When it comes to recklessness, the whizz-kids are small fry when compared to current bank regulators

Sir, Gillian Tett, referring to “the 2008 financial crisis writes: “Regulators were largely toothless because the whizz kids were creating financial instruments that straddled national borders, regulatory silos and outdated laws” “Cambridge Analytica scandal echoes the financial crisis” July 13.

Hold it there! If the regulators were “toothless”, what on earth were they doing regulating in the first place?

And, really, how much damage could reckless whizz kids have caused, if regulators had not, for instance allowed banks to leverage their capital with securities backed with mortgages to the subprime sector, 62.5 times, only because a human fallible credit rating agency had assigned that instrument an AAA to AA rating?

And what whizz kids have ever been involved with something as reckless as when regulators assigned a risk weight of 0% to sovereigns like Greece?

If we take this all to the issue of misuse of data, what are we to say about regulators who seem to keep a low profile on the fact that whatever data Cambridge Analytica laid there hands on, that was nothing when compared to the so much more extensive data social media, like Facebook, already possess. Could these regulators, in a Basel Committee for Data Supervision, really be crafting adequate policy responses that will not have serious “unexpected” consequences?

What if that data had now to be shared with governments, would that not make any autocrats’ “Big-Brother is Watching You” wet dreams come true?

@PerKurowski

The Basel Committee’s risk weighted capital requirements for banks, put the 2007/2008 “Minsky Moment” on steroids.

Sir, John Authers writes: “The greatest dangers to us are not from things we perceive to be high-risk, because we generally treat them carefully. Trouble arises from that which we perceive to be low-risk.”, “Unnatural calm sparks visions of a ‘Minsky Moment’” December 31.

Sir, you know I have written more than a thousand letters to FT over the last decade pointing out exactly that. For instance in July 2012 Martin Wolf wrote: “Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

Unfortunately FT has refused to accept the complete implications of this truth.

Authers, as if it suffices as an explanation now writes: “The crisis that came to a head in 2008 revolved around securities that the rating agencies had given the maximum rating of triple A — it would not have happened if they had been considered speculative”.

No! The full truth is that not only did markets and bankers consider and acted as if those AAA rated securities were safe. Regulators did too. With Basel II of 2004 they assigned what was AAA to AA rated, a risk weight of only 20 percent. Thereby they allowed banks to leverage 62.5 times to 1 their equity with these securities. Had banks been allowed to only leverage 12.5 times to 1, as they were limited to with loans to “risky” SMEs and entrepreneurs, that crisis might not even have been identified as a “Minsky Moment”.

Sir below is a link to the full explanation to what really happened with the AAA rated securities backed with mortgages to the USA subprime sector. Do you have it in you to share it with your readers?

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski