If not in US dollar notes under Warren Buffet’s mattress, what is Berkshire Hathaway’s “$104bn cash pile invested in?

Sir, you conclude that “Regulators and governments would do well to study whether the huge increase in repurchases has damaged business growth and capital formation” “Record share buybacks should be raising alarms” November 8.

Of course they should but let us be very clear, since that has been going on for quite some time so, if they have not done it yet, then shame on them.

For instance in July 2014 Camilla Hall, in “Bankers warn over rising US business lending” wrote, “Charles Peabody, a bank analyst at Portales Partners in New York, has warned that while it is hard to extrapolate what is driving commercial and industrial lending, if it is to fund acquisitions or share buybacks it may not indicate a strengthening economy. “It is loan growth, just not sustainable,” he said.” 

And therein Hall also wrote, “A banking lending executive at a large regional lender said ‘Traditionally banks have been very cautious of that’.”Of course, you and I know Sir that banker should not be throwing the first stone, since bankers too have morphed, thanks to the risk weighted capital requirements, from being savvy loan officers into being financial engineers dedicated to minimizing the capital their bank is required to hold.

Also, in 2017, when discussing IMF’s Global Financial Stability Report, John Plender wrote: “Low yields, compressed spreads, abundant financing and the relatively high cost of equity capital, it observes, have encouraged a build-up of financial balance sheet leverage as corporations have bought back equity and raised debt levels…Rising debt has been accompanied by worsening credit quality and elevated default risk.”

But what really caught my attention today was your reference to Berkshire Hathaway’s “$104bn cash pile [it holds] keeping its powder mostly dry for future deals — if, say, the market correction continues.”

How do you keep that powder dry? Since most probably it is not in dollar notes under Warren Buffet’s mattress, what is it invested in? We know that in accounting terms “Cash” includes a lot of investments, but in the real life, “Cash” does not always turn out to be real cash. In Venezuela you could now fill a whole mattress with high denomination bolivar notes, and still not be able to buy yourself a coffee with it. 

In a world in which regulators have assigned a 0% risk weight to for instance the already $22tn and fast growing US debt, which, if nothing changes, would doom that safe-haven to become very dangerous, is not Cash just another speculative investment?

@PerKurowski

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

Where have all safe assets gone? Short time passing. Gone to banks and central banks. When will regulators ever learn?

Sir, Elaine Moore, with respect to ECB’s QEs writes: “From the moment the European Central Bank first announced plans to revive the eurozone economy with a mass bond-buying programme, financial markets have expected trouble. First the focus was illiquidity and mispricing — now it is scarcity”, “Mechanics exposed as debt pool starts to run dry” September 9.

How could scarcity not be? Basel II’s low risk weighted capital requirements plus Basel III’s liquidity requirements, have substantially increased the demand of banks for low 0% risk weighted sovereign debt. That together with Central Banks purchases of “safe sovereign debt”, for their own QEs, just had to create scarcity.

Now we can hear widows, orphans and pension funds ask: Where have all safe assets gone? And the answer is to banks and Central banks everyone. Indeed when will they ever learn.

The saddest part though is that, as a result of all this odious regulatory distortion, the 100% risk weighted SMEs and entrepreneurs, those who most need and could do good with bank credit, they are left out hanging dry.

Sir, if we do not finance the riskier future and only keep to refinancing the “safer” past, we’re toast… even if there is no global warming.

@PerKurowski ©

“In a world where debt overhang holds growth back for years” what could happen to the safety of “safe assets”?

Sir, David Oakley writes about the possibility that “QE will only properly end when all the bonds purchased mature”. And “For fund managers, it means government bonds may have a more lasting appeal as yields remain lower for longer because of an underlying demand for safe assets in a world where the debt overhang holds growth back for years.” “We are the QE generation, and it is quite a burden” February 1.

But a more relevant question could be: “in a world where the debt overhang holds growth back for years” what could happen to the safety of those “safe assets”?

Here we are with central banks sitting on a great portion of sovereign bonds they cannot retire without affecting the market too much; while at the same time they fix the risk-weight of these bonds, for the purpose of the capital requirements for banks, at zero percent, while that of those who are the only ones who could help growth, the private sector, has a risk weight of 100 percent. Is that not an example of sheer human lunacy that has us begging urgently for some artificial intelligence to bail us out?

@PerKurowski ©

What are European banks to do when ECB has cornered sovereign debt, which perceived as safe, allows them to hold little equity?

Sir, I refer to your “Good news at last from the eurozone economy” March 6 and in which you, acting something like an ECB/Draghi groupie, egg ECB on to proceed with its quantitative easing. Sincerely I have no idea what good that would do at this moment.

For instance what is a poor equity lacking European bank to do, when ECB buys up even more of that relative scarce inventory of safe European assets which allows banks to hold little equity? And what are pension funds to do? And in what should widow and orphans invest?

Someone is cornering the market of the safe, right in front of your eyes, and you do not even notice it? Are you part of the great European risk aversion scam?

Europe does not need ECB or banks to finance what is safe… they need banks to finance what will keep it safe… namely the risky... the SMEs and the entrepreneurs.

Sir, is it not high time FT abandons its “Après nous le deluge" mode?

Sir, of the letters I wrote and which you published, before I was censored for the given reason that I wrote too many letters, that which gets the most attention in my blog is the one titled “Long-term benefits of a hard landing”.

In that letter I argued Why not try to go for a big immediate adjustment and get it over with? … This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.”

How sad it is that almost eight years later, after having basically wasted QE’s, Paul Serfaty still finds a valid reason to end his letter with “Bite the bullet. Reprice the assets. Write off the unpayable debt. Smite the unwary. Start again with a new confidence that there is an upside”, “QE monster has regulators and markets alike transfixed” January 22.

Sir, look back at what your columnists have written over the last eight years, and you will find that most of it has to do with kicking the can down the road, by means of QEs, fiscal deficits and much other… all having us climb ever higher, that mountain of excessive liquidity, unsafe excessive price of “safe assets” and excessive sovereign debt, from which we must come down from, sooner or later.

Frankly Sir, is it not high time FT abandons its “Après nous le deluge” mode?

We must stop building that mountain of dangerous elusive safety that is sure to crumble and fall on us.

Sir, I refer to Tracy Alloway’s and Michael MacKenzie´s “Finance: The FICC and the dead” August 12.

In October 2004, in a formal written statement delivered at the World Bank as an Executive Director, I warned

“I believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

I have of course been much ignored ever since, as it is not considered comme il faut to be too right especially in the company of credited experts.

But Sir, now we are back to that period, and again… and it is not that the waves have disappeared… it is that the wave is building up… Just you wait ´enry ´igggins, just you wait, until it breaks.

When bank regulators with their risk-weighted capital requirements of Basel II basically ordered banks to stay away from what is "risky"… and now make those orders even more imperative with the liquidity requirements in Basel III, and when we now read about asset managers “steering clear of certain bonds, such as asset-backed instruments whose so-called secondary markets are not deep” one thing is clear… and that is… the world is trying to build a more and more, a higher and higher, mountain of safe assets.

Perhaps something on its very top and its very center might survive, but the rest is going to come crumbling down… sooner or later, there is just not enough safety material to go around for that kind of mountain.

They seek it here. They seek it there. Those Basel bank regulators seek it everywhere. Is it in heaven? Is it in hell? That damned elusive bank stability… (which does not even have the decency to rhyme!)

A £1.000.000 house, but no job, and can’t pay the utilities

Martin Wolf warns correctly “Buyers beware of Britain’s absurd property trap” October 11.

Indeed, it would seem that the dream of politicians, government officials and bank regulators is for all us to be able to feel rich, sitting there in our houses. But unfortunately though the way they go about it will make us sit there without a job, and without being able to pay the utility bills.

But the trap is not solely related to houses, but to all assets that are perceived as “absolutely safe”, because those are the assets a bank is allowed to finance with little capital, which means lot of leverage, which means huge risk-adjusted returns on equity.

But Bbank financing to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups… that is of course a NO! NO! NO!

During the IMF and World Bank meetings in Washington this week we hear more and more about the scarcity of safe assets. Of course, it can’t be any other way. If you do not take a risk on risky assets, how on earth are you to produce the safe?

But also beware of the much greater risk derived from excessive lack of testosterone and dopamine

Sir, the fundamental problem with good articles like Sarah Gordon´s “Call in the nerds – finance is no place for extroverts”, April 25, is that they tend to analyze risks from the perspective of when risk-taking goes bad, without caring much for when risk-taking goes right.

The problem we are facing now is that bank regulators, with too little testosterone, and too little dopamine, and too little understanding of what they were doing, gave the banks extraordinary incentives to lend and invest in what was perceived as “safe” and to stay away from what was perceived as “risky”… and so the banks did… and loaded up on AAA rated securities, Greece, Spanish real estate and others safes.

Indeed if regulators had incorporated more behavioral analysis then they would not have based the capital requirements for the banks based on perceived risk, like that in credit ratings, but based to how bankers react to perceived risk. And then, instead of more-risk-more-capital less-risk-less capital, they might have applied a somewhat inverse capital requirements, since bank crisis have never ever resulted from excessive bank exposures to something perceived ex ante as “risky.

PS. As gold is mentioned, just as a curiosity let me remind you that in the Report on Global Financial Stability 2012, of April last year, the IMF listed 77.4 trillion dollars in safe assets and therein gold represented 11 percent.

What would the Basel capital requirements have been for a bank to finance Columbus’ voyage to the Americas?

Sir, Ralph Atkins, Philip Stafford and Brooke Masters’ in their analysis of regulations titled “Collateral damage”, October 25, mention about “growing fears that the very actions meant to build stability into the financial system are doing the opposite.” 

Of course, but that should be old news. Have they not looked at all bank assets which created this crisis? These were all perceived as safe, “The Infallible”, and for which banks were given extraordinary incentives to hold, by means of very low capital requirements. The frantic and frankly stupid efforts by regulators to keep the bankers away from “The Risky” led to a dangerous overpopulation of some safe-havens. 

When are regulators going to wake up to the reality that there is nothing like independent safe assets, as most of their safety depends on the existence of a safe economy? What they need to understand is that in order for some assets to become and remain safe, risky assets need also to be financed. 

By the way, since the article refers a lot to IMF, as I have written to you before, I am very skeptical about IMF’s analysis of safe assets. In their “Report on the Global Financial Stability 2012” they listed a total of 74.4 trillion U.S. dollars: 33.2 (45%) in sovereign bonds AAA / AA 5 (7%) in sovereign bonds A / BBB, 16.2 (21%) in securities with special guarantees; 8.2 (11%) in corporate bonds rated investment grade, 3.4 (5%) in other governmental or supranational debt, and 8.4 (11%) in gold. 

Let me assure you that though, for instance, holding both sovereign bonds and gold can be a very safe and risk-adverse strategy, since if something goes seriously wrong you might at least be left with something, 30 years US bonds yielding 3 percent, and gold at $1.715 per ounce, cannot simultaneously both be real safe assets, no matter how much IMF suggests it.

The article is also illustrated with a painting depicting Columbus voyage to the America’s, financed by Queen Isabella and who supposedly pawned her jewelry for that purpose. If Queen Isabella had been a bank, what would you think would be the capital requirements for that loan? Would America have been discovered during a regulatory reign of a risk-adverse Basel Committee? 

Instead, Spanish banks financed "safe" real estate... against very little capital.

England, what a shame!

Sir, what a shame to read that old brave England thinks it too risky to row a boat up the Thames… what is this wimpy England now to do, for instance when the International Monetary Fund (so surrealistically) announces a scarcity of safe assets?