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

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