Free markets were set up to go bad, because of bad bank regulations.

John Thornhill writes: “The global financial crisis of 2008 exploded the ideology that markets always deliver the goods” “Three game-changing ideas to shape the post-pandemic world” Life and Arts, May 30.

Sir, that is the problem, because that is exactly what all those against free markets want us to believe. 

The 2008 crisis resulted from huge exposures to securities collateralized with mortgages to the subprime sector in the USA, turning out risky. 

And those huge exposures were a direct result of: Regulators allowing European banks and US investment banks to hold these securities, if these were rated AAA to AA, which they were, against only 1.6% in capital; meaning banks could leverage their equity an amazing 62.5 times. 

Securitization, just like making sausages, is the most profitable when you pack the worst and are able to sell it of as the best. If you can sell someone a $300.000 mortgage at 11 percent for 30 years, which was a typical mortgage to the subprime sector, and then package it in a security that you could get rated a AAA to AA, so that someone would want to buy it if it offered a six percent return, then you would pocket an immediate profit of $210.000. 

The combination of those two temptations proved irresistible.

Yes, higher education must be much more of a joint venture, for all involved.

Sir, Sheila Bair is absolutely right that “proceeds from student debts go to colleges, while the risk of repayment falls on borrowers and, if they default, on taxpayers provides little incentive for schools to contain costs [which] provides little incentive for schools to contain costs.” As a solution she refers to “income share agreements” where universities provide some funding and students pay back a small share of their income over some years. “An investment model to put US students through college”, March 15. 

Since in a 2007 Op-Ed I asked whether higher education should not be more of a joint venture, I fully agree with the orientation of these proposals. 

That said I would not leave it solely as a student to college/university level. I believe that professors should also have skin in the game, and so perhaps their retirement plans should include a clear linkage to how their students did.

And why leave it at that? Why not think of securitizing those possible future participations in earnings so as to provide some upfront money to cover expenses? And what about insurance companies investing in these? And what about some students crowdfunding their tuition fees?

Where I do part though from Bair’s opinion, is on the concept that high earning students could/should subsidize the study costs of lower earning professions. That could cause some unexpected distortions, and it is much more a general societal responsibility, which the higher earning - higher tax paying already share.

PS. Sir, over the years I have written several letters to you on this subject... but 😒

@PerKurowski

FT, I have two questions and one observation to make about the securitisation and privatisation of student debt in UK.

Sir, Thomas Hale writes that after “the biggest privatisation of student loans…the first of a series of anticipated transactions that stand to create a market for graduate debt in the UK, the parliament’s spending watchdog concluded the government received too little in return for what it gave up”. “Spending watchdog criticises student loans privatisation” November 22.

The Department for Education, DfE, answered it was “confident that we achieved value for money for taxpayers… as Student loans are designed so that borrowers only repay when they can afford to [which] only means many students will never fully pay back their loans”

I have two questions and one observation to make

First question: Before a student has his debt packaged into a security to be sold off to investors, should he not have the right to make a preemptive offer for it? Not that it makes a real difference but, emotionally it might not be the same for some to owe their government than to owe Goldman Sachs  their student debt.

Second question: If taxpayer should receive value for money for all these student loans, should not those who are supposed to help students to repay their debts, the professors, the universities also have some skin in the game? I mean at this moment it would seem they get all the benefits from the students taking on debt, at no cost or risk for them.

I recently tweeted: Have you ever seen a university stating a normal investment disclosure like: “Warning, if you pay us for your studies by taking on debt, you might not earn enough to repay it.” 

Hale writes: “Securitisation, a process where assets are packaged together and sold on as bonds to investors, ranging from pension funds to alternative asset managers”

It is with respect to that I would like to make an observation, namely that of reminding that securitization is basically like making sausages, the worse the ingredients, the higher the profits. So pension funds, please beware!

@PerKurowski

The worse the mortgages packaged, the higher the potential of securitization profits was (is)

Sir, FT’s big read by Mark Vandevelde and Joe Rennison “The story of a house” September 6, leaves out two important facts:

First: Christopher Cruise, who ran popular courses in mortgage origination, is quoted with “You had no incentive whatsoever to be concerned about the quality of the loan or whether it was suitable for the borrower” 

But yes you did, only in a direction quite different than usual. The worse the borrower and the worse the mortgagor, the higher the potential of profits of packaging it in a securitization sausage bound for a high credit rating. All involved in that securitization would profit, immensely, except of course those who were being packaged into that sausage. Imagine, if that sausage obtained an AAA to AA rating, US investment banks and European banks were allowed by the regulators to leverage 62.5 times their capital with these.

Second: “Société Générale, the French bank, was one of those that took out insurance against a collapse in the value of Davis Square, buying exotic derivatives contracts from the insurance group AIG.”

That was not solely for insurance. Because AIG was AAA rated, whatever lower rated securitized mortgages it added its signatures to also gave the banks the possibility of a mindboggling 62.5 times leverage. 

Profit potential: If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy profit of $210.000

Sir, credit rating agencies using fallible humans did not stand a chance to get it right! 

@PerKurowski

For better transparency should newspapers have a section of “Journalism” and one of “Political Activism”?

Sir, Rana Foroohar discussing the issue of ever growing student debt, ends her review of Devin Fergus’s book “Land of the Fee”, with: “Perhaps the new generation of millennial socialists rising in the US should make this the issue they tackle first”, "Slow bleed" August 18.’

What’s wrong with plain millennials? Do they have to be socialists? Or is Foroohar more than a journalist an activist?

Sir, since many years I have been arguing that higher education should be much more of a joint venture between the students and their Alma Maters; and that financing preferentially educational costs would just leave over-indebted students and enriched professors. Just as financing preferentially house purchases benefits those who have invested in houses, much more than those who want a house just to be their home.

Here below are two of my tweets that I think cut over political lines, but that therefore might not be of too much interest to redistribution or polarization profiteers.

1. “Instead of taking on debt, perhaps students should go for crowdfunding their study costs, offering to pay a percentage of their incomes during their first 15 after graduation years. If so would not investors want their professors to have some skin in the game too?”

2. “Would insurance companies be willing to invest in the future by financing students against a percentage of their first 15 after graduations years of income? Would IRS be willing to certificate the incomes of these students for the investors?”

I have now ordered, “Land of the Fee” and so I will keep my comments till after I read it. That said I am sure I will again have to ask: Where was FT when regulators risk weighted sovereigns 0% and citizens 100%? Where was FT when regulators allowed banks to leverage 62.5 times only because an AAA rating issued by human fallible rating agencies was present? Where is FT on that all the real benefits of securitization do not accrue those securitized, much the contrary securitization profits are maximized when hurting the most? 

@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

Do subprime borrowers or investors in mortgages benefit from securitization? No, now all profits go to intermediaries

Sir, Ben McLannahan, with respect to securitization of subprime mortgages quotes Julian Hebron, head of sales at RPM Mortgage with: “Making credit available to borrowers who are subprime is national policy and it is an important part of economic growth” “Financial crisis: 10 years on: The return of subprime” September 2.

Q. Do the subprime borrowers get any interest reduction from having their mortgages securitized, such reduction that could make these mortgage a safer investments for those investor who acquires these at lower rates? A. No!

Convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years, packaging it in a security, and then with a little help from the credit rating agencies convincing risk-adverse Fred that this mortgage is so safe that a six percent return is adequate, allows that mortgage to be sold for $510.000.

The $210.000 profit is now shared in it entirety by those originating the subprime mortgage, those packaging it, and those obtaining the excellent credit rating for the resulting security.

If that is “an important part of economic growth” that merits being part of a national policy, I don’t get it. Do you Sir?

If for instance 70% of those profits were paid back to those borrowers who lived up to their obligations, that would indeed imply a different and much more positive incentive structure.

Is that not something like for which cooperatives are often intended but not always achieve?

@PerKurowski

The financial packaging / securitization process includes an evil incentive

Sir, Patrick Jenkins in the Spectrum special “Financial crisis: 10 years on: Where are we now?” September 1 writes: “So great was investors’ appetite for these high-yielding MBSs and CDOs that mortgage companies lowered their underwriting standards to feed the securitisation sausage machine.”

Yes and no! First these MBSs had the additional quality of being rated by the credit rating agencies as very safe, AAA in many cases; and so in fact offered extremely high risk-adjusted yields, which made their great attractiveness perfectly logical. Naturally many investors would fall for these.

But then we have the problem with the securitization process itself. If you package something safe and sell it of as something safer, the profits are much smaller than if you manage to package something very risky and are able to sell it off as safe. So “mortgage companies lowered their underwriting standards”, not only because of the demand, but also because that allowed the original mortgages to carry higher interest rates, and so the profits of the packaging team would be larger larger. Here is how I have described that on my blog for more than a decade.

“If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy profit of $210.000”

@PerKurowski

Its worse! To central banks’ holdings of public debt we must add that of normal banks holding it against zero capital

Sir, Kate Allen and Keith Fray with respect to the QEs write that “The Fed’s balance sheet has expanded significantly several times in the past, including during the second world war when it soaked up debt sales in a bid to improve market conditions. But the current era is the first time in history that such a large group of central banks has undertaken such a substantial volume of co-ordinated buying over the space of nearly a decade.” “Decade of QE leaves big central banks owning fifth of public debt” August 16.

That’s not the only “first time in history” event. Thomas Hale and Kate Allen, in “Europe weighs potential ‘doom loop’ solution” write “A critical factor in deciding demand for sovereign bonds is risk weightings, which determine how much capital a bank needs against its investments in different kinds of asset. Sovereign bonds in Europe have benefited from a zero risk weighting, making them highly attractive to banks, many of which borrowed cheaply from the European Central Bank to buy sovereign debt after the crisis.”

That should make clear for anyone not interested in hiding it that, to whatever public debts the central banks hold, we must add those that all banks hold only because they are allowed to do so against zero capital. Q. What is a 0.1% return worth if you can leverage it 1000 times? A. 100%

Sir, as I have told you umpteenth times before, in 1988, one year before the Berlin wall fell, that which was taken to be a big blow to statism, bank regulators, through the back door, introduced a zero risk weighting of sovereign debt. The statists have been playing us for fools ever since.

And now, when reality is catching up, they want to package and hide all this public debt in some securities they have the gall to name these European Safe Bonds “ESBies”, issued in order to “make the continent’s financial system safer”. Or, as Gianluca Salford, a strategist at JPMorgan disguises it, to “transport sovereign risk to a place where it’s more manageable”.

Sir, try to sell all central banks’ and banks zero weighted held public debt into a free market and see what rate you get. Taking current artificial public debts for real, or for being revenue neutral rates, or for being risk free rates, or for justifying public investment in infrastructure, is either stupidity or a shameful manipulation of truth. 

Sir, the day our citizens discover what is being done by these statist they will flee all sovereign debts and governments will be left, like Maduro in Venezuela, with central banks that can only print money to keep the can rolling and rolling until…

PS. Mr Salford argues: “Securitisation is not an innately bad thing — it can be used well as a stabilising source” No! If securities are sold at their correct securitized risks they do not provide remotely as much profits as those sold incorrectly offering securitized safety. In other words, suffering from innately bad incentives damns these.

@PerKurowski

So now European small businesses are being exploited like "subprime" buyers of houses were

Sir, Robert Smith writes: “‘It’s not quite 2006, but it does feel a bit like we’ve heard this script before’” “Europe looks to repackage bank debt: Return of securitisation coincides with concerns over slipping standards”

He sure has, or should have heard it! That because the incentive structure in the process of securitizations is as bad as they come.

If you take very good credits, let us say A+ rated, and you package it so it comes out an AAA rated security, you might have done a good job but it will not earn you much.

If on the other hand you manage to package a lot of substandard BB- loans into an AAA rated security, then you will make fabulous commissions when selling these into the market.

It was precisely that which originated the AAA rated securities backed with mortgages to the subprime sector in the USA, and which caused the 2007/08 crisis.

The worse and higher paying interest mortgages you cant put into these securities the better for the whole team was the rallying cry. In the end those buying their homes with these mortgages and those investing in these securities, they were all defrauded by a wrong set of incentives. 

So now the small businesses and entrepreneurs in Europe, those who are risk weighted by the regulators at 100%, will be packaged into securities for which “double-A credit ratings were most likely” and thereby seeing their risk weight magically reduced to 20%.

Will this in any way shape or form really benefit European SMEs and entrepreneurs? The answer is if so, certainly very few of them.

What Europe needs is to get rid of the risk weighted capital requirements for banks, those that have so profoundly distorted the allocation of bank credit to the real economy. Then your bankers will be forced to become bankers again; maximizing their returns on equity by normal lending, to all, and not by minimizing their capital requirements.

PS. Here’s some numbers on the prime subprime deal! If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the Joe mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy and instantaneous profit of $210.000

@PerKurowski

Regulators placed delicious cookies on the table and only banks are being punished for falling for the temptation

Sir, again, December 24, we read on your front page about banks being hit with penalties for the subprime mess, and still not a word about the responsibility of regulators creating the temptations they should have known that, sooner or later, some would not resist.

Here are four factors that explain the subprime mess, or at least 99.99% of it.

Securitization: The profits for those involved in securitization are a function of the betterment in risk perceptions and the duration of the underlying debts being securitized. The worse we put in the sausage – and the better it looks - the higher the profits. Packaging a $300.000, 11%, 30 year mortgage, and selling it off for US$ 510.000 yielding 6% produces and immediate profit of $210.000 to be shared among those involved in the process.

Credit ratings: Too much power to measure risks was concentrated in the hands of some very few human fallible credit rating agencies. The systemic risk with using credit ratings so much should have been anticipated by regulators.

Borrowers: As always there were many financially uneducated borrowers with needs and big dreams that were easy prey for strongly motivated salesmen, of the sort that can sell a lousy time-share to a very sophisticated banker. 

Capital requirements for banks: Basel II, June 2004, brought down the risk weight for residential mortgages from 50% to 35%. Additionally, it set a risk weight of only 20% for whatever was rated AAA to AA. The latter, given a basic 8%, translated into an effective 1.6% capital requirement, which meant bank equity could be leveraged 62.5 times to 1.

So, clearly the temptations became too much to resist for many of those involved.

The banks, like the Europeans, thinking that if they could make a 1% net margin they could obtain returns on equity of over 60% per year, went nuts demanding more and more of these securities; and the mortgage producers and packagers were more than happy to oblige, signing up lousier and lousier mortgages and increasing the pressure on credit rating agencies.

Of course it had to end bad... and it did… in sort of less than 3 years.

Financial Times, is this a version of the real truth that is not to be named?

PS. “DoJ penalties hit $58bn. If banks leverage 12 to 1, that means $696bn in credit capacity. Why do they not collect these fines in bank shares?

@PerKurowski

Lucy Kellaway, how should guilty bank regulators apologize and be held accountable?

Sir, I refer to Lucy Kellaway’s “Wells Fargo’s wagonload of insincere regrets” September 17, only in order to ask her a question.

Here is a link to my unasked for testimony on the causes of the bank crisis 2008

http://subprimeregulations.blogspot.com/2016/09/if-ever-allowed-following-would-be-my.html

If I am correct, how would Lucy Kellaway suggest the guilty bank regulators should apologize… and how should they be held accountable?

@PerKurowski ©

When securitization wedded the capital requirements for banks, the subprime mortgages' inferno overheated.

Sir, I refer to Gillian Tett’s “Unorthodox answers to the inflation enigma” April 1.

Ms Tett writes: “If the Fed, or any central bank, wants an illustration of why ethnographic research matters, they need only look at the last credit bubble, when most economists missed the subprime mortgage boom because they shunned on-the-ground research. Fed officials need to get into consumers’ lives. Or else hire a few anthropologists to work with those office-bound, and baffled, economists.”

Unfortunately central bankers have yet to understand the missed subprime mortgage boom, and so has anthropologists like Gillian Tett.

Anyone who has read Kirsten Grind’s spectacular tale of the Washington Mutual failure “The Lost Bank” 2012, Gillian Tett has praised it, should have been intrigued by a question the book poses but that remains unanswered. Why was there especially such huge demand for basically the lousiest mortgages?

An objective researcher would then have found that combining the dark secret of securitization, with the importance given to the credit rating agencies for determining the capital requirements for banks, created a temptation impossible for any ordinary humans to resist.

What “dark secret of securitization”? That the worse the assets to be securitized are, the more can those involved in the securitization process profit. Selling of a $300.000, 30 years, 11 percent mortgage, packaged in a security for which an investor thought that 6 percent was a great return, would immediately yield $210.000 in profits.

And on credit ratings, if a security got an AAA to AA rating, then the banks, according to Basel II, needed only to hold 1.6 percent in capital against it, and were therefore allowed to leverage a mind-blowing 62.5 times to 1.

The problem with any central bank research though, is that it would lay much blame on all central bankers involved with bank regulations… and, among colleagues, we can’t have that, can we?

Oh how I wish Kirsten Grind would go back to the subprime inferno and research the causes for why it overheated.

@PerKurowski ©

Securitization is useful, but not when it is driven primarily by differences in capital requirements for banks

Sir, Alexander Batchvarov writes: “It is claimed that securitisation was one of the main causes of the financial crisis because it was complex, performed poorly and lacked transparency.” “It is time to ditch the ‘toxic’ tag for the sake of Europe’s economy” March 24, 2016

There are deggrees of possible toxicity that are a direct function of how much the securitization process increases the perceived safeness of what is being securitized.

And in this respect what turned out to be really toxic, was not the securitization of relative safe 30 years fixed rate mortgages to the prime sector, but of home equity loans, subprime loans, Option ARM loans, and similar risky affairs.

But even these “risky” underlying loans would not have morphed into truly toxic securities, had it not been for the regulatory benefits awarded to them by means of risk weighted capital requirements for banks.

For instance Basel II assigned a risk weight of only 20 percent for securities rated AAA to AA- , which with a basic capital requirement of 8 percent, meant banks could leverage their equity with these securities a mindblowing 62.5 times to 1 (100/1.6). Those incentives distorted the whole process.

The moment when a securitization, for instance of SME loans, generates a lower capital requirement than non-securitized bank loans to SMEs, that introduces a distortion in the allocation of bank credit that can be very profitable for the banks, but generates little value for the SMEs.

And so if Batchvarov, head of international structured finance at BofA Merrill Lynch Global Research, wants to emphasise proper use of the securitisation technology for the benefit of the broader European economy, he should begin by favoring the elimination of the risk weights differences which cause bank capital requirement differences between what is ex ante perceived as safe and what’s perceived as risky.

And, by the way, that would not increase European financial instability, since there never ever are excessive dangerous bank exposures to something ex ante perceived as risky… that dishonor belongs entirely to what is perceived as safe.

PS. There is something fundamentally dangerous with securitization

@PerKurowski ©

Jonathan Hill: In order to lower the capital requirements for banks, why must credits be securitized?

Sir, I refer to Jim Brunsden’s and Alex Barker’s “Why Hill is no markets union swashbuckler” September 30.

In it they write: “Europe’s companies remain overwhelmingly reliant on bank funding, which is problematic when lenders are scaling back risk-taking post-crisis. The remedy is promoting access to other sources, notably through selling shares and bonds. Here there is room for growth”.

Not exactly, banks are not “scaling back risk-taking post crisis” they are scaling back on capital requirements based on perceived risks... c'est pas la même chose.

They also write: “The remedy is promoting access to other sources, notably through selling shares and bonds” and Jonathan Hill in his “A stronger capital markets union for Europe” suggests: “To help free up banks’ balance sheets, making it easier for them to increase lending, I am proposing a new EU framework, with lower capital requirements, to encourage simple, transparent and standardized securitization”.

And I must ask Hill: Are not direct bank loans to “risky” SMEs and entrepreneurs simple and transparent enough? Does not securitization increase the complexity and thereby reduce transparency? Does securitization mean the borrowers benefit from better terms or that securitizers obtain better profit margins?

Why does Hill not propose instead to lower the capital requirements for the banks when lending to those who, precisely because they are ex ante perceived as risky, have never caused a major bank crisis?

Could it be because Jonathan Hill believes that securitization magically makes all more secure, or is it that he does not want be blamed by colleagues for spilling the beans on the greatest regulatory absurdity of all times… the portfolio invariant credit risk weighted capital requirements for banks.

That absurdity on which FT having kept so much mum on, also must be praying fervently disappears unnoticed.

@PerKurowski

Mr. Jacques de Larosiėre. You are not telling the truth and nothing but the truth

Sir, I refer to Jacques de Larosiėre’s “Securitised debt could give Europe’s economy the kiss of life” April 22. Yeah, but he must mean a “kiss of life” for the financial intermediaries.

Securitization is the process whereby you lend at the highest possible rate, achievable by convincing the borrower of how risky he is, and then resell it discounted at the lowest possible rate, achievable by convincing the investor of how safe the borrower is…. so neither investors nor borrowers stand to benefit much.

For instance, a $300.000 - 11% - 30 years mortgage to the subprime sector, when it was resold discounted at 6%, yielded the intermediaries a tidy immediate profit of $210.000!

And de Larosiėre ends stating “Reviving the market for securitized loans is the fastest way to bring Europe’s credit shortage to an end”. Not so! The only sustainable way to devolve sanity into the European bank credit markets, is to get rid of those capital requirements which allow banks to earn much higher risk-adjusted returns on equity when lending to the “safe” than when lending to the risky”

Who not an “infallible sovereign”, or a member of the AAAristocracy, can compete for bank credit under such circumstances?

Europe, start by getting rid of all those working on Basel III, they are too busy covering up for their fatal mistake of Basel II.

“The Risky” borrowers, if only they knew, would envy like crazy the banks and “The Infallible”, their Basel Committee lapdog

Sir, Patrick Jenkins, reports “Watchdog to retreat from strict capital rules”. September 30. In it Stefan Ingves, the Swedish central banker who is the head of the Basel Committee on Banking Supervision, is quoted opining that perhaps they should be softening the “tough capital rules on securitisation introduced four years ago”. Why do not the “risky” borrowers have a similar access to a regulatory lapdog?

The more the regulators soften the capital requirements for banks on whatever can be construed as belonging to “The Infallible”, the more will these directly discriminate against those already being discriminated against by banks and markets, on account of being perceived as “risky”, such as medium and small businesses, entrepreneurs and startups.

When the “risky” become “safe”, by means of being bundled up in securities, the profits of lowering the capital requirements for banks, goes almost entirely to the bundler and the banks. Why does not that profit go primarily to those being bundled? 

It just comes to show that the small and “risky” of the real economy, even though they have never ever caused a bank crisis, are just chicken shit in the eyes of regulators who just love to mingle with the AAAristocracy.

Do not blame the messenger!

Sir, Avinash Persaud in “Hold tight: a bumpy credit ride is only just beginning” August 16, speaks nostalgically about those days “before securitization” and indeed he is right in so many ways especially on that part of the banks not any longer carrying and nurturing the credits on their own books. But he should not blame it on securitization as such, that is just a very valuable tool, if used correctly. He should blame instead those bank regulators that arrogantly thought they could drive banking risks out of banking without any consequences and that empowered a couple of credit rating agencies to do the impossible task of correctly rating credits without introducing systemic risks.