The same Basel induced temptations keep plaguing the banks

Sir since it was the extremely low capital requirements that were authorized for banks whenever the risk perceived by the credit rating agencies was non-existent that started the stampede into subprime land, John Plender is absolutely right when he writes “Banks let off the hook as flawed model is preserved” July 15. It does not matter much if you increase the minimum capital requirement averages if, on the margin, you keep on interfering in the same arbitrary way in the risk allocation mechanisms of the market.

Today, the banks are still authorized to leverage themselves 62.5 to 1 on the loans they give to corporate borrowers rated AAA to AA- or need to capital requirements at all when lending to sovereigns rated AAA to AA- and so, today, all the temptations to head off in the wrong direction are still there.

It was not the faith based financial institutions who caused it but the “too few to follow”

Sir we know with absolute certainty that had not the regulators empowered some “too few to follow”, the credit rating agencies, and created some perverse incentives that interfered with the risk allocation mechanism of the market, the minimum capital requirements for banks, we could have had another type of crisis, but definitely not this one. In this respect Michael Mackenzie is as right as he can be to argue “It’s a stretch to blame hedge funds for banks collapse”, June 27, and mind you I am not a great fan of these what I call “faith based financial institutions” that charge outlandish fees for their services and keep you mostly in the dark.

And blaming derivatives when the originals, the mortgages to the subprime sector in the US were so badly awarded is just like the robber pointing with his finger down the street and loudly shouting “there he runs that s.o.b!

Go City of London go!

Sir what caused this crisis, as I have so repeatedly written to you about over the years, were the regulators in Basel executing the mother of all interferences in the risk allocation process of the markets. 

Not only did they appoint the credit rating agencies as Thee Official Risk Surveyors but they also empowered them by concocting minimum capital requirements for banks that covered an incredible range from 8.3 to 1 to 62.5 to 1 with all of it depending on the ratings. 

In this respect when Martin Wolf in “Why Britain has to curb finance” May 22, refers to UK regulators having “an influence on the world economy out of proportion to the country’s size” he is either too parochial or he still completely misunderstands what has happened. 

Also a sheer reference to a “light touch” in the context of financial regulations would be almost laughable if not for the sad and serious consequences of the very heavy handed and truly relevant regulations that from Basel hit the world, London included.

Frankly the UK cannot afford to curb anything, less it wants to be left out completely. And the Financial Times should be the first to know that. 

Go City of London go!

Rasputins versus Oligarchs

Sir John Kay in “Beware the bail-out kings and backbench barons”, May 20, refers to “Simon Johnson’s comparison of corporate financiers with Russian oligarchs”. Kay should not forget though that Simon Johnson, as a former chief economist at the International Monetary Fund, is part of that regulatory technocracy which played God and interfered with the risk allocation processes in the financial markets, in the most amazing way, by allowing for a 62.5 to 1 leverages (that in some cases can even reach 179 to 1) all based on some credit rating agencies awarding their triple-As... and helped to cause this mess.

In this respect the Rasputins have now a clear and vested interest in blaming the oligarchs in order to protect themselves. John Kay rightly says “We need to reassert the notion that roles of authority are positions of responsibility rather than declarations of personal merit and routes to personal enrichment.” And that should apply equally to bankers and regulators.