When bank regulators allowed banks to earn higher returns on equity by avoiding the “risky”, they violated a fundamental social contract

Sir, you write “Unemployment rates are low in the UK and US, but many of the new jobs are more precarious than the old ones they replaced… [so] the US and EU need to do more to encourage investment, and to deter anti-competitive behaviour and, as important, encourage competitive pressure on complacent incumbents.” “A better deal between business and society” January 2.

If one allowed banks to leverage more, and thereby obtain higher risk adjusted returns on equity when lending to what is perceived safe, than when lending to what is perceived risky, it would require ignorance, or total lack of concern, to believe banks will finance as much as usual small unrated companies and new entreprenuers.

But that is what regulators with their risk weighted capital requirements did and so it should be no surprise that “Despite low financing costs, private investment — the vital seed for long-term growth — remains insipid.” I am not talking about an “out-of-date regulatory models” that could be reformed, but about a fundamentally mistaken regulatory model.

You want “A better social contract… built on the idea of a humane, mutually beneficial interdependence between” employers and employees. Sir, who could argue against that? There’s always room for that.

But, how many times have I begged you to put the weight of the Financial Times behind asking the regulators: “Why do you want banks to hold more capital against what has been made innocous by being perceived risky, than against what is dangerous because it is perceived safe?”

But for some internal reasons of your own, perhaps even a petty one, you have refused to do so. In my book, just like when regulators regulated banks without caring about the purpose of these violated a social contract, you also violate your social responsibility as journalists by not intermediating opinions between your readers and those officially responsible for the decisions being questioned.

@PerKurowski

I don’t envy editors nowadays being forced to flexibilize journalistic ethics more than ever, in order to survive

Sir, John Thornhill describes many amazing innovations. “Bold claims for AI are hard to compute for economists” of February 21.

Without expressing the slightest doubt about Thornhill’s integrity one could still ask: are these innovations true, fake-news, or just one of those stories designed to sell you an investment? 

Sir, how extremely difficult it has to be an editor nowadays. If you’re too severe with the facts, you might loose the juiciness of your stories that your readers might demand; if you’re too generous, you will loose your paper’s reputation sooner or later. I surely don’t envy you.

But when Thornhill refers to that a “Master Algorithm”, named so by Pedro Domingos, a computer science professor at the University of Washington “will be the last invention that man makes. And that “It will be able to derive all knowledge in the world — past, present, and future — from data”, then I have to reply, as I often did to the former President of the World Bank James Wolfensohn, one who loved to refer to the bank as the “Knowledge Bank”, that knowledge means nothing if it is not tempered by wisdom.

@PerKurowski

That’s it Lucy Kellaway. Keep them honest.

Sir, setting of course aside the pay package of £8.25m a year, I would not like to be in Jes Staley shoes having to face those who when meeting him discreetly look away after having read Lucy Kellaway’s “Barclays boss needs to ditch his inexcusable focus on value”

Good for her. To reveal haughty arrogant stupidity among the powerful is the absolutely most important role journalists have.

That’s the “Without fear and without favor” spirit we expect from the Financial Times. I have sure been missing a lot of it lately.

@PerKurowski ©

Financial Times - FT: Sir, on the causes of the crisis of Greece, how about some journalistic honesty from yourself?

Sir, you write that “Ms Merkel has allowed the entire euro crisis to be portrayed within Germany as a fiscal mess caused by profligate peripheral countries. This analysis ignores the role of the financial bubble fuelled by banks — including Germany’s”. And then you title it as “The need for honesty in the crisis over Greece”, August 22.

But this Merkel analysis, and your analysis, ignores what I have been writing to you about in over a hundred of letters over the last decade, namely that the financial bubble fuelled by banks, was a direct result of Basel’s credit-risk weighted capital requirements for banks.

You know, because I do not believe you dumb, that had banks needed to hold the same capital they are required to hold when lending to any European SME or entrepreneur, 8 percent, instead of the 1.6 percent or less allowed by regulators when they lent to the Greek government, this Greek tragedy would not have resulted, no matter how much Greece might have manipulated its financial data.

You even published a letter of mine I wrote in November 2004 in which I asked: “how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

So may I suggest it is high time for the Financial Times to also display some honesty over the causes of the crisis in Greece. Who are you covering up for? Is it perhaps for some too delicate big egos? Is yours really ethical journalism? Dare to live up to your motto!

http://teawithft.blogspot.com/search/label/Greece

@PerKurowski

FT, what about the moral responsibility of journalists of telling it like it is with Greece’s debt?

Sir, your FT reporters write: “Germany and France warned Greece not to expect taxpayers in other countries to pick up the tab for its policy decisions” “Berlin and Paris rebuff debt forgiveness call”, January 29.

The most important reason for such attitude is that Greece’s debt problem is primarily attributed to Greece and to banks. If Europe was really made aware of the role their bank regulators had causing this mess, European would be able to understand better why Europe at large need to share much more in the responsibilities of providing solutions.

In this respect I need to repeat, to all of your journalists, what I commented to you Sir and to Martin Wolf, just two days ago. 

Had it not been for the fact that European regulators allowed banks to hold little or even zero equity against loans to sovereigns, like Greece; which tempted banks with extraordinary expected risk-adjusted returns on equity when lending to sovereigns, like to Greece, then banks would never ever have lent so much money to Greece.

What about the moral responsibility of bank regulators of not distorting the allocation of bank credit? What about the moral responsibility of journalists of telling it like it is?

I am sure that if this truth really comes out Greece’s debt problem could be looked at in a much more understanding light… and perhaps would allow Greece, in a first stage, to restructure all its debts in terms appropriate to the risk-profile regulators held it to fit… something like that of Germany’s.

What would Greece’s debt profile look like if it received terms like 30 years at 1 percent?

You in FT have more voice than most professors teaching finance, so who’s really more “responsible for teaching responsibility”?

Sir, I refer to John Authers’ “Who is responsible of teaching responsibility” June 23, FT’s special “Business Education: Financial Training”

There Authers writes “And yet biggest business schools find it hard to prepare their students to joust with regulations. One problem is practical: these days, the top schools are global, but regulation is country specific” Hey where has Auther’s been? Does he not know that on June 26, 2004, 10 years ago, the G10 signed up on Basel II which established that truly nutty concept of risk-weighted capital requirements?

Had these business schools, and FT journalists, been a little more responsible for what they were doing, they would most certainly informed the regulators in their ivory towers, that this was going to distort the allocation of bank credit in the real economy, with tragically consequences.

And Authers also refers to “the pre-crisis power of credit rating agencies. The Basel II bank regulations gave investors a big incentive to buy anything stamped triple A by agencies. That way lay disaster.” Come on Authers. How many borrowers are not any longer contracting credit ratings because of Basel III? And how did Basel III really change something? By banks being forced to take a tougher stance if they believe credit ratings were wrong? Whoa!

And then Authers writes that “ratings were only ever advertised as opinions on publicly available information”. Where does he get that from? The truth is that credit rating agencies quite often have access to much more information the public and bankers have.

And if we are to talk about ethics, let us be clear that it is highly unethical of regulators to discriminate against “the risky”, those already discriminated against precisely because they are perceived as risky, as unethical it is for financial journalists to shut up about that discrimination… and so John Authers and colleagues might be more in need of courses in ethics than students in business schools… though that admittedly leaves us with the problem of finding out who are going to teach you those ethics. Me?

Ex-ante and ex-post perceived risks are not the same - belts or braces not both.

Sir, in “A belt-and-braces approach to banks” October 29, you write that regulators are too reliant on risk-weighted capital ratios and clearly your ego is not strong enough to admit that this problem is part of what I have been writing to you about for years, and which you decided just to ignore. 

You quote well Andrew Haldane´s arguments against complexity, one that I have also opposed on the grounds that markets, bankers and regulators have not understood what they were up to. 

But, you still fail to grasp the most fundamental objections to the use of capital based on perceived risk, that is of course unless you have understood it but want to play innocent. 

The problem is that perceived risk of default is cleared for by banks and markets by means of interest rates, amounts at exposure and other contract terms. Therefore all what risk-weighting for determining the capital of bank achieves is to allow for much higher bank returns on equity when lending to “The Infallible” and much lower returns on equity when lending to “The Risky”. 

And that my friends, completely distorts the economic efficient resource allocation function that banks are supposed to perform on behalf of the society. 

You want capital requirements for banks that could possibly distort less? Well then you might need to force banks to charge the same interest rate to everyone. So, no! It is not belt and braces, it is belt or braces. And I prefer the belt of one and the same capital requirement for all assets of the banks, a leverage ratio. 

But then you hold that “a leverage ratio encourages loading up on the riskiest assets available, which offer higher returns for the same capital”. No that argument is not applicable! Because for that you are looking at the ex-post determined risks, not the ex-ante perceived risks. 

Again I dare you, find me a bank crisis that has resulted from excessive bank lending to what was ex-ante perceived as risky. 

PS. Since you are little by little entering into somewhat dangerous terrain, at least in a moral sense, you might want to brush up on concepts like journalistic ethics and or journalistic plagiarism. Not only do I have comments received on these issues by many of your journalists, but other important persons have over the years also received copies of my letters to you, and, of course, on this blog.