FT, though fearlessly blaming accountants, seems to sheepishly favor bank regulators.

Sir you write: “Unscrupulous managers, increasingly rewarded with equity incentives linked to accounting measures, have exploited the system. By writing up asset values in line with market values — whether real or estimated — they could book profits, distribute dividends, boost share prices and make incentive payments. Consider investment bankers’ bonuses, distributed ahead of the 2008 financial crisis but based on asset values that tumbled only months later.” “Reform accounting rules to restore trust in audit” August 3.

I agree, quite often accounting is a tool used for not quite ethical behavior. But, when you refer to the investment bankers’ bonuses, you are sure pointing in the wrong direction.

I dare you dare to go back and look at how these investment (and European) banks, before the 2008 crisis, were leveraged with assets perceived (mortgages), decreed (sovereigns) or concocted (AAA rated securities) as safe. Do you think that if they had been required to hold as much capital against these assets, as they needed to hold against assets perceived as “risky”, like loans to entrepreneurs, there would have been room available for all those bonuses? No way Jose!

And you do seem to suggest somehow that the accountants, before that crisis, should have considered the possibility of asset values tumbling only months later. Sir, the explosion, and its real causes, is much more important than the how it is accounted. If accounting is to become even more predictive then we are surely feeding even more worms into that open can of undue behavior.

When we have regulators who believe that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe, I assure you that much more important than reforming any accounting rules, is reforming bank regulation rules. 

Sir, whenever, for whatever great sounding reason, it is argued that banks should not be required to hold more capital, you can be sure there are some neo-bankers thinking about their bonuses behind it.

PS. Neo-bankers? Yes because that is not the bankers I remember. Then they were savvy loan officers, now they are just equity minimizing financial engineers. I am sorry for feeling quite nostalgic.

PS. Most of the bonuses that are currently paid out to bankers, are still firmly rooted in the low capital requirements against what is perceived, decreed or concocted as safe.

@PerKurowski

John Reed, competing on equal terms with equal capital requirements, traditional and investment bankers can be friends

Sir, John Reed writes that combining traditional banking and investment banking into a universal banking is inherently unstable and an unworkable model “Our universal banking mistake”, November 12. 

Reed argues: “Mixing incompatible cultures… make the entire finance industry more fragile…Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward. In addition, investment banking organisations tend to organise and focus on products rather than customers. This creates fundamental differences in values.”

Reed might have a point, but, in my opinion, the main reason for the system being fragile is because regulators treat the different activities differently. With the credit-risk weighted capital requirements for banks, some are allowed to leverage their activities much more on equity than others. That introduces distortions that are impossible to clear for.

Apply one single capital requirement for all assets, for instance 8 percent, and the leveling of the internal playing field would strengthen the system and help to drive out many of those cultural differences. 

PS. Could farmers and the cowboys be friends, if treated so differently?

@PerKurowski ©

Are those who lend to a morally bankrupt government not just as morally bankrupt themselves

Sir, FastFT reports “Venezuela bonds yields are shooting higher” September 11.

It refers to a recent article by Ricardo Haussman’s and Miguel Angel Santos’ that said: “The fact that [the government] has chosen to default on 30 m Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of moral bankruptcy”.

And FastFT states “Investors are clearly little concerned”… something which is quite ok with me.

Most investors in Venezuelan debt, perhaps all, have for a very long time been perfectly aware that things in Venezuela were not as they should be, but they have decided to look away, because of the high risk premiums offered. And so as I see it, they are just as moral bankrupt.

And I repeat questions I have often made: Would it be right to buy bonds to finance the building of concentration camps... if the price, the risk premium, is right? Where do you draw the line on what is morally admissive lending? Where do you draw the line on what kind of intermediation fine reputable investment banks can do before they become morally repulsive?

The way I see it, the world, at least us citizens, need good governance ratings and ethic-ratings, much more than what it needs credit ratings

If Venezuela defaults, two have tangoed, an incompetent government and highly irresponsible lenders.

Sir, I refer to John Paul Rathbone’s “Call for default underscores Venezuelan incompetence” September 8.

In it Rathbone analyses Ricardo Hausmann’s and Miguel Angel Santos’ recent “Should Venezuela default?” where they so correctly argue that Venezuela’s government, though being current on its debt service, has already de facto defaulted in so many ways on “its people”, something which signals a “moral bankruptcy”.

Venezuela’s government has clearly shown absolute incompetence, the highest disdain for Venezuela’s constitution and for instance, according to Human Right Watch, has also committed crimes against humanity. And facts like gasoline-petrol being given away at US$ 1 cent per gallon, 278 times less than the price of milk… makes all of the above as evident as can be.

But, let it us be very clear, all equally points to highly irresponsible lenders who do not care one iota, as long as the price, the risk-premiums, are right.

Rathbone reminds us that “Venezuelan bond yield on average 12.3 percentage points more than US treasury”. Let us then suppose a bond issue yielding 20% that is going to finance the building of some concentration camps. Where do you draw the line on what is morally admissive lending? Where do you draw the line on what kind of intermediation fine reputable investment banks can do before they become morally repulsive?

As I have been arguing for some time, anyone investing in a bond that (when rates are as low as the current) pay for instance 4% more than the risk free rate, should know he is buying morally questionable pre-defaulted bonds… and that he must renounce to the possibility of having the cake and eat it too, meaning aspiring to get 100% of risk premiums and 100% of principal.

As a Venezuelan citizen let me also remind all that currently the government receives directly 97 percent of all the nation’s exports and, while so, as I see it, has no right to take on any debt whatsoever.

PS. During the Venezuelan default in the 80s I asked a foreign banker “How come you lent especially much to this entity that is emblematic of all non-transparency, corruption and mismanagement in Venezuela?” His answer was: “At the end of the day it is all going to be government debt, and this entity pays the highest interest rates”. I felt like slapping his face, I wish I had!

Sometimes formal limits signify fewer limits

Sir Krishna Guha in “Call for investment bank rules to change” April 18 mentions that Bear Sterns had a debt to equity ratio of about 30 times and that "experts argue that the investment banks should be subject to the same capital requirements as commercial banks - requirements that in effect limit their leverage. Not necessarily so!

If investments banks invested in those super senior debt that carried the triple A-tag and that are described by Gillian Tett in “Super-senior losses just a misplaced bet on carry trade” then according to the minimum capital requirements that apply to the commercial banks these could in fact have an even higher leverage…in some circumstances even more than 60 times.