Regulators tell banks “Occupy what’s safe”; and so expel widows, orphans and pension funds, to handle what’s risky

Sir, Brooke Masters reports on how the Security Exchange Commission is making sure that private equity industry duly manages conflicts of interest and treats its clients fairly. “SEC enforcers must keep bearing down on private equity” August 27.

But Masters also writes: “Historically, PE clients have been highly sophisticated. So they are either well placed to decipher complex investment contracts or rich enough not to quibble about extra fees. But that is changing. Public pension funds are shifting more and more of their money into private equity as they chase higher yields. Pension fund managers are far less experienced with the sector.”

Why did this happen? When regulators, with their risk weighted capital requirements told banks they could leverage more, and therefore obtain higher risk-adjusted returns on equity with assets perceived as safe than with assets perceived as risky, they made banks occupy that area in which, without leverage, widows, orphans and pension funds used to dwell.

So see what they done. By trying to make banks safer they clearly made life for widows, orphans and pension funds much riskier. That is what happens when regulators regulate with no concern about the impact their regulations will have.

And the saddest part of it all is that it is all for nothing. Major bank crisis are never the result of excessive exposures to what is perceived as risky, but always the result of unexpected events or excessive leveraged exposures to what was ex ante perceived as safe, but that ex post turned out not to be.

PS. For the sake of our children and future pensioners, I pray we can reverse this, and that there are still some bankers out there who know how to be bankers, and not only how to be equity minimizers. 

@PerKurowski ©

We need to slam Moody too!

Sir, “Moody’s slams private equity” is how Francesco Guerrera and James Politi title their report on July 9 about the strong criticism that this credit rating agency is making about the private equity industry; and I believe it is high time for us to slam Moody as clearly the powers they yield over the markets is getting to their heads. Who do they think they are? Is a neutral credit rating agency supposed to get involved into what business their clients do? If they do not like how the business is structured, and believe it will affect negatively the credit ratings, then they should say so, in their ratings. To come up with unsolicited a priori advices that could only bias their future outlooks is not what they are supposed to do. Next time they might just opine on the cars that GM should produce to get a rating.

Let’s face it, if we do not stand up to the credit rating agencies we will help to create and strengthen some real financial Frankenstein monsters, authorized to dictate their feelings about anything. And, do not get me wrong, there is not a world in Moody’s comment about the private equity industry that I would object to, I just object, totally, that they should be the messenger. The credit rating agencies have already far too much power for their and our own good.

Private or informal?

Sir when looking to analyze “Private equity’s risks and rewards” July 7, it might be useful to always differentiate between what could happen when someone goes into private practice from what could be the results from hiding out, going informal. The freedom to be private must always be defended, just as the forces that drive the growth of the informal sector must always be opposed.

Let us keep it as much as possible above the board

Sir, years ago, when the Venezuelan state owned oil company PDVSA was a thousand fold more transparent about its activities than it is now under the Chavez regime, I still had to go to their official filings in the US, produced as their debt were publicly listed there, in order to get the best possible information. I must confess that ever since, I am totally biased for public listings. I needed to alert to that fact before commenting on the letter of Javier Echarri the Secretary General of the European Private Equity and Venture Capital Association and where based on their own compilation of research reports he categorically states that “Private equity is fully regulated and benefits the pension funds of millions of ordinary people” June 7.

It might very well be that Echarri is right, but since the reason for taking companies private sometimes sound so similar to why some big chunks of our economies in many countries go underground into informality, should we not at least mention that it surely reflects badly on our society as a whole if we make darkness more valuable than sunlight.

By the way, one thing confuses me with respect to all those investments by pension funds in private equity funds that Echarri mention. As I have understood it pension funds are frequently restricted to the use of investment graded instruments, and so in this case that would signify that private equity companies can be investment grade, for public purposes. Is that not something of an oxymoron? Or do the credit rating agencies have access to some internal information we don’t?