There must be serious consequences for regulators and controllers who fail or allow themselves to be cheated

Sir, Tim Harford writes “In the case of VW, transparency was the enemy: regulators should have been vaguer about the emissions test to prevent cheating” “How do you catch a cheat?” February 19.

What? That seems like the absolutely most certain way to produce a cheat. Or is it that Harford believes regulators and emission controllers are a different set of humans with angel like qualities? Does he not understand what kind of temptations that would create?

Sir, the greatest problem with Volkswagen cheating on US emissions tests, is that the failed emission controllers who allowed themselves to be cheated have not been publicly shamed and sent packing home. Just like the extremely failed bank regulators of the Basel Committee for Banking Supervision have not been. In fact, the latter are still working on tweaking their fundamentally wrong regulations.

If creating regulations and controlling what’s being regulated carries no consequence when failing or being cheated, things are only bound to get worse. So, should we parade Paul Volcker, Alan Greenspan, Mario Draghi, Stefan Ingves and all their other bank regulating colleagues down our avenues wearing dunce caps? Why not? Do we not owe at least that to all who have suffered and will be suffering the consequences? Sincerely that seems like a very minor and gentle reprimand for all the societal damages they have caused with their risk weighted capital requirements for banks.

Sir, Harford correctly concludes though with “The truth is that the world can be messy place. When our response is a tidy structure of targets and checkboxes, the problems really begin”. Precisely! It reminds me of an Op-Ed I wrote in 1998 titled “Regulations as enemies of bank missions”

PS. Sir you might ask why I here mention Paul Volcker. The truth is that he was one of the responsible for the genesis of what with time will be considered one of the greatest statist regulatory failures ever. 

@PerKurowski

If VW were a pupil in the European Boarding School… whom would we blame, VW or the headmaster of that school?

Sir, Richard Milne at the end of his report of Volkswagen’s woes writes: VW makes about the same number of cars as Toyota – but has almost double the number of workers – 593.000 to 344.000”, I guess then that 249.000 workers would not be in total agreement with the titling of the report: “System failure” November 5. You just cannot have the cake and eat it too.

It must be quite clear that to overcome such a competitive disadvantage, VW had to resort to other means… in this case clearly not so elegant or legal means. Do I condone it? Of course not, but let's keep the debate real. The trade off between carbon emissions and jobs is very much out there in the real world.

But let us now also suppose VW was a pupil in the European Boarding School. If it had acted this way, blatantly infringing regulations during years… whom would we blame, VW or the headmaster of that school?

Or should 249.000 potential Toyota workers want Toyota bosses to cheat on the headmaster too?

@PerKurowski ©

Never allow anything to be classified as unexpected or unintended consequences, unless proven beyond doubts to be such.

Sir, I refer to Gillian Tett’s “Emerging markets brace for a bumpy ride” September 19.

I agree with absolutely all she writes about the losses many emerging nations suffered with their exposure to derivatives in 2008 “when the dollar suddenly surged in value as a safe haven currency”, except for when she argues“It is a lesson in unexpected consequences in a tightly interconnected world”.

As I see it, nothing should be classified as an unexpected, or much less an unintended consequence, if it has not been proven to be beyond any reasonable doubt to be so. Otherwise it just serves as an excuse for stupid behavior.

For instance, in January 2003 in FT I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds” and I was no bank regulator.

And so no one should be allowed to talk about unexpected or unintended consequences of ordering the banks to follow so much the credit ratings as Basel II did. But yet, how often have you not heard about the unexpected or unintended consequence of credit rating agencies not rating correctly?

In the real world, not the world of unaccountable regulators, anyone guilty of such a mistake, would have had two minutes to collect his personal items and hit the door, never to return. And yet there they are as if nothing happened… even expected to save the day.

Could what happened because of the exposures in derivatives Tett describes not be an unexpected consequence? Of course it could... but let them prove it to us first.

Where were the regulators on April 26, 2007?

I just read in the Washington Post that the CDO discussed in the suit against Goldman Sachs, ABACUS 2007-AC1, and in which investors lost more than $ 1 billion, was created on April 26, 2007

Just out of curiosity I went back to my blog TeawithFT and found the following letter:

On March 19, 2007: Let us pray the estimates are wrong

Sir, let us pray for that the estimate that 2.2m of American families could lose their homes and that John Gapper mentions in “The wrong way to lend to the poor” is totally wrong. If not, then let us prepare for the worst, as the political consequences of such fallout in the sub-prime mortgage market would by far surpass whatever all other thorny issues such as Iraq and the illegal immigration could all produce, together.

What I miss in this scarily good saddening and scaring article, is some words of how it came about that some 2.2m obviously individual shaky loans could have, when all was said and done, produced the sufficiently good ratings needed to attract so much money. The credit rating agencies sure must have some explaining to do, as has those Bank regulators responsible for giving the credit rating agencies so much power to begin with.

You can find it here http://bit.ly/9clEC9 ... but that’s not all friends;

On April 13 I responded to an article of Gillian Tett in FT titled “Subprime proposals could broaden litigation risk all around” http://bit.ly/d9I0rt

Also on April 13, 2007 I responded to an article in FT by Richard Beales titled “A whiff of double standards” http://bit.ly/d2vopp

And on April 18, 2007 I responded to a comment in FT by Desmond Lachman titled “Housing bubble burst into American elections” http://bit.ly/cxKT3P

And so there obviously has to be so much more to it? Where were the regulators on April 26, 2007?

Zapatero is just another Rolly Polly Doll

Sir we read in you interview of Spanish leader José Luis Rodríguez Zapatero, “A legacy in limbo” April 12, that he is “ready to be judged on plans to take control of public finances”. Are they not amazing these Rolly Polly Dolls when they with so much bravura announce they are willing to be held accountable on how they get us out of the mess they helped to get us into? They do all sound and act like financial regulators.

Do not help the regulators to get off the hook.

I have always thought that bank regulations should primarily focus on stimulating the banks to take the kind of risks that are more useful to society, and so that, when something goes wrong, as it will do sooner or later, that it has all at least been worthwhile.

Instead the Basel Committee focused on trying to exorcize risk-taking from the banks so as to guarantee bank stability, something that per se does not serve society much; by allowing for some minuscule capital requirements for banks as long as they lent to or invested in operations that the credit rating agencies perceived as risk free… in other words:

Sheer lunacy! There is nothing to be obtained by giving those already blessed with being perceived as having low risks the additional advantage of generating low capital requirements for banks.

Sheer lunacy! Since capital by nature is already too coward, assigning special preferences to the “safe-havens” guaranteed these were to become overcrowded and create a new set of risks.

Sheer lunacy! Only some extremely gullible and naïve regulators would be unable to see that beside the fact that the credit rating agencies, composed by humans trying to measure hard to define risks were bound to go wrong, sooner or later, that with these regulations they were being set up for capture by many interested parties.

And this is why though I absolutely agree with much of Martin Dickson’s “The bankers who wouldn’t say sorry: a cautionary tale”, December 29, I completely disagree with it as a whole, since by pointing excessively at the bankers it might help the regulators to get off the hook.

Most will not even wake up to the ‘silo curse’

Sir when Gillian Tett writes “Waking up to the ‘silo curse’ is far from the end of the problem” October 9 she is absolutely correct since the worse “silo curse” is the one we all carry in our own minds and which keeps channelling our minds towards the answers we feel comfortable with. For most the real problem is that they will never even wake up to it. And, among them, are many regulators.

In order to reform regulations we need first to reform the regulators.

Sir John Dizard is calling the bluff of the regulators in “The inside story of reforms is that there is no story” February 17. Well done! Now in order to have a chance to make truly worthwhile reforms there are two things that must happen.

First we need a totally new crop of regulators, most especially in the headquarters of the Basel Committee as those currently there have dug themselves so deep in their framework they have no earthly chance of getting out of it. As an example they cannot even visualize a world without “trustworthy” credit rating agencies when we all know well that no one but God should be given so much trust.

Second there must be some type of accountability. For instance the thousands of licensed professionals involved in generating those masses of lousy mortgages to the subprime sector should, as a bare minimum, have their license revoked for five years.

Thou shall not induce the markets to trust some particular information agents

Sir, in the Life & Arts of October 18, in very small letters, your readers are told they can go to ft.com/magazine for an article on how the credit rating agencies got it so badly wrong… which sort of implies that the human frailties present in the CRAs could somehow be avoided in the future… and so that we could trust the CRAs even more. 

Is the FT building up some defences against an accusation of having downplayed the role of the CRAs in this crisis? Do you not think this article merited to be printed in the Financial Times; when the world is so dumbfounded confronting a financial crisis of immense proportions and the role of the credit rating agencies lies at the heart of it? 

The article “When junk was gold” by Sam Jones is not bad but does not classify as good either, since one cannot understand how he could have left out mentioning how the bank regulators in Basel, in the mid 90s, empowered the credit rating agencies with oligopoly rights in the risk information markets, and thereby elevated exponentially their influence. Sam Jones writes “lawmakers may not have the appetite to go after the rating agencies. 

The world’s financial markets have credit rating hard-wired into them… going to an investor-pays model is probably too big a change to ask for more broadly. American and European market regulators seem happier to push for a much-reformed status quo. 

I am not so sure of this. Just like there are many new regulatory proposals based on identifying and managing the behavioural patterns in the relation between borrowers and lender, there are also many like me who argue that the behavioural patterns between security vendors and investors has to be realigned, and in this respect consider that the number one reform needed, in order not to repeat mistakes that could be even more catastrophic, is for the regulators to avoid empowering any supplier of information in any special way.

Just as I warned against the introduction of a systemic risk in a 2003 FT letter

The champions of gluttony

Sir I read Jamie Whyte’s “Spread the word about the benefits of advertising”, June 27, and since I presume that he is in the advertising industry, and though he references himself to be the author of a “Guide to Clear Thinking” I conclude that he must be even more confused than what I normally am, when he basically washes his hands and places the full burden for responsible behaviour squarely on his own clients shoulders, for instance in the case of the increased consumption of junk food.

He is also exquisitely politically incorrect when he argues the defence of his industry in such terms as motivating you to drink more in order to save you from the risk of not knowing the fun of being drunk although in this as a “desire for more” inspirer he has a clear point, since we should ask ourselves what would happen to our economies if our regulators convinced us all that we have had enough, of everything.