Sheer regulatory stupidity and statism caused the financial crisis. But that shall not be admitted!

Sir, Lord Adair Turner writes: “The financial crisis began because of dangerous features within the financial system itself. Massively leveraged investment banks engaged in socially useless trading of huge volumes of complex credit securities and derivatives… The excessive risk-taking was allowed by bad regulation justified by flawed economic theory.” “Banks are safer but debt remains a danger” September 12.

Turner, like all other involved, does just not tell it like it is! 

The “massively leveraged investments of banks” were caused, 100%, by the simple fact that regulators allowed for these.

The “socially useless” in complex securities were mortgages awarded to poorer house buyers in the US, the subprime sector. 

The “excessive risk-taking” was in fact an excessive risk aversion that led to the excessive build up of bank exposures to what was considered, decreed, or concocted as safe. 

Yes Turner mentions “bad regulation justified by flawed economic theory”, but there was none of that, there was only sheer stupidity. Like when regulators allow banks to leverage 62.5 times only because a human fallible credit rating agency has assigned it an AAA to AA rating.

And Sir, assigning a 0% risk weights to the sovereign, like to Greece is not based one iota on economic theory but all on flawed statist ideology.

Turner is right though when he writes that the “economic growth has been anaemic despite massive policy stimulus… “That poor performance reflects… inadequate capital regulation.”

Indeed, the distortions that the risk weighted capital requirements produced in the allocation of bank credit to the real economy that have not even been admitted much less were eliminated. “Debt burdens shifting around the world economy from private to public sectors” are just one symptom of those distortions. 

In fact by having raised the floor of bank capital requirements with leverage ratios, on the margins, the roof, the distortions of credit risk weighted capital requirements could be worse than ever.

Turner consoles us with “A deep economic recession, made worse by a large debt overhang, could occur even if not a single big bank went bankrupt or needed to be rescued with public money.”

Not true a deep economic recession, a dysfunctional economy is as dangerous as can be for the banks and for us. That is why the most important question that regulators need to answer before regulating banks is: what is the purpose of banks. Except for being safe mattresses to stack away cash there is not on word on this in the whole immense Basel Committee compendium on rules.

“The increasing role of real estate in modern economies is also crucial.” That is because, by means of giving house purchase access to credit on preferential conditions, a house is no longer just a home it has also become an investment asset. The day houses return to being home only it is going to hurt, a lot. 

“Rising inequality”… with capital requirements that favor the “safer” present over the riskier future, how could that be avoided?

PS. And Sir, you know it, FT has in many ways been complicit in the cover up of our mistakes stories peddled by regulators and their colleagues.

@PerKurowski

Flags need also to be raised, when influential multilateral financial institutions help to blow up bubbles

Agustín Carstens, the general manager of the Bank for International Settlements writes: “A decade of unusually low interest rates and large-scale central bank asset purchases may have left many market participants unprepared, and contributed to a legacy of overblown balance sheets” “It is precisely when pressure starts to build that flags need to be raised” June 26.

Indeed, but to that we should add the presence of extraordinary low capital requirements for banks when lending to what’s perceived as safe, like to house buyers and sovereigns. These have helped to explode the exposure to this type of loans, as well as distort the signals sent to the markets, something that of course has also helped to inject a lot of liquidity. 

Carstens also opines: “At the BIS, we have come to appreciate how unrewarding it can be to flag risks when markets are running hot. Yet that is precisely when risks tend to be highest.” 

Indeed, that is the same difficulty all influential institutions like the IMF face since, whenever they flag a risk, they could be accused for helping to set off a crisis. But now they all have themselves to blame for making the flagging problem so much worse. By assigning risk-many sovereigns a risk weight of 0% they painted themselves into a corner. When you know that risk weight is absolutely wrong, how do you go about to change it without scaring the shit out of the markets?

@PerKurowski

Risk weighted capital requirements for banks guarantee banks will have the least capital when the worst crises occur

Sir, Jim Brunsden and Cat Rutter Pooley write that Mario Draghi “said that speedy work was needed to conclude talks on an overhaul of bank rules that had been under discussion for more than a year. The reforms would introduce the latest international standards aimed at making the financial system more resilient to crises”, “Draghi warns banks of Brexit ‘frictions’” February 6.

Sir, again, for the umpteenth time, the price of being “More resilient to crises” in the way current regulators propose, is only to be more exposed when crises happen? This is because the risk weighted capital requirements for banks that still, quite surrealistically, form part of regulations, by giving banks incentives to stay away from what is perceived as risky, might reduce the number of crisis, but that at the price of banks having especially little capital, right when the worst crises happen, namely those that result from something ex ante perceived, decreed or concocter as very safe turn out ex post to be very risky.

Sir, again, for the umpteenth time, your banking systems are in hands of regulators who cannot answer: “Why do you want banks to hold more capital against what’s been made innocous when perceived as risky, than against what’s dangerous because it’s perceived as safe? Does this not set the world up for slow growth and too-big-to-manage crises?”

But, then again, “Without fear and without favour” FT does not dare ask regulators those questions either.

PS. Brunsden and Cat Rutter Pooley also write that “Michel Barnier, EU chief negotiator visiting London, that “the time has come” for Britain to make a choice about what kind of future relationship it wants.” Does Barnier, know what future relation the EU wants with Britain after Brexit, or is it that he thinks he speaks for all Europe?

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

When are regulators grilling Citi to be grilled on their own responsibilities for causing the 2007-08 crisis?

Sir, Katie Martin reports: “Regulators to grill Citi over role in sterling flash crash” December 10.

That’s OK. Grill Citi! But when are regulators going to be grilled on the crisis they caused by allowing banks to leverage over 60 times to 1 their equity when investing in AAA to AA rated securities; or almost limitless when lending to sovereigns like Greece?

And when are they going to be grilled on how their nonsensical risk aversion impedes satisfying the credit needs of the real economy?

I say. Grill Regulators Too!

I suggest that grilling could begin with the following questions that regulators have steadfastly refused to answer me… because I am no one to have the right to ask them questions (and FT has refused to help me)

@PerKurowski

The globalization of idiotic bank regulations caused globalization to go astray

Sir, Wolfgang Münchau writes: “Another shock has been the global financial crisis — a consequence of globalization — and its permanent impact on long-term economic growth.”, “The revenge of globalization’s losers” April 25.

Yes that is the result of idiotic global bank regulations that:

1. Allowed banks to leverage more with assets perceived, decreed or concocted as safe; and thereby make banks earn higher expected risk adjusted returns on equity with these “safe” assets; and thereby gave the incentives that by generating excessive exposures against too little capital, caused the crisis.

2. Require banks to hold more capital against what is perceived as risky, like SMEs and entrepreneurs, and thereby earn less risk-adjusted returns on equity that what they can earn with “the safe”. And obviously such distortion must impact long-term economic growth.

But Wolfgang Münchau seemingly insists in thinking these risk weighted capital requirements are great. Could it be because he sees himself as a soon to be retiree? I say this because the risk aversion implicit in the risk weighing is precisely what a financial advisor would recommend to someone with a much shorter life expectation than young professionals’. 

@PerKurowski ©

Sir, would you trust a columnist who refuses to acknowledge what produced Europe’s financial crisis?

Wolfgang Münchau asks: “would you trust with your own security somebody who cannot even contain a medium-sized financial crisis? I personally would not, which is why my own preference is for the Schengen system of passport-free travel to be suspended indefinitely” “A history of errors behind Europe’s many crises” March 28.

Sir, here are some of the Basel II’s risk weights that determined how much of the basic bank capital requirement of 8 percent banks were required to hold against some different exposures:

Loans to sovereigns zero percent; to the AAArisktocracy 20 percent; financing residential housing 35 percent; and loans to ordinary unrated citizens 100 percent

That meant banks could leverage equity unlimited times when lending to sovereigns; 62.5 times to 1 when lending to the AAArisktocracy, 35.7 times when financing residential housing 35.7, and only 12.5 times to 1 when lending to the unrated citizens.

And that allowed banks to earn different risk adjusted returns on equity not based on what the market offered, but much more based on what the regulators dictated.

So forget the Euro, forget bank unions, that distortion of the allocation of bank credit to the real economy had to provoke, more sooner than later, financial crises that will destroy Europe.

And so I ask you Sir, would you trust a FT columnist that steadfastly refuses to acknowledge such facts to opine on anything? I would not!

@PerKurowski ©

What bank regulators do not yet understand and do not yet discuss, is truly scary stuff

Sir, John Vickers who chaired the Independent Commission on Banking (ICB) writes: “A central lesson of the crisis of 2008 was that banks had woefully inadequate equity capital” “The Bank of England must think again on systemic risk” February 15.

That is dangerously imprecise! The central lesson of the crisis was that banks had woefully little capital against assets that had ex ante been perceived or deemed very safe as a result of woefully wrong regulations.

The regulators allowed banks to hold much less equity against safe assets; which allowed banks to leverage much more their equity with safe assets; and which allowed banks to earn higher risk adjusted returns on equity on safe assets than on risky assets.

And the fact that regulators are still not able to comprehend that it is not their role to regulate based on what assets a bank has, but based on how banks manage those assets, is just scary.

And the fact that regulators are still not able to digest the truth that the assets that are really dangerous to the stability of the banking system are not the risky but those perceived as safe, is just scary.

And the fact that the distortions in the allocation of bank credit to the real economy that risk weighted capital requirements produces are not yet even discussed, is just scary.

@PerKurowski ©

“A free lunch?” That depends a lot on who is doing the cooking. The Basel Committee’s lunch is both expensive and bad

Sir, Lawrence Summers writes: “The strengthening of regulation reduces the incidence of financial crises, thus improving economic performance while promoting fairness by helping consumers.” “No free lunches but plenty of cheap ones” February 8.

That could happen, but please let us not confuse strengthening with dumbing.

Right now the pillar of bank regulations is the risk weighted capital requirements for banks; more ex ante perceived risk more capital – less ex ante perceived risk less capital.

That, by making the access to SMEs and entrepreneurs, “the risky”, more difficult than the one for “the safe”, sovereigns and AAArisktocracy, hardly promotes fairness, it actually promotes inequality, and neither does it help consumers in need of job opportunities.

But let us also not ignore that major bank crisis never result from excessive exposure to something that was ex ante perceived as risky, but always from excessive exposure to something ex ante perceived as safe but that ex post turned out to be very risky. And, in this respect, these regulations, allowing for too little capital when real shit hits the fan, also increase the severity of the really big financial crises.

“No free lunches?” Well as we can see that would also very much depend on who is doing the cooking, and of who are having lunch. Currently our bank regulators are serving us both a very expensive and lousy lunch. 

@PerKurowski ©

Gillian Tett, the origin of banks’ reluctance to lend to SMEs is to be found before the post-2008 financial reforms

With Basel II of June 2004 bank regulators determined that bank equity, and the support banks received from society, could be leveraged by bank borrowers’ offers of net risk adjusted margins in the following way, depending on their credit risk.

If offered by sovereign borrowers rated AAA to AA, then there was no limit.

If offered by sovereign borrowers rated A+ to A, then 62.5 times to 1.

If offered by sovereign borrowers rated BBB+ to BBB-, then 25 times to 1.

If offered by private sector borrowers rated AAA to AA, 62.5 times to 1.

If offered by private sector borrowers rated A+ to A, then 25 times to 1

And if offered by those unrated or rated BB+ to B-, then 12.5 times to 1. 

Clearly the offers of net risk adjusted margins provided by the usually unrated SMEs and entrepreneurs, had the lowest value to the banks.

Sir, that is why I do not understand when Gillian Tett now writes: “Small business also requires a wider range of financing channels, particularly since one very unfortunate consequence of the post-2008 financial reforms is that banks are now very unwilling to provide funding for smaller companies” “New York steals Silicon Valley’s crown” December 11.

Of course the financial crisis made a huge dent in bank capital, and therefore banks are very averse to lending to those who generates them the highest capital requirements, but which are the post-2008 financial reforms that have made banks more unwilling to lend to SMEs?

In fact it was that kind of discrimination that drove banks excessively into the arms of what was perceived as safe, like AAA rated securities, loans to Greece and all other “safe” exposures, which caused the 2007-08 crisis. 

We must get to the heart of the problem since if SMEs and entrepreneurs are denied fair access to bank credit there is no future for our economies. God make us daring!

@PerKurowski ©

When final history on the bank crisis is written, it is going to be about stupid regulations, and the silencing of it

Sir, I refer to Patrick Jenkins’s and Martin Arnold’s “BEYOND BANKING: Tempestuous times” November 11 and December 9.

Therein Philipp Hildebrand, former head of the Swiss National Bank is quoted with: “The banking model is in many ways getting more like we’re turning the clock back to the early 1990s…When the history books are written, the aberration will not be the past crisis but the 15 years running up to 2007.”

Indeed, when history is written it is going to be about the regulatory aberration of allowing banks to hold so little of that capital that is to be there for unexpected losses, because the expected credit risks seemed low.

Indeed, when history is written it is going to be about how bank regulators never understood that, by allowing different capital requirement for different assets based on perceived credit risks, something which allowed different leverages of bank equity and of the support given to banks by the society, they completely distorted the allocation of bank credit to the real economy.

Indeed, when history is written it is going to be about that regulatory aberration of setting a zero risk for sovereigns, while assigning a 100 percent risk weight to the private sector.

But when final history is written, it is also going to be about how expert papers like the Financial Times turned a blind eye to all of the above. And this even when someone like me sent it thousands of letters explaining the problems, and this even though they knew that in previous letters they had published, I had correctly alerted on many of the risks.

@PerKurowski ©

The Basel Committee’s dangerous, risk adverse and failed bank regulations illuminates brightly a World Bank's mission.

Sir, Alan Beattie writes” The World Bank’s policy experience makes it a natural source of ideas for growth and development, but its expertise is being underused… Ramping up one more source of infrastructure finance for emerging markets is a lesser priority than solving the developing world’s longer-term problems. The bank needs more money less than it needs a new mission.” That is correct ,but then Beattie titles it:  “The World Bank lacks the tools to enrich humanity” October 15.

No! The World Bank, as the world’s premier development bank, has the tools to enrich humanity, but it must be willing to use these… and not be silenced by being required to harmonize with other institutions, like the IMF, and that have completely different missions. The Basel Committee’s dangerous, risk adverse and failed bank regulations illuminates brightly a World Bank mission. 

Allow me to shamelessly quote myself. The following is part of what, as an Executive Director of the World Bank, in 2003, I formally stated with respect to Basel II, those bank regulations which would later be approved in June 2004. 

“The whole regulatory framework coming out of the Basel Committee for Banking Supervision, might possibly put a lid on development finance, as a result of being more biased in favor of safety of deposits as compared to the need for growth.

The financial sector’s role, the reason why it is granted a license to operate, is to assist society in promoting economic growth by stimulating savings, efficiently allocating financial resources satisfying credit needs and creating opportunities for wealth distribution. Similarly, the role of the assessor –in this case, the Bank– is to fight poverty, and development is a task where risks need to be taken.

From this perspective we have the impression that the Financial Assessment Program Report might revolve too much around issues such as risk avoidance, vulnerabilities, stress tests and compliance with international regulations, without referring sufficiently to how the sector is performing its social commitments…. In this respect let us not forget that the other side of the Basel coin might be many, many developing opportunities in credit foregone.

We all know that risk aversion comes at a cost - a cost that might be acceptable for developed and industrialized countries but that might be too high for poor and developing ones… There is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. The World Bank seems to be the only suitable existing organization to assume such a role.

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. Perhaps only the World Bank has the sufficient world standing to act in this issue. 

Basel is getting to be a big rulebook”—this said by the World Bank. And, to tell you the truth, the sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies, introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them—instead of rather fatalistically accepting their dictates and duly harmonizing with the International Monetary Fund.

Basel is getting to be a big rulebook—this said by the World Bank…. As the financial sector grows ever more sophisticated, making it less and less transparent and more difficult to understand for ordinary human beings, like us EDs, it is of extreme importance that the World Bank remains prudently skeptical and vigilant, and not be carried away by the glamour of sophistication. In this particular sense, we truly believe that the World Bank has a role to play that is much more important than providing knowledge per-se and that is the role of looking on how to supply the wisdom-of-last-resort.

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. Who could really defend the value of diversity, if not The World Bank?"

All of the above was extracted from my comments on the World Bank’s Global Development Finance 2003, the Financial Sector Assessment Program 2003 and the World Bank’s Strategic Framework 2004-06

Sir, in light of the financial crisis that has now hit the developed world I ask, does not what I wrote in 2003 contain much of what, besides its ordinary lending business, should be the World Bank’s mission… and not only for the developing countries? 

Sir, development is a continuous process, if we stop we stall and fall. God make us daring!

PS. For anyone interested here my comments on bank regulations during a Risk-Management workshop at the World Bank in 2003. 

@PerKurowski ©

Alan Greenspan is either blind to what caused the financial crisis 2008, or does just not want to admit it

Sir, I refer to Alan Greenspan’s “Higher capital is a less painful way to fix the banks” August 18.

Greenspan has either no idea about what happened, or does just not want to admit it. Suppose the base capital requirement had been the 30% he speaks of instead of that basic 8% required in Basel II. What would that have meant in terms of effective capital requirements using the risk-weights of Basel II. Banks, when lending to prime governments with a 0% risk weight, would then have had to hold, just as today, zero capital. Banks, when investing in AAA rated securities, or getting a default insurance from an AAA rated company, to which a 20% risk weight applied, would then need to hold 6% in capital instead of Basel II’s 1.6%; while for loans to SMEs and entrepreneurs risk-weighted 100% they would then be required to hold 30% in capital instead of the 8% they must currently hold.

Would that have created more or less distortions in the allocation of bank credit? No way Jose! The current crisis has resulted much more from the existence of different capital requirements than by their standard level. Just reflect on the fact that all assets that caused the crisis have in common they originated very low capital requirements for banks compared to other assets. To fix the banks, much more important than the size of the basic capital requirement is getting rid with of the risk-weighting.

Greenspan is also guilty here of serious misrepresentation. He writes: “Bank equity as a percentage of assets, for example, declined from 36 per cent in 1870 to 7 per cent in 1950 because of the consolidation of reserves and improvements in payment systems. Since then, the ratio has drifted up to today’s 11 per cent.” The 36 percent in 1870 and the 7 percent in 1950 was bank equity based on all assets, while today’s 11 percent is based on risk weighted assets… and are therefore absolutely not comparable. Besides, analyzing bank equity without considering other security factors, like reserve requirements that have fluctuated considerably, cannot tell the whole story.

FT, may I suggest you ask all experts writing on capital requirements for banks the following two questions, before allowing him space in your paper:

First: Why are the bank capital requirements, those that are to cover for unexpected losses, based on the perceptions of expected losses?

Second: Why do you believe government bureaucrats can use bank credit more efficiently than the private sector, as your risk weights of 0% and 100% respectively de facto imply?

If they can’t give you satisfactory answers to those questions do you FT really think they have the necessary expertise to opine on this issue?

@PerKurowski

Are bank regulations and their effects something that is beneath the dignity of financial academicians to study?

Sir, Lawrence Summers writes: “The financial crisis, the great recession and sharp increases in inequality have all properly led to a negative reassessment of the functionality of unfettered free markets.” “Complacency and incrementalism are traps to avoid” July 13.

That is because he, as most of economy/financial academicians, have not had any interest in studying what bank regulators have been up to. Had they done so, and had they understood how current credit-risk-weighted capital requirements for banks distort the allocation of credit to the real economy… they would not speak of “unfettered free markets”… that is unless it is part of their political agenda.

Basel Accord of 1988 indicated risk weights of zero percent for loans to OECD governments and 100 percent for loans to the private sector. That translated into allowing banks to leverage over 60 times when lending to governments and only about 12 times when lending to the private sector. “Unfettered free markets”? You’ve got to be kidding!

Let us break down the components:

1. The financial crisis: All bank assets that turned into major problems had in common that regulators allowed banks to hold these against very little equity.

2. The great recession: Since regulators require capital scarce banks to hold more equity against loans “the when the going gets tough the tough gets going” SMEs and entrepreneurs than against “safe” assets… there is no chance to get out of the recession in a sustainable way.

3. Increases in inequality: By banks, because of these capital requirements, negating opportunities to “the risky” inequality must prosper.

I rest my case ... at least for some minutes J

@PerKurowski

FT, for the time being, forget the unaccountable bankers… we’ve got a much bigger problem at hands.

Sir I refer to your “Hold Britain’s banks to higher standards: New rules on personal accountability are tough but necessary” October 9.

In it you write: “The regime also brings in a new criminal offence of reckless misconduct that causes a financial institution to fail. This would carry a sentence of seven years’ imprisonment and an unlimited fine”,

And then you state: “Those grumbling about perverse regulation should acquire some perspective. Blowing up the nation’s physical infrastructure would carry the severest penalties. Recklessly damaging its financial plumbing can be just as damaging, but has been punishable at most by social opprobrium and a moderation of compensation from previously outlandish highs. No top banker has been punished for the enormous losses that caused the crisis.”

But, as you very well know, I hold bank regulators as the prime responsible for the crisis, having approved incredibly distorting credit-risk weighted capital (equity) requirements which they did not and have yet not been able to understand. And so, if I am right, is not the regulators lack of accountability so much worse? If I am right, and a banker responsible for a failed bank should get seven years... how many years in prison do these failed regulators deserve?

And FT, dare look at it… don’t turn away cowardly. The unrepentant chairman of the Basel Committee when Basel II was approved, is now the General Manager of the International Bank of Settlement; the unrepentant former chairman of the Financial Stability Board, is now the President of the European Central Bank; the current unrepentant chairman of the Financial Stability Board is also Governor of the Bank of England; and the clearly unrepentant current chairman of the Basel Committee is also the Governor of the Swedish Riksbank.

And FT don’t tell me you are unaware that there is a 100 percent correlation between what got banks in trouble and what these regulators allowed the banks to hold against extremely little equity… only because they perceived these assets, ex ante, as “absolutely safe”, and because of their hubris they never doubted their perceptions.

And FT, don’t tell me you are unaware of that secular stagnation, deflation, mediocre economy and all similar creatures, are direct descendants of that silly risk aversion displayed by our unaccountable to anyone failed bank regulators.

So FT, forget the bankers… if only for the time being... we got a much bigger and serious problem at hands.

Do I feel these bank regulators should be jailed? Of course not! I just feel they should go home, in shame, put on their dunce cap, and then beg the forgiveness of all those young who because of them will now become part of a lost generation.

PS. And, by the way, when journalists and columnists of an important paper withhold important arguments only because they do not like the messenger, or the messenger does not stroke their ego sufficiently, does that have no implications when it comes to personal accountability?

Two questions Mr. Kay, on “strict liability” and bank regulators.

Sir, John Kay makes a convincing case for applying “strict liability” to bankers, especially when ending with that clarifying principle “if you take the bonus, you take the rap”, “If you do not want to do the time, prevent the crime” August 6.

That said I have two questions to Kay with respect to “strict liability” and their applicability to bank regulators.

First, suppose a regulator knows very well that allowing for lower capital requirements for banks on assets perceived as absolutely safe than on assets perceived as risky could, in the long run, risk the buildup of dangerously large exposures to what is now perceived as safe, but he allows it anyhow because he does not want to be held responsible for any bank failure under his watch…. are we talking about something for which “strict liability” could be relevant?

Second, if you as a bank regulator are explained something, like that which is contained in the Basel Committee on Banking Supervision’s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005, and you do not understand it, but yet, without asking for clarification, because you do not want to see as if you do not understand, you approve of any regulations based on that information, and disaster ensues… are we talking about something for which “strict liability” could be relevant?

In the case of bank regulators, should not something like “if you take the promotion, you take the rap” also apply?

No Gillian Tett, it was sordid practices in the world of bank regulations which caused the banks to implode.

Sir, in “Shine a light on the sharks that lurks in dark pools”, June 27, Ms Tett writes that “since 2008 regulators have battled to make credit and derivatives markets more transparent”. What? Has she not read how Basel III has introduced further really hard to understand distortions to the credit markets?

But of course, if she thinks that “banks imploded… because of sordid practices that had proliferated in the worlds of derivatives and debt” she might be excused… she has still not understood it, even though as an anthropologist she should stand a better chance to understanding it than the financial experts.

Ms Tett writes that “simply relying on the principle of caveat emptor to keep the system from becoming too opaque is naïve”… Why? Our problems started precisely when regulators forgot the principle of caveat emptor and naively started to believe credit rating agencies and what they themselves perceived were the risks and allowed for ridiculously low bank apital requirements for what they thought “absolutely safe”.

No, it was not sordid practices in the world of derivatives and debt that caused our banks to explode, no matter how much comfort Ms Tett might get from thinking that way, it was sordid practices in the world of regulations that did it… and unfortunately those practices still reign.

Ms Tett, in the case of “derivatives”, their biggest danger lies in how delightfully sophisticated they sound!

Sir, Gillian Tett writes about “the mortgage credit derivatives that proved so deadly in that credit bubble”, “The female face of the crisis quits the spotlight” April 4.

One of the problems with understanding our way out of this crisis, are all those who wants us to chase anything they cannot explain, like the sophisticated sounding derivatives. And that stands in the way of attacking the real easy straightforward “vanilla” problems which caused the crisis.

As an example, that which “proved so deadly”, were real securities backed up with different tranches of very real though utterly badly awarded mortgages, something which has nothing to do with derivatives. And the reason these securities, if AAA rated, became so attractive they blinded the markets, was that banks, according to Basel II, could hold these against only 1.6 percent in capital… meaning being able to leverage their equity 62.5 time to 1.

Again what had problem loans to Greece, Spain’s real estate sector, Cyprus’ banks and much else to do with derivatives?

Let me try to explain the issue in my words. In derivatives you always have a winner and a loser, and in this sense, with exception made for the very serious counterparty risk, and which in itself is not a derivative risk but a normal credit risk, what derivatives do, is to redistribute the profit and the losses… in other words they are a wash out.

It is only the losses in the values of real assets which can create the real losses which can cause serious recessions. We should never forget that… while we keep allowing our banks to incur into dangerously large exposures to “ultra-safe” real assets… like infallible sovereigns and the AAAristocracy.

What is perceived as “absolutely safe” is the prime source of the unexpected which can cause bank crises

Sir, Roger Altman, referencing the “epic credit collapse of 2008 and the eurozone sovereign and debt banking crisis that began in 2010” writes “the message of history is the repetition of such crises and how the next one can occur at any time and from an unexpected source”, “Why the Fed needs Summer’s firefighting skills”, August 13.

And it is that part of “from an unexpected source”, which is precisely one of the most important things the next Fed chair needs to understand, in order to help correct totally dysfunctional bank regulations.

Currently the capital requirements for banks are much lower for what is perceived as “absolutely safe” than for what is perceived as “risky”. And these do not only distort the allocation of bank credit in the real economy, by discriminating in favor of The Infallible and against The Risky, but are also perfectly useless when it comes to increasing the safety of the banking system.

I have been trying for a decade now to get regulators to justify these capital requirements that I find to be dangerous and loony, but all the responses I get are in terms of “more-risk more capital less-risk less capital… does that not sound logical?

I am sorry, it is not enough to sound logical for us to bet our future on it, it has to be logical.

There is a world of difference between “ultra-safe-AAA-rated junk” and “risky-junk”

Sir, Gillian Tett asks us to “Remember the lessons of the rush into “junk” in 2007”, March 15.

Does she mean that ultra-safe AAA rated junk, which banks were allowed to purchase or lend against holding only 1.6 percent in capital, meaning they could leverage 62.5 to 1 their equity, or does she refer to other junk?

She writes “many banks are reducing loans to risky corporate names because of new capital regulations” and that is not correct. Banks have been reducing loans for a long time to what is perceived as risky, and this because of "old" Basel II regulations, which allowed them to have very little capital for what was perceived as safe. And now, when some of those perceptions turned out to be very wrong, and they were left with little capital, they just have no choice but to run away even more from "risk-land" into "safe-land".

She also writes “So far the short-term money that has gone into the corporate debt world does not appear to be associated with too much leverage; this makes the picture notably different from the asset-backed commercial paper market or repo sector in 2007”.

Yes, indeed there is a difference, and that is explained by the difference between “ultra-safe-AAA-rated-junk” and “risky-junk”. It is always the former which is the most dangerous, though our current sad crop of bank regulators just forgot or preferred to ignore that.

John Kay, when at the bar, you’d better ignore those too respectful of the establishment!

Sir, I refer to John Kay´s “To grasp the meaning of Christmas, head down to the pub”, December 19. My first impression was he was building up an alternative explanation for why he preferred to go to the bar with Gillian Tett than with Martin Wolf, without having to state the obvious. 

But then Kay ends with “if you want to understand, the 2007-08 financial crisis, your approach must be eclectic… and, of course, you need anthropological insights that accounts for the peculiarity of human institutions”; and which makes clear that the bar visit he refers to has solely a professional motif.

For about a decade I have forewarned and explained the 2007-2008 crisis, as caused by giving banks excessive incentives for exposures to the ex-ante perceived as “The Infallible”, that which is truly dangerous because it is perceived as absolutely safe; just as getting out of the crisis is now made almost impossible by discriminating against the access to bank credit of “The Risky”, those already safely known as "risky". And though I am an economist and not an anthropologist, I know I am right. 

And so perhaps what John Kay most needs as company when heading down to the bar to talk about the crisis, has nothing to do with the profession but with the willingness of, "without fear and without favour", profoundly question the professional capacity of the establishment.