When paid by Volkswagen, the fines should go to patent free research of better diesel engines… and emission controls

Sir, Brooke Masters write “Drivers who bought VW’s “clean diesel” engines are now faced with technical fixes that could well reduce both fuel efficiency and power. Their communities have much dirtier than anticipated air” “Lawsuit on behalf of 1m $1 investors is something to fear. Somebody ought to sue” October 3.

Indeed but when suing make sure that if you win it can make a difference, not just make up for something secondary.

Many Volkswagen’s diesel engine buyers, who said they bought it out of environmental concern, many of them just green show-offs, now have a legitimate grievance being left out hanging like fools. But, if they are going to sue, they should at least request that, if successful, all fines paid by VW should go to finance the development of patent free better diesel motors.

Brooke Master’s also writes: “There are many frivolous [and not non frivolous] law suites were the attorneys on both sides walked away with millions of dollars in fees”. And with that she reminds me of that, at least in the case of banks being sued, all lawyers should be paid their fees in bank shares… I mean so that we do not hurt the lending capacity of banks and with that of ten thousands of innocent bystanders borrowers… the sort of civilian casualties.

Perhaps if we start looking into the issue of where compensation payments and fees go to, and how it is paid, then perhaps we will start looking at tort reform from a much more productive angle.

@PerKurowski

Bank fines should be paid with bank equity, not with cash, unless we are masochists and want to be cruel to the economy.

Increasing the capital requirements for banks in the midst of a slow economy, while at the same time eroding bank capital with fines, is sheer economic cruelty… pure masochism. And especially so against those who for which cruel regulators decided, for no other reason that they think that to be a great idea to keep banks safe, that banks need to hold especially much capital when lending to them, like the SMEs and the entrepreneurs.

Sir, with respect to the reimbursement of claims for mis-sold insurance, you write that “As of this year, banks have already paid out about £20bn” and at long last take notice of that “The consequent erosion of banking equity can hinder credit provision in ways that damage the economy as much as the stimulus has helped” “UK banking’s sorry tale draws slowly to a close” October 3.

At long last FT! £20bn times a prudent level of 12 to 1 leverage gives you £240bn less lending capacity… at current imprudent sort of 30 to 1 leverage that would signify £600bn less lending capacity.

I hold “At long last FT!” because I have written you several letters on this problem but that, as usual, for your own internal reasons decided to ignore.

But I repeat. We must find a new way of imposing fines on banks. I have suggested that instead of cash banks pay in new shares issued at current market value. These shares if paid to the State could be non-voting and if paid to persons, like in this case, could include preferred dividends for some years.

PS. Having those mistreated by banks become their shareholders, seems like a innovative way of educating banks  J 

PS. Allowing authorities decide at each moment in what proportion of cash or equity these fines should be paid, would give them a new countercyclical tool  J

PS. The payment in bank shares should apply, of course, to all legal fees too J

PS. How come so many that loudly complain about government austerity loudly support bank credit austerity… do they all carry the virus of statism in their hearts? L

@PerKurowski

$100bn in legal settlements for banks also means $2tn less in bank lending capacity

Sir Richard McGregor and Aaron Stanley write on FT’s first page “Banks hit by $100bn in US legal settlements since crisis” March 26.

If I was a medium or a small business, an entrepreneur or a start-up, starved for bank credit, and if I multiplied that bank capital gone in legal settlements by the allowed leverage implied by in a 5% leverage ratio, 20 times, I would know it means I am $2tn in bank credit capacity further away from having my fund needs satisfied.

If in Europe, with its Basel III 3% leverage ratio, 33 times, I would find myself an even more distant $3.3tn from it.