risks… of “irresponsible financial deregulation... closely linked to the agenda of the Republicans” and argues: “The short-term effects of taking the brakes off an unstable financial system might also be positive. The longer-term ones might include a more devastating crisis even than the one of a decade ago.” “An upswing is not sustained growth” April 26.

Indeed! The short term effects of the Basel Committee favoring what was perceived as safe with much lower capital requirements for banks, had positive short term effects, but also caused the crisis a decade ago, by pushing too much investments in what was AAA rated and lending to sovereigns like Greece.

But I don’t remember reading Mr. Wolf warning about that miss-de-regulation.

The current (republican) proposals we now hear about, like the Financial Choice Act, that suggests a 10% leverage ratio instead of the Basel risk-based capital standards, seems to head in the right direction of eliminating the distortions in the allocation of bank credit to the real economy caused by Basel’s risk weighted capital requirements.

Of course, that is as long as exposures to sovereigns are not calculated differently from other exposures.

As is, lower capital requirements for banks when holding the sovereign’s debts than those of the citizens, de facto implies a belief that government bureaucrats know how to use bank credit better than citizens… and that is of course totally false and absolutely unsustainable.

@PerKurowski

Why does Gillian Tett insist in that bank regulators are doing such a splendid job so that they should stay on?

Sir, Gillian Tett, horrorized at the possibility, writes “consider what might happen to credit guidelines and stress tests if the White House puts pro-finance, anti-deregulation officials into the four Fed governor positions that will come vacant in the next couple of years” “Trump’s stealthy deregulation delights business” March 3.

Yes what could happen? If Trump helps to squeeze in some regulators who know that what is perceived as safe is much more dangerous for the banking system than what is perceived as risky; and would therefore not assign those loony risk-weights of 20% to what is AAA to AA rated and 150% to what is rated below BB-, we could only be better off.

If Trump help squeeze in some regulators who do not possess such statist agenda so as to risk weigh the Sovereign at 0% and We the People at 100%, we could only be better off.

If Trump help squeeze in some regulators who, when stress-testing banks, are also interested in looking at what should have been on banks’ balance sheets and is not, like loans to SMEs and entrepreneurs, we could only be better off.

Sir, Ms. Tett, and you too, should ask yourselves whether regulators have performed adequately their fiduciary responsibilities of doing no harm? As I see it, they have caused a crisis, caused stagnation and helped to create greater inequality.

With failed regulators like these, there is nothing better than real de-regulation.

@PerKurowski

On FT’s Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance

Sir, I refer to Patrick Jenkins’ discussion of Donald Trump’s “seven “core principles” for (de) regulating US finance this month”; as “decoded by a sceptic”, “Trump’s battle with red tape will hurt consumers and world” February 14.

1. “A swipe at the Consumer Financial Protection Bureau, the new body that has returned $12bn to more than 25m Americans ill-treated by financial groups.”

That comes to an average of $480 per person, which leaves open the questions of: At what cost? Should Americans because of CFPB’s feel safer and, if they do so, are they really safer? What has happened to good and useful old “Caveat emptor”?

2. “Mr Gary Cohn blamed regulatory capital requirements for a shortage of credit to the economy: “Banks do not lend money to companies . . . because they’re forced to hoard capital,” he said. Nonsense, given that equity capital is free to be used for lending.” What? Has Patrick Jenkins not yet understood how for instance requiring banks to hold more capital against “risky” SMEs than against the sovereign and the “safe” AAA-risktocracy, distorts the allocation of bank credit?

3. “There has in any case been pretty strong credit growth, about 6 per cent a year since 2012.”

Credit for what? Yes: for corporation repurchasing their shares; for more loans to “safe” sovereign; for increased automobile financing portfolios; for residential mortgages… but what about the financing of the riskier future our kids and grandchildren need to be financed?

4. “It may also be a pop at the Financial Stability Oversight Council, the only US federal body that assesses risk across banks and non-banks… disbanding FSOC, would… be dangerous”

No! All those involved with bank regulations that do not understand the fundamental reality that what is perceived as very safe, is much more dangerous to the bank system than what is perceived as very risky, should be disbanded… the faster the better.

5. “Enable American companies to be competitive with foreign groups in domestic and foreign markets. A natural adjunct of the president’s all-encompassing call for national greatness… is likely to translate into… deregulation.”

What? If banks have needed to hold the same amount of capital against loans to Greece or AAA rated securities that they needed to hold against loans to SMEs and entrepreneurs we might have had other type of crisis, but not the 2007/08 one, nor would we be suffering such lazy economic responses to all the huge stimuli doled out?

6. “be in no doubt: this president will deregulate”

If that means to take away what distorts the allocation of bank credit to the real economy then welcome, not a moment too soon. To just modify the regulations is not to deregulate, but only to neo-misregulate.

7. “Restore public accountability within Federal financial regulatory agencies”

That would be not a second too late. Not only the Federal financial regulatory agencies, but also most of the world’s bank regulators, refuse to answer some simple questions such as: Why do you assign a low 20% risk weight to the so dangerous for the banking system AAA rated, and a whopping 150% to the so innocuous below BB- rated?

@PerKurowski

Animal spirits yes, but of lions, hyenas or pussycats? Do we have irrational exuberance, or rational fright?

Sir, John Authers commenting on how the Dow Jones Industrial Average can top the 20,000 mark for the first time writes: “Animal spirits are back. The enthusiasm is palpable, and is on a scale unseen since the height of the tech boom”, “Echoes of exuberance as the Dow stirs animal spirits” December 17.

Authers, with “markets… were in a very different state” would seem to agree with that we are not talking of the spirits of the same animals. The tech boom had lions with great illusion and too much optimism and bravery pursuing a brand new future. The current boom, resulting from low interests, QEs and excessive public debts everywhere, seems more one of pussycats taking refuge in whatever is offered. Of course, as always, hyenas are present in order to feast on the many cadavers any heightened volatility causes.

What brought all this on? Sir, as you know I think, but you do clearly not want the rest of the world to think, that this is the natural result of regulators taming, or castrating, the animal spirits of banks. That they did with their capital requirements based on ex-ante perceived risks, precisely those risks that were often already being cleared for too much by the ex-ante-risk-adverse bankers Mark Twain referred to.

Authers now writes: “Trump’s deregulatory agenda could delight markets.”

That’s a new view I very much welcome. Over the last decades, public opinion has almost exclusively been fed the notion that all of its troubles were only the result of financial deregulation.

The problem though is that Trump, even though he himself has been a bank borrower, does not really understand that without removing the odious regulatory discriminations against the “risky”, like SMEs and entrepreneurs like Trump, his stimulus plans, that which includes tax cuts, has not a fair chance to work.

@PerKurowski

Why is obvious crony statism referred to as crony capitalism?

Sir, I refer to Martin Wolf’s “Why Xi cannot succeed with his reforms” December 14.

In it, Wolf quotes the following from Minxin Pei’s “China’s Crony Capitalism”: “The emergence and entrenchment of crony capitalism in China’s political economy, in retrospect, is the logical outcome of Deng Xiaoping’s authoritarian model of economic modernisation… because elites in control of unconstrained power cannot resist using it to loot the wealth generated by economic growth.”

But “Capitalism” (at least according to Wikipedia), “is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets, and prices and the distribution of goods are mainly determined by competition in the market.”

Sir, so why does it refer to “crony capitalism” when it is clearly much more a case of “crony statism”? Could it be that the “unconstrained power of the elites” also cover the terminology we are to use? Like for instance when references are made to our economies being under the yoke of “neo-liberalism”, all while bank regulators gladly risk-weigh Sovereigns with 0%, and We the People with 100%. Or like when intrusive and complex bank regulations are mentioned to have happened in a period of "deregulation".

PS. Here is the current summary of why I know the risk weighted capital requirements for banks, is utter dangerous nonsense.

@PerKurowski

What’s wrong with deregulating lousy regulations? Get rid of risk-weighted capital requirements for banks… but gently

Sir, Patrick Jenkins speculates on what Trump will do to bank regulations and regulators and how the latter would respond in America and in Europe. “Trump’s agenda on deregulation is as vital as his Nato policy” November 15.

I just know that with statist and distorting regulations, like the current risk weighted capital requirements, deregulation and getting rid of regulators, would be a good thing. But of course, that needs to be done with utter care, since you could otherwise easily make the cure worse than the disease.

The basic principle with respect to any changes in the capital requirements should be grandfathering, so that these only operate on the margin of the new, without shaking up the average of the old. Of course grandfathering should not be a tradable feature. If a European bank carries a low capital requirements mortgage on its book, and holds it that way until it runs out that is ok, but it should not be able to profit by selling low capital requirement’s mortgages to other more "needy" banks.

@PerKurowski

Are liberals willfully blind or just blind? The financial crisis was caused by a mismanaged managed economy

Sir, Janan Ganesh writes: “Maybe Mrs May has a genius plan for a more managed economy stored away but do not bet on it. The British state has no enthusiasm or competence for such a burden, even after the experience of the financial crash… liberalism carried the past 40 years” “Even a homeless liberalism remains the best idea” October 25. 

Questions: 

What kind of liberalism assigns a 0% risk weight to the sovereign and 100% to We the People?

What kind of liberalism tells banks “We will allow you to earn much higher expected risk adjusted returns on equity, as long as you keep to what’s safe, like to what has an AAA rating, and stay away from what’s risky, like unrated SMEs?

Does Ganesh really think the financial crisis was the result of liberalism and not of a highly mismanaged managed economy?

Clearly, too many with liberal instincts have been fooled into believing the statists’ version of history that assigns the cause of the banking crisis to “deregulation”. Wake up! What caused it was the mother of all silly regulatory overextensions.

The 2007-08 crisis would never have happened were it not for the distortions in the allocation of bank credit to the real economy the risk weighted capital requirements for banks produced. Name one single asset that did not generate a ridicule low capital requirement for banks that grew into a dangerous bubble.

The ensuing slowness in economic growth is caused by those same distortions; which for instance have banks preferring to finance the basements where (homeless) kids can live with their parents, to the SMEs that stand a better chance of generating the jobs that could allow the kids to become parents too.

We had about 600 years of banking that served us fairly well. But then daft bank regulators, thru the bathroom window, in 1988, with the Basel Accord, introduced statist and foolishly risk adverse regulations. In 2004, with Basel II, they thickened the layer of risk aversion, by also imposing discrimination within the private sector, depending on credit ratings.

Next to Ganesh, Margaret Heffernan, the author of “Willful Blindness” writes “Making a fetish of overwork is bad for productivity”.

For me it begs the question: Were the loony bank regulations caused by overworked stressed technocrats in the Basel Committee?

“Death by overwork — karoshi” Might there be a Japanese word for death by technocratic stupidity?

Are liberals guilty of willful blindness too?

PS. Here a more extensive aide memoire on some of the monstrosities of such non-liberal bank regulations.

@PerKurowski ©

The Basel Accord’s statism and misregulation trumped all neoliberalism and deregulation

Martin Wolf writes: “banks remain highly fragile businesses. By their nature, banks are highly leveraged entities with ultra-liquid liabilities and far more illiquid assets…What remains disheartening is that shareholders and a few small fry among the employees have been punished, but the decision makers who ran these institutions have escaped more or less unscathed.” “Deutsche Bank offers a tough lesson in risk” October 5.

Wolf is totally correct on that! But, may I ask, what about the responsibility of regulators who, against all common sense, allowed banks to leverage their equity and the support they received from society; limitless when lending to its own or to a friendly sovereign; over 35 to 1 when financing residential mortgages; and 62.5 to 1 only because a human fallible agency rated a creditor AAA to AA?

There’s been absolutely nothing of holding those regulators accountable, worse yet they are still in charge of the most important monetary policy decisions.

And what about the responsibilities of leading opinion makers like Martin Wolf himself, when they refuse to acknowledge the extremely serious distortions in the allocation of bank credit to the real economy risk weighted capital requirements for banks produce?

I am currently reading Philip Ther’s interesting “Europe since 1989”. Already I do not how many times in the very first chapters I have seen neoliberalism and deregulation mentioned. What a difference a year makes! Had Ther began his history in 1988, he might have had to include the Basel Accord with its risk weights of 0% for the Sovereign and of 100% for We the People. Frankly, when all is said and done, the Basel Accord’s statism and miss-regulation has trumped all neoliberalism and deregulation.

As for the Deutsche Bank, its best chance for a sturdier future, lies in regulators telling all banks to abandon the business model of maximizing returns on equity by minimizing capital that their regulations promoted.

Let us pray, for our children’s and grandchildren’s sake, that banks return soon to earn their returns on equity by evaluating risk adjusted interest rates and size of exposures, without any considerations to capital requirements.

@PerKurowski ©

Margaret Thatcher, if explained the capital requirements for banks based on perceived risk would ask “Are you nuts? Accept defeat?

Sir, I have read many obituaries of Margaret Thatcher that attributes to her much of the bank de-regulations they blame for the current crisis.

I do not hold to know the whole story but, let me assure you that if someone would have asked her about the possibility of, by means of bank regulations, allowing the banks to earn immensely higher risk-adjusted returns on their equity, by sticking to financing solely “The Infallible” and keeping away from “The Risky”, the Iron Lady would most certainly have asked “Are you nuts? That sounds like a defeat and I do not recognize the meaning of that word" 

And if also told that the most infallible of “The Infallible” was to be the government, and that therefore banks could lend to it without any capital at all, leveraging without limits, she would also most certainly have asked “Are you a communist?

FT, for the umpteenth time, it was not deregulation it was bad regulation.

Sir, in “A fresh approach” October 4 you write: “The recent global crisis, also rooted in an excessive faith in deregulation, removed any vestigial credibility from the view that markets always work best when left to themselves”.

I am amazed. Do you not yet know that this crisis was provoked directly by regulations which allowed banks to leverage their equity 62.5 times to 1, or more, when investing or lending to anything related with a triple-A rating? Is this what you call deregulation? I just see it as extremely bad regulations. Do you truly believe the markets would have allowed banks to leverage the way they did if left on their own design? Of course not! Just look at how they keep the unsupervised hedge funds in a much tighter leash.

Consumers...hedge your energy bets

Sir in “Potential Energy” June 27, you state as a fact that Europe’s citizens would best be served by full liberalisation. I agree, but although you bring up two minor caveats, I must warn you that the final results has a lot to do with how that liberalisation is implemented and how later all the market imperfections are managed. In case you are not that certain of the final results, you could also suggest all the European consumers that they hedge their bets and take a position in the resulting energy companies, with the caveat to make certain that all the potential benefits are not captured by the financial intermediaries. Capicce?