If Europe’s sovereign debt is to be securitized, who’s going to earn those origination and packaging profits?

Sir, with respect to the European Systemic Risk Board —recommendations of pooling, packaging and tranching sovereign bonds from all members of the single currency into synthetic securities you opine: “Having a safe asset proposal in the mix would make it less risky, for example, to introduce a sovereign debt restructuring mechanism or risk weights for banks’ government bond holdings.” “Eurozone ‘safe asset’ is crucial to banking union” May 22.

Once securities with mortgages to the subprime housing sector in the US got a high rating, that allowed the originators of very long, very high interest and very lousily awarded mortgages, to sell these of at very low discount rates, and thereby generate huge immediate profits for them and the packagers. Did this benefit in any way the subprime sector? No! On the contrary… it got much more mortgages that it could reasonably swallow.

In the same vein, let me ask, how are subprime rated nations like Greece to benefit by having its public debt packaged together with higher rated nations like Germany? If its debt is sold off in riskier tranches, then all remains the same. If its debt remains in the safer tranches is there then not a build up of a new crisis?

Sir, what Europe does not need is to try to hide away in some new securities, the regulators’ fatal use of risk weighted capital requirements for banks, that which favored way too much sovereign indebtedness. 

What Europe, and the western world need the most is to get rid of that regulation in order to allow banks to again become banks that earn their return on equity by giving loans with calculated risk taking, and not by reducing equity.

A Systemic Risk Board that does not understand the systemic risk bad and intrusive regulations pose is a joke of a Board. 

PS. Yesterday I visited the Bank of England’s Museum

@PerKurowski

Amazing! Simon Kuper calls a zero risk weight of government and a 100 % for the private, a “right’s cult of free markets”

Sir, Simon Kuper writes: “the right’s cult of free markets was the last surviving big idea. Then the financial crisis of 2008 killed it off almost everywhere outside the US Republican party.” “Small ideas are better than big ones” October 24.

That is simply not true. If we are going to talk about the biggest current idea, and that has been applied on a global scale, I would say that is the credit-risk weighted capital requirements for banks, an idea concocted by the Basel Committee. And its origin, the Basel Accord in 1988, set the risk weights for loans to governments at zero percent while the risk weight for loans to the private sector were set at 100 percent.

That BIG IDEA, discriminating with regulations against the citizen and in favor of the state, has survived the financial crisis, and is still up and running strong in Basel III 

If anything, the Basel bank regulations should be called, the product of a “left’s cult of controlled markets”.

PS. Of course small ideas are always better than big dumb ideas. 

@PerKurowski ©

Financial Times, if you do believe in small state and open markets, you are certainly not showing it.

Sir in your editorial of April 7, “The UK must look beyond the crisis” you state with some hubris “The Financial Times stands for a small state social justice and open markets”. Sincerely, if that’s so, you’re not showing it.

Current Basel regulations require a bank to have 8 percent in capital when lending to a small business or an entrepreneur but if lending to a government of a sovereign rated AAA to AA- the banks needs zero equity, and this with any lens used is a clear expression of an immense bias in favour of the state.

On November 18, 2004 you published a letter I wrote that said “We wonder 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.”

But since that, and after almost some 100 letters more on the same issue; and after you must have seen sufficient evidence of how banks all over the world, and especially in Europe, loaded up on public debt, not once have I seen express your disgust over something that most clearly goes against “a small state and open markets”.

But Greece should insist they only speak with ECB... for now.

Sir in “Europe manages a wise compromise” March 27 when you quote Churchill in that “the eurozone makes the right decision in the end, though not before exhausting all other alternatives” someone could interpret you as naively believing that the Greece problem has been ended, and we wouldn’t want that, would we?

Since in fact Greece is living an economic impossibility and since IMF represents hair that cannot be cut, if I was Greece I would much prefer calling IMF for help after a restructuring, not before.

By the way, if you were a young Greek and Greece were set upon making good on their debt no matter what, would you stay in Athens or go to Hamburg?

If you can pay out on a credit default swap you are not naked.

Sir Wolfgang Münchau opines that it is “Time to outlaw naked credit default swaps” arguing that “the case for banning them is as strong as that for banning bank robberies”, March1. I must say that the simile provided is quite unfortunate not only because it is not more bank-robbery than the robbery that can be carried out by the bankers inside a bank but also because though bank robberies have always been banned that has not prevented them from happening.

The real risk with naked credit default swaps is that it permits someone to collect upfront the insurance premiums without necessarily having to capacity to pay up when the incident occurs, in other words the counter-party risk. If all those who are now selling a five years CDS contract covering Greek Bonds for €394.000 per year could immediately pay out the €10m they had obliged themselves to do then nothing would have happened except for a redistribution of moneys… and of course there would be no robbery involved.

In this respect we should not outlaw the CDS but instead assure these CDS are traded through clearing houses that apply rules which really guarantee the payouts, and make sure that our banks are required to have so large capital requirements against their CDS positions so as to remain banks instead of becoming bookies. AIG went wrong not because of its bets but because of the unlimited credit that because of the AAA-ratings it received as a bookie.

Sincerely, what could be more naked that the fact that our banks can hold zero capital when lending to sovereigns rated AAA to AA-? That has helped to cause the huge public debt overhangs much more than any consequential CDS trading has done and so, if something real is to be done about it, let us go for the jugular.

But I’d better whistle in the dark or sing too!

Sir there we are, sky-walking on a slack-wire over a high ravine in windy weather with no safety net under us, and Martin Wolf comes along with his timely advice telling us we could hurt ourselves by falling on either side, “How unruly economist can agree” February 26. Thanks! Now, how are we to remain calm?

Wolf recommends a very active use of a balancing pole which on one side (hand) has the closing of “structural current deficit relatively rapid”, to keep our faith in the sustainability of the public debt, and on the other, “credible temporary offsets, particularly via spending on investment and tax holidays”, as a stimulus for the economy.

Sounds swell but, since I am absolutely not as daring as a Maria Spelterine, I’d better also start doing some whistling in the dark or singing to stop me shaking like a leaf. “I’m singing in the rain.... what a glorious feeling...”

Obama heads in the absolute wrong direction!

Sir Tom Braithwaite reports “Obama to renew call for stricter capital levels” February 19. This is just what the US, and the world, least need now.

Allowing the private banks to help out the economy by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is much better than having government bureaucrats do the lending or decide on fiscal spending.

A dollar spent by a bureaucrat is a tax dollar spent but a dollar lent by a banker does not necessarily mean a future tax dollar spent and this is what anyone concerned with a fiscal deficit should know by now.

Are there not any other routes and, if not, when do we get to the point of no return?

A dollar spent by a bureaucrat is a dollar spent but a dollar lent by a banker does not necessarily mean a dollar spent.

I believe that allowing the banks to help out the economy by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is much better than having government bureaucrats trying to do it directly.

And it is because calling for the first available tool, fiscal stimulus, might make it more difficult to identify alternative options that I mostly differ with Martin Wolf when he states his case for the immediate short term need of fiscal looseness, “How to walk the fiscal tightrope that lies before us”, February 17.

And then of course is the fact that no matter how sure you are of the direction of where you are heading, sooner or later, one reaches the point of no return... and that must make a difference. Where is that point in this fiscal walk?

We need a new morning, before darkness sets in!

Sir Gillian Tett holds that “Deleveraging out of the debt mire will be an unsavoury task” January 15 mostly because “it remains a very open bet whether western voters will accept austerity without a backlash”.

Good for her, that kind of opinions are exactly those needed in order to start to prepare a debt resolution plan that makes sense for future generations... since what least makes sense is to hang on to something unsustainable just because that is the right thing to do. Anyone proposing the "hang on and let’s work it out" route should first establish how much of a tax on his wealth he is willing to contribute for such a dignified purpose.

The value of a clear morning no matter the storm during the night should not be underestimated. I would prefer my children to work for their tomorrows than to pay for our yesterdays. And if the young find some resources to take care of us baby-boomers then that would be a much welcomed and appreciated bonus.

The monsters that thrive on hardship haunt my dreams

Published in FT

As a son of a Polish soldier who had to endure more than five years in a German concentration camp, I also connect to Martin Wolf's feeling that the civilisation we pray survives for our descendants is indeed at stake ("The challenges of managing our post-crisis world", December 30).

In this respect my worst nightmare is that unmanageable Versailles-type public debts will become fertile ground for those monsters that thrive on hardships, and that is why I often wake up wishing that the US, instead of taxing and inflating itself out of an almost impossible problem, would simply do an Argentine form of restructuring such as offering 10 cents of the new dollar for each 100 cents of old dollar debt, hand out some Dollar II to its citizens and then take it from there. I believe not only that the world would still accept Dollar II as it has little other choice but also that China would then wake up and adjust . . . you see, governments can't stop dancing either while the music plays.

Once the air is cleared then we might have a better chance of tackling other challenges to civilisation like the climate change threat. As to the banking system, there is nothing that could not be solved by asking ourselves the simple question about what our banks are supposed to do for us, because, unfortunately, that is the question our current very poor set of regulators have never asked themselves.

Happy new decade!

Banker’s fears should pale in comparison to ours.

Sir Gillian Tett writes “when banks have made loans to western sovereign nations – or simply bought their debt, in the form of bonds – they typically do not post big reserves, since such debt is deemed ‘zero risk weighted’ in bank regulatory rules, and most western countries carried a triple A credit rating”, “Sovereign risk comes high on banker’s fears for 2010” December 22.

As I have written to FT so many times over the years now, though it has been blithely ignored, the banker’s fears should pale in comparison to ours as citizens, seeing that banks are allowed to lend to the State (which is what “sovereign nations” really means) without any capital requirements while, when lending to an ordinary citizen it must find at least 8 percent in equity.

Is not the State powerful enough without this regulatory favouring? Can’t you see it? Our banks are being nationalized through their balance sheet... or what would you call it when the bank holds many times their equity in government obligations?

I never held FT to be a procommunist paper but contemplating it’s unbelievable silence on this issue I am quite sincerely starting to have my doubts.

http://www.theaaa-bomb.blogspot.com/

There should be a growth market in tea-parties.

Sir Gillian Tett is too forgiving when she describes as a “perverse situation” that “the Europeans banks are now net sellers of insurance against the chance of their own governments going into default – even though those same banks are implicitly backed by those governments”, “CDS market needs reform if more drama is to be avoided” December 18.

It is worse than so, it goes to the heart of what could be deemed to be an immense collusion of interests between big governments and big finance, which starts with the fact that banks in many countries, courtesy of the regulators, are required to hold zero percent in capital when lending to the government and therefore leveraging even more its power.

That an ordinary citizen’s borrowing gives cause for an 8 percent or more capital requirement for banks while the same lending to the governments cause a zero requirement must be a dream come true for any government. There seems to be a growth market in tea-parties all around the globe.

Is communism being infiltrated through financial regulations?

Sir José Maria Brãndao de Brito, in “New rules on liquidity could do more harm than good”, December 3, refers to how “the Committee of European Banking Supervisors, aim to raise the quantity and quality of liquidity buffers by forcing banks to hold significant amounts of ‘high quality’ government bonds”.

If we add to that the fact that the current Basel regulations permits banks to lend to the government with a zero percent capital requirement, compared to 8 percent when lending to an ordinary citizen, there are reason to suspect that some are trying to smuggle in communism through financial regulations. Are they building a new wall? With governments and their special triple-A rated comrades on one side of it, and all the rest of us the rabble or Pöbel on the other?

http://www.theaaa-bomb.blogspot.com/

Hurrah! We managed to get out of the garage!

Sir Martin Wolf sounds like someone who taking a very long car trip reassures his wife with a “Honey we´re doing fine” after being able to manoeuvre out of his garage, “Rising government bond rates prove policy is working” June 3. There are thousands of treacherous miles left to drive in a used car that does not seem too trustworthy and we have recently been given evidence that we can’t even trust the GPS or the petrol meter or for that matter the mechanics or the traffic signs.

Does Wolf need an example of one of the trolls awaiting him round the bend? If a bank lends to a car company then the government requires it to have 8 percent of bank equity but if it lends to the government so that the government can lend to the car company then it is not required to have any equity at all.

Does Martin Wolf really have any idea of where the 10 year US bond rate would be without the quantitative easing of the Fed or the subsidies implied in the zero capital requirement for the banks when they hold such paper? I don’t think so, and so even for a fierce anti-deflationist like him it is much too early to shout out any type of Hurrah!

“Sharp tightening, but not yet”… that is indeed the battle cry of the baby-boomers “Après nous le deluge”

There is a zero capital requirement for banks on AAA public debt

Sir, some define systemic risk simply as the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, but, that is in fact more the result of the systemic risks that originates from the interdependencies and the failures of the system itself.

John Taylor, in “Exploding debt threatens America” May 27, writes that he believes the debt projected level of US debt to be systemic. Yes indeed, the debt could be so large that it could bring us an awful inflation but, what really propels it as a systemic risk, is not so much its size but the fact that the current minimum capital requirements for banks, in the case of public debts rated triple-A, is an astonishing zero. This not only subsidizes the growth of public debt but also leaves the system totally unprotected.

This type of systemic risk led us to the precipice of the badly awarded mortgages to the subprime sector ,just as it will help to lead us to the precipice of governments too much in debt.

Please, may we have a small but growing capital charge on governments?

Sir if your bank lends your government 100 pounds then it is not required to have any equity but, if it lends that amount to your unrated neighbour, then it has to put up 8 pounds in equity. That might sound very reasonable to you I do not know your neighbour, but be sure that in the long term it will just mean we will all end up more and more entangled in the web of the government.

In this respect when we read Aline van Duyn and Francesco Guerrera report in “Geithner plan fuels cost fears”, May 19, that “companies face capital charges against hedges” one wonders when they will start imposing some capital charges on what seem runaway governments. A small increasing capital charge on anything to do with governments is probably an essential element to help stimulate the banks into lending more to the private sector again.

You need to stress-test the American taxpayer first

Sir in “America’s fate is not in its hands” April 16, you mention the stress tests of the financial sector. Much more important than that would be to stress-test the American taxpayer.

What the US dollar bill really should state is “In the American Taxpayer We Trust” and so the more pragmatic Americans have printed the “In God We Trust” on it.

There is no way that the current American generation, having been brought up as the consumers of last resort in the world, would now turn around and accept to be the world’s taxpayers of last resort… at least not with the current taxes and any stress-test of them would show you that.

The US government should be much more conscious of this before launching itself on a fiscal spending stimulus binge which, if allowed by the markets, will build up its public debt to a totally unsustainable level.

That said I believe the market is going to say NO much earlier than that, since one thing is to be searching for a safe temporary haven and another quite different to be trapped in a permanent home.

And that is why, before the US Dollar loses its AAA rating, that the US, and the world, should work hard in developing a totally new generation of taxes that can be perceived as legitimate, that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy.

The real question is what does the market have to say in general about retroactive laws?

Forget about the AIG executives, the real question to be made is whether a country that has to hit the markets to the tune of a couple of trillions in public debt can afford to be tinkering with such dangerous-to-confidence issues like retroactive taxes.

The 160 million in cost of the bonuses could pale in comparison to the additional margins the markets could charge the US in risk premiums in order to compensate for such unsettling behaviour.

A UK financed overnight?

Sir John Authers in “The Short View” March 6 writes about the Bank of England’s plan to buy long dated gilts…which will make money cheaper by reducing the rates on long bonds. That might be what happens with the marginal rate but not necessarily what happens with the average rate.

In fact what is being done is reducing the current interest rate cost of the public debt of the UK by reducing its average maturity and which could prove to be very costly tomorrow, like many Americans who entered into adjustable rate mortgages could attest.

It is indeed the Bank of England taking the short view. Let us see what happens when markets wake up and finds England financed overnight.

Do not dangerously overcrowd the safe-havens.

Sir Willem Buiter in “The ‘submerging market’ crisis”, February 6, proposes that the US and UK Treasuries should cover the Fed and the Bank of England for the credit risks they take on when they purchase private securities. This is one good way of looking at it.

I would prefer the Fed and the Bank of England charging their respective Treasuries with a commission on all public debt issued. This way the Treasuries would know better that the benefits derived from safe-havens considerations is really not for them to keep; and also that it costs a bundle to keep ever more crowded safe-harbors safe.

That the markets trust Treasuries has more to do with the lack of alternative ports during a very difficult storm than with any intrinsic trust in the harbor chiefs. The governments need to humbly accept that before they and we are left with nothing.