Mr. Martin Wolf, please run a regression of the current problem loans on the 20 percent or less Basel II risk weights

Sir, Martin Wolf, in “The riddle of German self-interest”, May 30, refers to governments and banks as “the drunks are seeking to stay upright by leaning on one another”, but fails, as usual, to explain that the brewage these drunkards intoxicated on, were the basically non-existent capital requirements for banks when engaging with something officially perceived as not-risky. 

Mr. Wolf should run a regression between all the problem loans in banks that caused this crisis, like lousy securities disguised as splendid triple-A’s, loans to Icelandic banks, loans by the Spanish banks to the real estate sector in Spain, loans to a Greek government, and other similar… on the risk-weight of 20 percent or less and which, according to Basel II, allowed the banks to finance that mentioned holding only 1.6 percent or less in capital. 

If the Germans would come to understand what was the primary cause Europe ran into trouble, then they might be more sympathetic to Wolf’s urgings, otherwise there is no reason why they should not believe these are simply the expression of his own self-interest.

But Roosevelt and Churchill would have saved us from the dumb bank regulators.

Sir, Edward Luce, in “The worst is still ahead for Obama’s chief firefighter” May 28 writes “If there’s just Roosevelt and Churchill sitting in a room with a brandy, that’s an easier negotiation” 

Absolutely! And this is what these two great gentlemen would say. 

“Franklin, why do we not get rid of this stupid bank regulations they sold us as being able to control for the risk of default, and which has only brought us obese bank exposures to what was officially perceived as absolutely not risky, generating so many losses in lousily awarded mortgages disguised as splendid triple-A’s, lousy loans to Icelandic banks, lousy bank loans by the Spanish banks to the real estate, lousy loans to a Greek government?” 

“Indeed dear Winston, and to top it up, as I believe you call it, they also hindered our banks to give loans to our “risky” small businesses and entrepreneurs, and which you and I know are the ones most likely to take our nations forwards”… and so… 

“We, Franklin Roosevelt and Winston Churchill, in order to save the Western world, knowing that risk-taking is the oxygen of any development, hereby decree the closure of the Basel Committee for Banking Supervision and the expulsion, forever, of their silly wimpy nannies. We also declare substituting immediately a Financial Functionality Board for a purposeless Financial Stability Board”

For a fragile Europe to change fast, it needs to understand much better what caused its problems.

Sir, Martin Wolf ask us to “Consider how much better off Europe would have been if the exchange rate mechanism had continued, instead, with wide bands. Interest rates in the crisis-hit countries would probably have been higher and asset price bubbles and current account deficits smaller”, “A fragile Europe must change fast” May 23. 

Indeed Wolf is right, but only partially. He still stubbornly, no matter how much I explain it to him, refuses to consider that much more important than the Euro, for the construction of bubbles and deficits were the minuscule capital requirements for banks when lending to what was officially perceived as safe. 

Has Wolf for instance completely forgotten the over 1 trillion in Euros that where invested in triple-A rated securities backed with lousily awarded mortgages to the subprime sector, and which required only 1.6 percent in capital of the banks, the same minimal capital requirement as when lending to Greece? What on earth had that to do with the Euro?

Low-government borrowing rates? Hah!

Sir, Martin Wolf cheerfully quotes Jonathan Portes of the National Institute of Economics and Social Research saying “with long-term government borrowing as cheap as in living memory, with unemployed workers… this is the time for government to borrow and invest”, “Cameron is consigning the UK to stagnation” May 18.

Not necessarily so! Government lending is not viewed by the markets as an attractive cruise boat, but more as a floating piece of driftwood they need to hang on to so as not to drown… and, if to the low rates nominal rates, we add the opportunity cost of all those who are being squeezed out from lending because their borrowings generate capital requirements for the banks while the “infallible sovereign” does not, then the real rates on government borrowing could be historically the highest.

Why do they not for instance half the current capital requirements for banks when lending to small businesses and entrepreneurs, so to allow these to lend a helping hand? Or has the whole debate and regulations been monopolized by the “we-trust-only-governments” crowd?

Yet Jamie Dimon knows immensely more of his business than the regulators do of theirs.

Sir, in “JPMorgan takes a salutary stumble” May 15, you hold that “Bank’s loss illustrates why its boss is wrong on regulation”. Mr. Dimon must certainly be wrong in many ways, at least I have never thought him or anyone else as infallible, but, let me assure that if it is about getting it wrong on regulations, then the regulators are the champs. 

You mention “reckless practices to reduce risk” and in this I believe we have never ever seen something as reckless as our current regulators. They allowed the banks to hold minimum capital requirements for what they from the outside considered as safer lending than other, without giving a thought to the fact that the perceptions on risks had already been cleared for by the bankers, and that this would alter the whole dynamics of the market. 

If I was a shareholder of JPMorgan I would most probably wish for Jamie Dimon to remain as its head, but, as a citizen, I have no doubt I would sack most of our current dumb regulators. 

Do we not need to reign in the too-big-to-fail? Of course we do! But there are wise ways and there are reckless dumb ways of doing that. A wise way begins by eliminating all the growth-hormones that have made them so big, like ultralow capital requirements, the dumb way is to give them a special treatment, like is now proposed under the systemic approach, and which will only result in making them bigger and more dangerous.

Jamie Dimon, would you help me save my savings, in the shadows, please?

Sir, in reference to John Gapper´s “Jamie Dimon is a whale of a hedge fund manager” May 12, I would not make such a big thing about the 2 billion dollars or so in losses sustained by JP Morgan. 

Allowing the banks to lend out to the “infallible sovereigns” against no capital at all, signifies putting all ours, and our children’s´ and our grandchildren’s’ funds, in a truly mindboggling huge hedge fund where the proprietary dealings are not made by a Jamie Dimon, but by some unknown government bureaucrats… with certainly more skewed incentives…and that I guarantee will be much more harmful for tax payers than whatever a JP Morgan can invent. 

Frankly sometimes I feel the urge of picking up the phone and calling a Mr. Dimon or someone like him, to beg him to help me save my small savings… that is as long as he agrees to do that in the shadows, as far away as possible from our current loony banks regulators.

Although with cancer, Europe still smokes… a lot!

Sir, Jens Weidmann, the president of the Deutsche Bundesbank, in “Monetary policy is no panacea for Europe´s ill”, May 8, writes that “Macroeconomic imbalances and unsustainable public and private debt in some member states lie at the heart of the sovereign crisis”. 

Indeed that is the cancer but, the smoking that caused it, was the silly discrimination through the capital requirements for banks in favor of what was officially perceived as not risky and against what was perceived as risky. Like for instance the 62 to 1 leverage a German bank was allowed to have when lending to Greece, compared to the only 12 to 1 leverage allowed when lending to a German entrepreneur. 

And so I feel there is need to remind Mr. Weidmann of the sad fact that Europe still smokes… a lot!

The World needs a World Bank

Sir, as a former Executive Director of the World Bank, 2002-2004 I would like to add to the many insightful comments of Sarah Murray, on the difficulties of being a president of a World Bank, “Leaders face a set of complex challenges” April 26. 

As I see it, and in much as I experienced it, the real problem of the World Bank is that, at its Board of Executive Directors, the World at large, and its humans, are not truly represented, only parochial governmental interests are. 

If we are going to have a chance to rally support for such global critical issues as world-wide sustainability and job creation for our youth, I do believe we need some sort of World’s World Bank, and, a good start, just for starters, could be adding to the Board some independent voices who do not report to a government, or, much worse, to a single ideology. 

Would such a proposal be feasible? I haven’t the faintest! But, if we cannot get the human beings to cooperate and work as one, on some vital issues, across the borders, our chances of all humans making it are much reduced… let’s not kid ourselves.

Who placed and keep the banks on a eurozone knife-edge?

Sir, part of the problems with banks is that those same regulators who should have required equity from the banks when these placed sovereign loans on their books, but did not, because the regulators wished to consider these sovereigns as infallible, are now dumb enough to require the banks to immediately adjust to the fact that the sovereigns might not be so infallible after all. In other words, the banks are forced to deleverage, which hits of course the most those who require the most of bank equity, namely the officially decreed as risky, namely the small businesses and entrepreneurs, namely those least responsible for this crisis. 

In a period where countercyclical action is required, new bank equity should be raised to support new lending and not to cover capital requirements for old bad lending. But, even though Martin Wolf now begins to admit the need “to break the adverse loop between subpar growth, deteriorating fiscal positions, increasing recapitalization needs, and deleveraging”, he still refuses to do a full Monty disclosing the regulatory stupidity, probably because he does not want hurt his buddies, “Banks are on a eurozone knife-edge” April 25. 

Of course, it also reflects the fact that Martin Wolf, the chief economics commentator at FT, from an ideological point of view, much rather prefers government bureaucrats to run the Keynesian deficit spending he favors, than allowing the banks to allocate those resources without the interference of regulating bureaucrats. 

Yes banks are indeed on a eurozone knife-edge, but we surely need to look more into who placed them there and who keeps them there?

The “risky” are the European untouchables.

Sir, John Plender is absolutely correct when he identifies the officially “risky”, the emerging economies of eastern Europe and small and medium sized businesses, already penalized by the Basel capital regime, as the biggest victims of the ongoing deleverage, “Europe faces vicious circle of disorderly bank deleveraging” April 25. 

The World Bank and the IMF during their recent spring meetings were all dressed up in signs that asked about “reducing gaps”. And indeed, one gap that surely needs to be closed, and where the World Bank and the IMF should be at the forefront, is the one odiously increased by senseless bank regulators, between those perceived ex-ante as “not-risky” and those similarly perceived as “risky”. 

Unfortunately no one made a big point of this during these spring meetings as they were all busy talking about the scarcity and the need of “safe-assets”. Clearly, those perceived by the regulators ex ante as “risky”, in Europe, are a new class of untouchables.

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?

Does Greece need permission to use the Euro?

Sir, El Salvador, Ecuador and some other countries, use the US dollar and I cannot remember them asking the US for any permissions to do so. If Greece goes into total default, perhaps it could still decide to use the Euro, it could be of great interest to them.

The survival of Spain and Italy (and Portugal) is day by day being more in the hands of their respective shadow economies, their respective economia sommersa

Sir, no matter where you look in the developed world, you will find dangerous obese bank exposures to what was or still is officially perceived as absolutely not risky, like what was or is triple-A rated and the “infallible” sovereigns; and for the society equally dangerous, anorexic bank exposures to what is officially perceived as risky, like small businesses and entrepreneurs. Nevertheless the bank regulators insist on discriminating against ex-ante perceived risks. 

In this respect, when Robert Zoellick in “Europe is distracted by endless talk of firewalls” April 17, writes that “the survival of the eurozone now depends on Italy and Spain”, but, instead of trying to figure out how their private banks could help out, he recommends a minor capital injection in the European Investment Bank, I can´t help but to feel that the real survival of Italy and Spain (and Portugal) will, in its turn, depend on what the Italians and Spaniards (and Portuguese) can manage to do in their more real and less distorted shadow economies... their respective economia sommersa.

PS. That is specially so when in the official economy regulators apply perceived credit risk weighted bank capital requirements, which so much favors the access to credit of the sovereign over that of entrepreneurs and SMEs.

FT, you do not support intelligent bank regulations by silencing its stupidities

Banks consider the perceived risks of default of borrowers when setting the interest rates, the amounts of the loans and all other terms. Therefore, to also favor with bank regulations bank exposure to what is officially perceived as absolutely not risky, like triple-A rated and infallible sovereigns, and thereby castigating their exposure to what is officially deemed as risky, like small business and entrepreneurs, dooms the banks to dangerously obese exposures to the “not-risky”, and to the for the economy equally dangerous anorexic exposures to the “risky”. And that, no matter how you look at it, is plain stupid bank regulations.

Since FT has clearly, and I would say deliberately ignored the previous argument, about which I have sent FT over 600 letters the last 7 years, I find it absurd when in “Lost in translation”, April 14, FT expresses that it has “always favored intelligent banking regulations”

For example just earlier this week Martin Wolf wrote, for the umpteenth time, about balance of payment problems in Europe stating “In the years of euphoria before the financial crisis private capital flowed freely [to] Greece, Portugal and Spain”, and again completely ignoring the fact that these capital flows were actually much pushed by the dumb capital requirements for banks, “Why the Bundesbank is wrong”, April 11. 

No wonder Margaret Atwood can express so much bile against powerful uncontrollable and unaccountable private sector Gods of high finance, “Our faith is fraying in the faceless god of money” April 14. No one has cared to inform her that without the stupid bank regulations there would have been no market for those bad mortgages she rightly abhors. No one has cared to inform her that those who really played Gods, and with immense hubris thought themselves risk managers of the world, were the bank regulators, and who now, instead of being held accountable, for instance for Basel II, are in charge of producing its sequel Basel III, which, by the looks of it, will just dig us all deeper in the hole.

How naïve can we allow them to be?

Sir, Robin Harding reports that “IMF warns on threat posed by shortage of safe assets”, April 12, and it amazes me how an organization like that, and bank regulators, fail to understand that just defining an asset as “safe” starts eroding its safety. Has this crisis which resulted exclusively from obese exposures to assets officially considered as absolutely safe gone unsafe not taught them anything? 

Not only did the capital requirements for banks based on perceived risk create an artificial demand for safe assets but now they are stoking that fire when, for liquidity purposes, the “regulations are increasing the demand for safe securities from banks” 

It is truly scary how these experts can be so naïve. Not only do their regulations guarantee the dangerous overcrowding of any safe havens but also, if the demand for safe assets outstrips the supply, they should know the market will deliver Potemkin type safe assets… and that’s life! 

Again, an asset can only remain safe as longs as it is believed it could foreseeable turn unsafe!

What the financial sector needs to be stable is a lot of shake rattle and roll.

Sir, Paul Tucker, a deputy governor of the Bank of England holds that “Stability comes before the good things in life”, April 5. Wouldn´t he, typical bank nanny, many other would hold that stability, like in the grave, comes last in life. 

Jest aside, when he writes that the Financial Policy Committee should not use bank capital weights to try to steer the supply of credit to achieve other objectives than stability, as “this is not an exercise in economic or social engineering”, I would just ask if forcing risk-taking out of our banks is not just an exercise in economic engineering? 

The more you allow the economy and the financial sector to shake rattle and roll, the more stable and productive it will be. It is when regulating busybodies interfere, like with setting the capital requirements for banks based on risk, even though theses perceived risks have already been cleared for with interest rates and others… that they doom the banks to overdose on perceived risks and to end up with dangerous obese exposures to what is or was considered as absolutely not risky, like triple-A rated securities and infallible sovereigns, and with anorexic exposures to what is officially considered as risky, like small businesses and entrepreneurs.

More than a “brave” World Bank we need a World Bank that helps the world to be brave.

Sir, we sometimes hear about that “if the developed rich countries get a cold, the non-developed poor countries get pneumonia”. But what, when the rich countries get pneumonia? 

The regulators who based their capital requirements for banks based on perceived risks, even though theses perceived risks were already cleared for… caused a monstrous crisis by making the banks overdose on perceived risks, and end up with dangerous obese exposures to what is or was considered as absolutely not risky, like triple-A rated securities and infallible sovereigns, and anorexic exposures to what is officially considered as risky, like small businesses and entrepreneurs. 

As a result, at this moment, I believe it is more important than ever for the World Bank, as the world’s premier development bank, to remind the whole world, especially the rich developed countries, about the importance of risk taking and the dangers of excessive risk-avoidance. 

I say this because I am not really sure that Jose Antonio Ocampo is referring to this “brave” in his “My pitch to build a brave new World Bank”, April 5. 

I support the candidacy of Ms. Okonjo-Iweala, but I trust my former colleagues will make the best election based on the merits of all candidates, and Ocampo certainly has many, but, that is as long as Executive Directors remember that when doing that they are, according to the statutes of the bank, responsible as individuals… and so no hiding behind the skirt of “my government told me so” 

Ps. I just saw a letter signed by 100 economists supporting the candidacy of Jose Antonio Ocampo. These days though, it could be more prudent not mentioning the endorsement of economists, those who did little to nothing to prevent the crisis, and instead list the endorsement of 100 unemployed… as that could prove to be more significant

Don´t kill the eurozone dream just because bank regulators failed

Sir, Martin Sandbu is absolutely correct when in “Forget break-up: it just needs more parental love” april 3 he writes “It is not the euro’s fault that investors, policy makers and academics failed to spot the dangers”, though one of the current problems is that at most policy makers and academics do not want to acknowledge that.

When Sandbu writes about crazy capital flow that threw money at American house-buyers with no income or Icelandic banks with no experience or European sovereigns – he is referring precisely to those sectors which were subsidized by bank regulators, because their perceived risk of default was low. Had the bank regulators required the banks to hold as much capital/equity when lending to these as they required the banks to hold when lending to small business and entrepreneurs, some other crisis might have happen, but definitely not this one and definitely not one as large.

PS. Who did the eurozone in?

Yes, bank regulators must be held to account for the crisis

Sir, you are absolutely right in that “There has been no proper holding to account for the crisis” “Reckoning delayed is reckoning denied” March 17, as we have yet to see one single bank regulator parading down a 5th Avenue wearing a cone of shame. 

When the regulators allowed banks to hold extremely little equity when lending or investing to what was officially perceived as not risky, and thereby allowed banks to earn extraordinarily large return on equity, they doomed the banks to for them dangerous obese exposures to triple-A rated paper and infallible sovereigns, and equally for us dangerous anorexic bank exposures to what is officially perceived as risky, like to small businesses or entrepreneurs. 

You might be right in that Wall Street has closed ranks around Goldman against Greg Smith’s j’accuse, but you in FT have also closed ranks around the bank regulators, by silencing my over 600 j’accuse letters. Who knows, you might yourself be held to account for that one day!

Occupy the Basel Committee! http://bit.ly/dFRiMs

What we need to check is the bank regulators testosterone levels to see if it is sufficient.

Sir, I am not sure about the applicability to banks of Gillian Tett´s “Regulators should get a grip on traders´ hormones” March 16, since Mark Twain´s “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” would indicate that the testosterone level of bankers is far from being abnormally high. 

But what might behoove us is to test the regulators hormones. When these decided that even though banks were already clearing for perceived risks of default of borrowers by means of interest rates, amounts exposed and other terms, they should also consider those same perceptions for their capital requirements, they most definitely evidenced what would seem to be a severe case of lack of testosterone. 

As a direct consequence of the risk-adverseness of the regulatory nannies, we are now suffering from obese bank exposures to what was officially perceived as absolutely not risky, like triple-A rated securities and infallible sovereigns, and anorexic exposures to what was officially perceived as risky, like the small businesses and entrepreneurs.

Lord Turner and his regulatory colleagues are to blame for the current obesities and anorexics of banks

Sir, I refer to Brooke Master’s “Alert on ‘shadow bank’ where she reports on Lord Turner’s recent speech at the Cass Business School in London, and in which he blamed others for “Myopic risk assessment and the delusion of low risk investments”. 

As a regulator Lord Turner should be ashamed of himself. By means of their capital requirements for banks that use weights based on the perceived risk of default; a risk which has already been cleared for by the banks by means of interest rates amounts of loans or investment and other terms, the regulators guaranteed that the banks were to become obese on whatever was officially perceived as not risky, and anorexic on whatever was officially perceived as risky. 

Lord Turner should in front of cameras try to answer the following two questions: 

1. If banks already look at the credit information provided by credit ratings when setting interest rates, amount to lend and other terms, is it intelligent for the regulators to also look at the same credit ratings, or similar risk perceptions, in order to define the capital requirements for banks? Is that not overdoing the nanny part a bit too much? Could that not lead to a dangerous overexposure to whatever is officially deemed as absolutely not risky? Like for instance to triple-A rated securities and infallible sovereigns? 

2. And is not the whole idea of lower capital requirement for banks when the perceived risks are low just a quite dumb idea to begin, knowing, as we do, that big systemic bank crises never ever occur because of excessive exposures to what is believed to be risky, but that they always occur because of excessive exposures to what was wrongfully believed as absolutely not-risky? 

Occupy Basel! Bank regulators should be made to wear cones of shame http://bit.ly/dFRiMs

Deleveraging is so much harder on those officially deemed as risky

Sir, in a world of capital requirements for banks based on perceived risks, the banks achieve the most deleveraging by getting rid of what is officially perceived as risky. For instance for every 100 a bank currently drops of triple-A rated assets it will only free about 1.6 in equity, compared to the 8 in equity it manages to free up by dropping 100 of loans to small businesses and entrepreneurs. 

That regulatory discrimination, based on perceived risks, is absolutely indefensible since markets and banks have already cleared for that by means of interest rates, amounts at exposure and other terms. 

It is truly sad to read Martin Wolf´s “A hard slog in the foothills of debt” March 14, as well as the quoted Mc Kinsey report “Debt and deleveraging”, January 2012, completely ignoring the regulatory discrimination against those officially deemed risky, which was already present when leveraging, but is also now, by far, the ugliest facet of deleveraging.

Professor Stiglitz, why do you not come down to earth and have a look at the so mundane bank regulations?

Sir, Professor Joseph Stiglitz writes that “The American labour market remains in shambles” March 13. Of course, but how could it be otherwise! We are suffering under the thumb of thick as a brick bank regulators who give banks huge incentives to lend or invest in anything officially perceived as not-risky, like triple-A rated securities and infallible sovereigns, and to avoid like pest what is officially perceived as risky, namely those most important new job creators of all, the small businesses and the entrepreneurs. 

In various occasions I have with no luck tried to explain to Professor Stiglitz that excessive bank exposures to what was erroneously ex ante perceived as absolutely not risky, does not really match up with excessive risk-taking, but is more the result of an excessive regulatory induced risk-adverseness. 

Much of our current problems derive from the fact that for the aristocrats of economic, such as Nobel Prize winners, bank regulations are something very mundane, almost low class, and to be treated with the same importance given to an Ikea sofa assembly instruction.

When demand for risk-free bank assets outstrips the supply, banks will load up on Potemkin like risk-free assets.

Sir, David K. Richards in his letter of March 13 “Think again about higher bank credits” blames all bank problem on bad bank assets resulting from “slipshod credit analysis by the rating agencies, by regulators, by securities buyers and by the banker themselves. That is correct but completely ignores that slipshod credit analysis was doomed to happen. 

When the regulators allowed banks to buy triple-A rated securities or lend to “infallible” sovereigns against only 1.6 percent in capital, giving the banks the possibility of leveraging their capital a mindboggling 62.5 to 1, the demand for these assets grew so immense that the market, unable to accommodate that demand with real AAA rated securities or real solvent sovereigns had to, in good old Potemkin style, produce falsely triple –A rated securities and false solvent sovereigns like Greece.

More but also much less risk discriminating banking equity is what really serves us better.

Sir, Prof Anat R. Admati and Mr Neil M. Barofsky hold that “More bank equity serves us all better” March 8, and I would have to agree, unless that more bank equity only means more regulatory discrimination based on perceived risks. 

What would happen if regulators required the banks to hold 20 percent in basic equity but still kept the zero risk weight when lending to the infallible sovereigns that translates into a 0 percent capital requirement, or the 20 percent risk weight when lending to triple-A rated borrowers that obliges only 5 percent? The answer is that the lending to the “risky” small business and entrepreneurs that would require the 20 percent in capital would receive its final deathblow. 

When are the experts to ask themselves why regulators have to discriminate their capital requirements based on the risk perceptions that banks have already used to set interest rates, amounts loaned and other terms?

Bank regulations are possibly the biggest barrier to break through there is.

Sir, Robin Harding begins his “Barriers to break through”, a title which is very adequate to the theme, mentioning someone who wants to drive a taxi in Milwaukee, but that, in order to do so, has to, on top of the cost of the vehicle, pay $150.000 for the license, February 23. 

In precisely the same vein, though much less transparent, all those who are officially perceived as risky, on top of the higher interest rates they already have to pay banks because of that perception, need also to pay the bank an additional margin so as to produce a similar risk-adjusted equity return as those perceived as not risky. 

This is so because the regulator, stupidly ignoring that those perceived as “risky” have never ever caused a major and systemic bank crisis, only those perceived as absolutely not-risky do that, impose higher capital requirements on banks when they lend to the “risky” than when lending to the “not-risky”. And that, in terms of barriers to break through, is as big as they come.

The sad result is there to see. Banks have huge and dangerous overexposures to triple-A rated securities and infallible sovereigns and, equally or even more dangerous, underexposures to small businesses and entrepreneurs.

Do not allow regulators to hide behind “unintended consequences”.

Sir, where do you draw the line between unintended consequences and sheer stupidity? That is the question we should make after reading an article such as “The tough challenges to revive the global economy” written by George Osborne and Jun Azumi, the finance ministers of Britain and Japan, February 23.

Privileging bank lending to what is officially perceived as not risky, by means of extraordinarily low capital requirements, just had to create excessive and dangerous bank exposures to triple-A rated securities and infallible sovereigns. That I repeated over and over again, even while being an Executive Director of the World Bank 2002 -2004. So that should not be allowed to fall into the category of unintended consequences. 

It behooves us to hold regulators very accountable for how they regulate, most especially if they regulate on a global scale. In this respect we must see to that those regulators are not allowed to hide behind “unintended consequences”… or Black Swans for that matter.

The best bank regulator knows absolutely everything about banking… or nothing at all.

Sir, Patrick Jenkins, in “Bank of England needs more than a new governor”, February 21, comments on how much a governor might need to know about banking in order to understand the banks it will soon have to regulate. My answer is either all or nothing at all. Let me explain. 

If bankers knew what they were up to and their risk perceptions and risk models were perfect, then there would be no problems. Therefore the regulators should never ever bet the house on the bankers being correct, as they currently do with their capital requirements for banks based on perceived risk, but always prepare for the consequences of the bankers being wrong. 

And those best positioned to do so are either the ones who know absolutely nothing of the risk perceptions and risk models, and therefore do not want to have anything to do with these, or those who know everything about risk perceptions and risk models, and therefore also do not want to have anything to do with these. 

The truly dangerous ones are those who know a little about risk perceptions and risk models but who do not want to admit to any ignorance. In other words the truly dangerous bank regulators are precisely those we have.

Naïve trust was what caused Greece’s illness.

Sir, Tony Barber titles his article “Malignant mistrust threatens to be the death of Greece” February 18 and speaks about “the slow uncoiling of malignant forms of mistrust in Greek society”. 

Hello, where has Mr. Barber been! I have never ever known a Greek who has expressed trust in his government, has he?, and, if something really caused the death of Greece, that was the bank regulators’ incredibly naïve trust in Greece which they shown by allowing all European banks to lend to its government holding only 1.6 percent in capital. 

The Greeks meanwhile, knowing the Greeks never thought of doing something as stupid as lending to their government so much money at so low rates, and so instead they took a couple of hundred of billions Euro out of Greece and lend it among others to the German Government. 

And so now we have for instance German banks with billions of Greek debt, and Greek citizens with billions of investments in German debt which sort of leads us to the question of… who seem to be better off? 

The reason the Greece problem has not been solved, is not because Greece can’t pay, everyone knows that, it is because Europe is left holding the bag.

Who’s really shortchanging who in India?

Sir, David Pilling in “India’s ‘bumble bee’ defies gravity”, February 16, writes: “By selling the licences on the cheap, the telecom ministry is accused of shortchanging the exchequer to the tune of $39bn.” 

Indeed, but, one could just as well argue that if selling the licenses for $39bn more, the exchequer would then be shortchanging the mobile telephone users, to the tune of $39bn plus expected returns more in fees, and over a very long time. 

In other words the $39bn are equal to taxes collected in advance,to be paid by users that are not even aware of it, meaning something which is not an example of transparency. 

In other words the $39bn will have to be repaid at the rate of return required by the telecom investor, rather than at the usually lower interest paid by the government on its public debt, meaning something which is not an example of economic rationality.

The first lesson from Greece for the eurozone… the existence of loony bank regulators!

Sir, Martin Wolf asks “What does Greece…this small, economically weak and chronically mismanaged country…tell us about the eurozone?”, “Much too much ado about Greece”, February 15. 

Well, the first thing it clearly tell us, is that the eurozone banks have been in the hands of loony regulators… who allowed the eurozone banks to leverage with Greek public debt 62.5 to 1. Without it, Greece would not have been able to ramp up as much debt, no matter how bad and fraudulent its accounting. 

And the second thing it tells us, is that the accountability and good-governance within the eurozone is basically non-existent. It is basically the same regulators who produced the failed Basel II, which are now in charge of producing Basel III with only minor changes in the script, except of course for those regulators that have been promoted. There has not even been the slightest hint of the bank regulators having been Sarbanes-Oxleyed. 

PS. Europe, if doctors can be sued for malpractice, why can’t bank regulators?

There´s no reason for any risk-weighting of bank assets, after risk-adjustment has already taken place in the price and terms of these

Sir, Brooke Masters, your Chief Regulation Correspondent writes: “capping total leverage has a disproportionate impact on banks that provide basic services to the wider economy such as financing overseas trade. Because these are low-risk activities, they require very little capital under the risk-weighted-assets system, but under the leverage ratio they are treated exactly the same as high-risk derivatives and speculative loans.”, “Leverage ratio has the power to help banking tree thrive” February 14. Let me make the following comments. 

First, and as this crisis has so clearly proven, let us be crystal clear on the fact that “they require very little capital” does not by any means turn these into “low-risk activities”. 

Second, in terms of capital requirements, what is wrong with “low-risk activities” being treated “exactly the same as high-risk derivatives and speculative loans”? Have not the banks already cleared for differences in perceived risk by means of different interest rates, amounts exposed and other terms? It is precisely the double dipping into perceived risks, that have saddled our banks with excessive exposures to what is has officially been perceived as not-risky and created equally dangerous underexposures, like for instance in lending to small businesses and entrepreneurs, only because the latter have officially been deemed more risky by some wimpy bureaucrats. 

Basel Committee, please stop infantilizing our banks!

Greece’s infantilization is nothing when compared to that of our banks.

Sir, you write that the eurozone’s approach to help Greece has been to infantilize it, “Let Greece stand on its own feet”, February 11. This is absolutely correct and very worrisome but, why do you in FT insist on ignoring the much more tragic and serious infantilization of our whole banking system? 

In essence by means of the interest rate and the size of the exposure, grown up bankers should be able to act on what they perceive as the risk of default of borrowers without any interference. But, the regulators, in a sublime nanny-like effort to keep the banks out of trouble, imposed capital requirements which allow the banks to hold much less capital when the perceived risk are low than when these are high. 

As a direct result, we now have our banks drowning in dangerous excessive exposures to what was perceived as not-risky, like triple-A rated securities and infallible sovereigns (like Greece); and maintaining equally dangerous underexposure to what is perceived as risky, like in lending to small businesses and entrepreneurs. 

A Western world which has prospered because of its willingness to take risks is now shivering in fright and huddling taking refuge in whatever safe-ports are left… and these safe-ports are of course becoming more and more dangerously overcrowded.

FT wake up!

India, whatever you do, do not forget that risk-taking, not risk-aversion, is the oxygen of development.

Sir, Martin Wolf in “Crisis must not change India’s course”, February 8, would perhaps like to make clear to his green readers that when he writes “India can generate rapid growth by catching up on the world’s richest countries, almost regardless of the global environment” that it was not that “global environment” he was referring to. 

Wolf then recommends carefully watching the financial system and adopting the emerging global norms, because “Huge crisis may be socially manageable for high-income countries. They would be grossly irresponsible for a country like India”. I completely disagree. 

Global banking norms, which have emerged in the developed world, are designed to encourage banks to invest in what is not risky, completely ignoring the efficient capital allocation purposes of a bank, and that, though sad and not good, might be something acceptable for a high-income country that wants to hold on to what it’s got, is completely unacceptable for a poor developing country. 

A country like India cannot afford to forget that the cost of keeping its banks safe could be much larger than a bank crisis, because of all the developing opportunities foregone. Someone ought to have asked Mr. Wolf how his country developed and what banking norms were in place in his country before the current ones.

What is most appropriate, cones of shame or tarring and feathering?

Sir, in “Banks at risk” February 7, notwithstanding that you, at long last, write about the incestuous relations of banks with national government and admit that many countries see banking as an extension of the state, you mention only the taxpayers subsidies to banks, but ignore the immense subsidies governments collect, in terms of more public debt and at lower interest rates that what a free market would allow, as a result of being able to borrow from banks without generating, when compared to other borrowers, as much capital requirement. 

Current bank regulations, produced by our banking central planners, decided that the only thing that matters is that banks do not default, and this set our banks on the course of creating huge excessive exposures to what is officially deemed not risky, and to equally dangerous underexposures to what is deemed as risky. 

That our banks are now at risk? Ha! The whole Western world is at risk 

How are these regulators now best shamed, having them parade down Trafalgar Square wearing cones of shame, or would tarring and feathering be more appropriate.

We should also strip the Financial Times of its honorable motto

Stripping someone of his honorific title does seem to be a quite civilized way to shame those who seemingly have done society wrong… and society really needs to recover, urgently, some serious shaming powers. 

That said, in order for shaming to really work, it should not be seen as singling out someone to shame, like in the case of Fred Goodwin, especially when it is well known that others should be on the list.

Independently of what regulators say, the banks and the markets consider the perceived risk of default, such as that information contained in the credit ratings, when it sets the interest rates, the amounts and the other terms of a financial exposure. 

That is why, when the regulators decided to use the same information for setting the capital requirements for banks, they guaranteed an excessive bank exposure to what is officially perceived ex-ante as not risky, like the triple-A rated securities and infallible sovereigns, and an underexposure to what is officially perceived as risky, like lending to small businesses and entrepreneurs… and that was the primary cause of this systemic financial and bank crisis.

I have written literarily hundreds of letters to the Financial Times during the last seven years about this almost unbelievable mistake committed by the bank regulators, and these have all been ignored. Now, if truth is silenced, we should not be surprised to see many pseudo-truths prosper, which is one reason that banker bashing has achieved its current levels of popularity and why regulators have not even come close to being held to any real account.

Therefore I am of course in total agreement with Martin Dickson´s “The burn-a-banker frenzy is tempting – but wrong”, February 4, when he reminds us of perhaps also burning “those meant to police the credit system”. 

But, to that, I would also add the need of stripping the Financial Times of its honorable motto “Without fear and without favour”, since obviously its silence, can only be explained in terms of journalistic or media cronyism... which is a public bad.

http://www.teawithft.blogspot.com/search/label/subprime%20banking%20regulations

Let us hope we are not ordered to do or not to do something because of long term central-bank projections.

Sir, Charles Goodhart in “Longer-term central bank forecasts are a step backwards” February 2, writes: “If official predictions contain additional information beyond that implied by market forecasts of the term structure of short-term interest rates then well and good. If not, then all central bankers are doing is exposing that they are as clueless about the future as the rest of us.” 

That is correct, but at least a long-term central bank forecasts is, for now, not being pushed down the throat of a market which has already considered that information, like happens when the bank regulators, with their capital requirements based on perceived risk, and as primarily perceived by their outsourced official risk perceivers, the credit rating agencies, push that information again down the throats of the banks. 

But, who knows, any moment, someone could order us to do or not to do something based on those long-term central bank forecasts.

A market distortion error is much worse than a model error

Sir, as you might guess from my hundreds of letters to you over the last 5 years and which were ignored, I completely agree with Pro Johan Lybeck that we should “Forget Basel III and head straight for Basel IV” February 2. I have though two differences with him. 

When he suggests “fixed risk-weight for all assets, so as to eliminate “model error”, I much prefer the same risk-weight for all assets, so as to eliminate the much worse non-transparent market distortion error. 

The second difference is that he suggests that the changes in capital requirements should be implemented now, even though that could mean banks could be partially owned by the state because they cannot raise new capital in time. My suggestion is to allow banks to keep the original capital requirements on any assets booked previously, since there is no need to cry over spilled milk, and allow the banks to use whatever new capital they can raise for the new business we so sorely need.

Martin Wolf, it is the risk-taking austerity we’ve really got to be scared of

Sir, Martin Wolf writes that “Europe is stuck on life support” February 1, and concludes that only shifts in competitiveness between the members will give the latter the opportunity to survive disconnected. Who would not agree, the issue is how to achieve that. It starts by better understanding what caused this mess we’re in and, in that debate, much more important than discussing the dangers of fiscal austerity, is realizing the dangers of risk-taking austerity.

The banks, courtesy of the Basel regulations and the capital requirements based on perceived risk, have now all been painted into the corner of what is officially perceived as not-risky, and where of course any real shifts in competitiveness do not normally reside.

Take for instance Italy, in many ways it has survived in spite of its governments, and, nonetheless any European bank is currently required to have much more capital when lending to an Italian small businesses or entrepreneur than when lending to the Sovereign Italy.

Mr. Wolf, at this moment, much more than a Heinrich Brüning, who we really must fear, are the sissies in the Basel Committee, in the Financial Stability Board and in the UK’s own FSA.

How come the real flaw of Basel bank regulations is not even discussed?

Sir, Karel Lannoo, in “Rulemakers in Europe must flex muscles on Basel III”, January 31, gives a good description of many of the particular problems derived from the current capital requirements for banks, but is yet incapable of pinpointing the true core of what´s wrong with these… namely that regulators add their risk discrimination on top of the risk discrimination that already occurs in the market. But, of course, it is not only Mr. Lannoo, who fails to see that.

Recently John Reed, a former Chairman and CEO of Citicorp, a former Chairman of the New York Stock Exchange and currently the Chairman of the Massachusetts Institute of Technology's Office of Corporation, during an interview in a program of Bill Moyer titled “How Big Banks are rewriting the rules of our economy” said the following:

“It does not take a genius to see what happened … the presumption that you can capture risk by looking at historical volatility…. As soon as you say something appears not to be risky you get an overinvestment in it because the capital requirements are less, and then if something does go wrong the hurt is all the more because you do not have the capital to cover that risk”

But what does obviously not take a genius to see, even I saw it, and about which I have written hundreds of letter to FT, is something still totally ignored in the debate, and in the rewriting of the next Basel version. The useless and so dangerous capital requirements for banks based on perceived risks remain the main pillar of the Basel bank regulations. How come?

Ref: 17:40 to 18:15

http://billmoyers.com/episode/full-show-how-big-banks-are-rewriting-the-rules-of-our-economy/

Big time meddler Greenspan is no one to warn us about meddling with the market.

Sir, Alan Greenspan is one of those responsible for the regulations which require banks to hold quite a lot of capital when lending to small businesses and entrepreneurs but allow these to lend to the government against no capital at all. As such he is de-facto one of the biggest market meddlers of our time, and has no moral right to appear in the Financial Times preaching us with “Meddle with the market at your peril” January 26. 

As former chairman of the US Federal Reserve he must be aware that the whole world economy is flying blind, because of those capital requirements… like what would the rate on US treasury be if the banks had to treat citizens and government alike?

Crony journalism is also a public bad

Sir, in “The world’s hunger for public goods”, January 25, Martin Wolf holds that extreme financial instability is a public bad; and which presumably has to mean that correctly understanding the reason for it, should be a public good. 

Nonetheless, over many years now, the explanation that I give for the current crisis, as an individual who provided some of the clear and earliest documented warnings, even in FT, and which I thought I could make public through sending letters to FT, has been silenced. For what reasons, I do not know… but it could perhaps be explained in terms of crony journalism. 

Nonetheless, here is an explanation again, for the umpteenth time. 

If a banker after analyzing a borrower’s creditworthiness decides to limit the amount of the loan, and charge higher interests to compensate for the perceived risks, the borrower might try to renegotiate better terms, but he would not consider it unfair, as it would be the result of natural market discrimination. 

But, when bank regulators also force the bankers to further limit their loan to the borrower, and increase even more the interest rate charged, all because they require the bank to hold more capital when the officially perceived risks are higher than when they are low, as they do, then we enter into the world of the nannies, the world of artificial regulatory risk discrimination; which only leads to the kind of unfairness that exasperates the inequalities. 

As a result of this regulatory risk discrimination we now have a crisis of financial instability that threatens to take the Western world down; all because of excessive bank exposures to what is officially perceived ex-ante as not risky – for instance, triple-A rated mortgage-backed securities or “infallible” sovereigns and a growing bank underexposure to what is officially perceived as risky – for instance, lending to small businesses and entrepreneurs. 

The parents need to discuss this issue urgently with their financial nannies, before it is too late and the economy has turned terminally sissy and terminally unfair. 

PS. Occupy Basel! http://bit.ly/dFRiMs

PS. http://www.cityam.com/forum/holy-moly-banks-were-drugged-basel-s-rulebook

We are living dangerously in the land of officially declared safeness!

Sir Martin Wolf’s “Yet another year of living dangerously” January 25 would have benefited from the subtitle “in the land of perceived safeness”. The world has in fact been living extremely dangerous, ever since the Basel II rules were approved in June 2004, and which set of a frantic race for whatever assets were officially perceived as not risky and that, just because of that, required the banks to hold extremely little capital. 

Much of the global macroeconomic imbalances that Mr. Wolf obsessively insist on blaming for this crisis, were precisely financed by the fact that banks could lend or invest trillions against only 1.6 percent in capital or even less. 

To save the world from the current dangers, we need to get rid of the nannies in Basel and help our bankers relearn how to take real bank risks and not just regulatory arbitrage risks. 

For fixing finance, start by getting rid of the official risk-weights

Sir, when on markets´ and bankers´ natural risk adverseness, you stack on regulators´ risk adverseness, applying Basel risk-weights, you get too much risk adverseness, which naturally results in excessive exposures to what is perceived as not risky and equally dangerous underexposures to what is perceived as risky… precisely what has caused the current crisis. This is what unfortunately Mr. Martin Wolf cannot or does not want to understand.

When in “Seven ways to fix the system´s flaws”, January 23, Mr. Wolf calls for more bank capital, suggesting a leverage of ten to 1, he just ignores the fact that the higher the capital requirements, the larger will be the distortions produced by the perceived risk discrimination that result from the use of official risk-weights.

Don’t downgrade the rating agencies, downgrade the regulators.

Sir, already a couple of years into this crisis Philip Stephen shows a surprising lack of understanding of it, in his “Downgrade the rating agencies”, January 20. 

Suppose that human fallible credit rating agencies were able to produce absolutely perfect ratings, in terms of measuring the risk of default, and which are of course used by the banks to choose who to lend to, how much, and at what rate. 

But consider the fact that regulators imposed capital requirements for banks that were also based on the same ratings, and which functioned therefore like a hallucinogen, a veritable LSD; increasing the banker’s sensitivity to risk, so that he perceived a good ratings in a much brighter light, and a not so good ratings took on an even scarier appearance. 

As should have been expected by any independent regulator, not part of a incestuous group-think, the consequences were: 

A growing excessive bank exposures to what is officially perceived ex-ante as not risky, like the triple-A rated securities and infallible sovereigns, leading to a dangerous overcrowding of the safe-havens and; 

A growing bank underexposure to what is officially perceived as risky, like in lending to small businesses and entrepreneurs, equally dangerous, because of the lost opportunities to create the next generation of jobs for our grandchildren. 

So again it was not primarily the rating-message’s fault it was the fault of those who ordered how those rating-messages were to be read. Downgrade those regulators! 

Occupy Basel! http://bit.ly/dFRiMs

We do not need banks avoiding risks we need banks taking the right risks.

Sir, Vikram Pandit in his comment on “Capitalism in crisis” January 11 rightly refers to the capital requirements for banks set by the regulators based on perceived risk of default as a (arrogant) presumption of “clairvoyance no regulator can posses”. I totally agree with that, but then he suggests bettering the system by having the banks comparing the risk profile of their assets with some “benchmark” portfolio created by the regulators. 

Ha! What would have happened in the building up of the current crisis? Those banks that had held the most of ex-ante triple-A rated securities and of infallible sovereigns would have certainly compared great against the benchmark, and be rewarded for that, but could then have been among those who turned into the worst nutcases when the ex-post realities set in. 

And, if the banks already now shy away way too much from taking on the real risky but rewarding prospects we need them to take, such as lending to the small businesses and entrepreneurs, they would do more so, if subject to a new sort of “neutral” measurement tool. 

Mr. Pandit and Mr. Regulator, we know you are looking to the safety of the banks, but, we other humans need to look at the safety of our economy and the prospects of creating jobs for our grandchildren, and neither capital requirements based on perceived risk nor a “benchmark” portfolio has anything to do with that… on the contrary these just make our prospects so much dimmer.

Capitalism is in crisis, being attacked by regulators!

So capitalism is in crisis? Analysis, January 9. Would golf not be in crisis too if the handicap officers assigned more strokes to the good players than to the bad? Would horseracing not disappear if the bad horses had to carry more weight than the good? What would you say about a government that on top of the higher premiums the unhealthy pay, proposes to also tax them because they are riskier? 

The banks are of vital importance for how capitalism functions, and Mark Twain reminded us with his the lending of an umbrella when the sun shines and taking it back when it rains, that bankers might be too risk-adverse. If they were that before, well now they are that a hundred times more. 

Because now, thanks to our ingenious bank regulators, for a bank to finance 100 dollars of what is officially perceived ex-ante as risky, it needs about 8 dollars in capital, but, to finance100 dollars of what is officially perceived ex-ante as not risky, it needs only about 1.6 dollars. 

Which means that when a bank lends to what is officially perceived ex-ante as risky, it can earn the risk and cost adjusted margins of those loans about 12 times for each dollar of bank capital, but, when lending to what is officially perceived ex-ante as not risky, it can earn the risk and cost adjusted margin of those loans more than 60 times for each dollar of bank capital. 

The natural consequence of such stupidity, is that the lending to what ex-ante is officially perceived as risky, like the lending to entrepreneurs and small businesses, is in relative terms made much less interesting for the banks, while the lending to what ex-ante is officially perceived as not risky, like the triple-A rated and infallible sovereigns, is given extraordinary incentives. 

And so the perhaps most important and dynamic participants of capitalism, the small businesses and entrepreneurs, are either not getting bank loans, or having to pay much more for these, all while, what is ex-ante officially perceived as absolutely safe-havens, and therefore already easily attracted cheap funds, are now, ex-post, turning into dangerously overcrowded havens. 

A byproduct of such stupidity is of course also that an allowed bank leverage of more than 60 times, serves as the most potent growth-hormone for the too-big-to-fail banks and of the too-big-to be-decent banker bonuses. 

What to do? Let capitalism be capitalism. Capitalism discriminates sufficiently on its own based on ex-ante perceived risks, so as to need further assistance from the excessively worried nannies in the Basel Committee for Banking Supervision.

More of this in the video

Has FT just turned into an Occupy Wall-Street extremist?

Or are you just expressing pent-up jealousy about banker’s bonuses? 

In “Restoring faith in the banking system” December 29 you write “Prior to the crisis, bankers garnered great fortunes by loading individuals and companies with excessive and unnecessary debt, or by churning investment portfolios to extract transaction fees.” Frankly, what on earth does that have to do with causing the current crisis? 

We are not in a mess because of the banker having made to much money on that! We are in a mess exclusively because the bankers built up excessive exposures to what was ex-ante officially perceived as not risky, like triple-A rated securities and “infallible” sovereigns; and that happened exclusively because silly regulators allowed the banks to do so against very little or no bank capital at all. If you want to search for the source of income which originated immense bankers’ bonuses, then look no further than to the outrageous leverages allowed for some assets. 

How on earth will the Western World be able to restore its faith in the banking system with editorials like this which seem to indicate that our only possibility is to sit down and wait for the new good bankers?… like waiting for a New Soviet Man. 

Want to restore faith in the banking system? Throw out those who produced Basel I and II, instead of allowing them to concoct an even more dangerous Basel III. 

PS. You write “The asymmetry of risk and rewards in banks has led to poor outcomes for society” and I must ask, what about the information asymmetry powers you exercise in favor of the opinions of those you want to favor? Do we have to occupy FT too? 

US, and the Western World, is becoming “the home of the risk-adverse”.

Sir, I, as most humans, am extremely risk-adverse, and that is why I have always appreciated the role of designated risk-takers that the banks perform for the society. We cowards were used to worry our bankers were too cowards to, with their lending of the umbrella while the sun shines and taking it away when it rains. But then came the bank regulators and with their capital requirements that discriminate fiercely based on perceived risks made it all so much worse. 

Martin Wolf comments on the “Great Stagnation” by Tyler Cowen of George Mason University, December 21. What they both fail to identify is that requiring banks to have a lot of capital when the perceived risks are high, and allowing them to hold minuscule capital when the perceived risks are low, stacks the returns on bank equity against what is perceived as risky. And that has nothing whatsoever to do with what made “the Home of the brave” big. The US is now, as is most of the Western World, becoming the Home of the risk-adverse. 

Not taking risks is about the most dangerous things a society can do… as the only thing that can result from that is the overcrowding of the ex-ante safe-havens

Nothing ‘creative’ about destruction of lending to start-ups

Published in FT, December 14, 2011

Sir, Ed Crooks writes that start-up businesses are crucial for creating US jobs but their dwindling birth rate is stalling hopes of recovery "Cycle of 'creative destruction' loses momentum to start-ups", Is America working? December 13).

Lending to start-ups, as something perceived as “risky” for the banks, even though its absence would of course be much riskier for the world at large, requires a lot of that bank capital that is so scarce now; especially after the regulators allowed the banks to lend to what was perceived as not-risky, with little or no capital at all.

In Schumpeterian terms, one can say that bank regulators are engaged in simple and plain vanilla destruction.

The Western World is in a freefall, and no one is discussing the reason why

Simplified, if the cost of funds for a German bank was 2 percent; if it wanted to earn a 1.5 percent margin; if the cost of analyzing the credit worthiness of a German small business was 1 percent; and if the risk that the borrower would default was perceived as 3 percent, then the German bank would charge the German small business an interest of 7.5 percent. 

And if the cost of funds for a German bank was the same 2 percent; if it wanted to earn the same 1.5 percent margin; if the cost of analyzing the credit worthiness of Greece was zero, because that is paid by Greece to the credit rating agencies to do; and if the risk that Greece would default was perceived as 1 percent, then the German bank would charge Greece an interest of 4.5 percent. 

If the German bank was required to have about 8 percent in capital against any loan, and could therefore leverage its capital about 12 times, the bank could expect to earn 18 percent on its capital when lending to a German small business or when lending to Greece. 

But that was before the bank regulators of the Basel Committee intervened and messed it all up. 

These regulators, ignoring the empirical evidence that bank crisis never occur because of excessive exposures to what was considered risky but only because of excessive exposures to what was considered as absolutely not risky, with their Basel II, told the banks “You German bank, if you lend to a “risky” German small business you need 8 percent in capital, but if you lend to an infallible Greece you only need to have 1.6 percent in capital”. 

And because that 1.6 percent allowed for a leverage of more than 60 times when lending to Greece, the German bank, though it still could earn a decent 18 percent on its capital when lending to a German small business, suddenly could expect to earn 90 percent on its capital when lending to Greece. Hell, the German Bank could even afford to lower the interest rate it charged Greece and still earn more when lending to Greece than when lending to a German small business. 

And of course the German bank, as did all banks in the Western world, started running to the officially perceived safe-havens of Greece, Italy, Spain, triple-A rated securities and others, where they could earn much more; and of course the governments of the safe havens could not resist the temptations of cheap and abundant loans, and all these safe-havens became dangerously overcrowded… while the small German business found it harder and much more expensive to access any bank credit… and while the too big to fail banks grew even bigger.

And, many years into a crisis that has the Western World in a freefall, this issue is not even discussed, and the same failed bank regulators are allowed to work on Basel III, using the same failed loony and distorting ex-ante perceived risk of default based capital requirement discrimination principle.

Hell, even the Financial Times has decided to ignore the hundreds of letter I sent them about it, and this even when they know they published two letters of mine that clearly warned about what was going to happen. In January 2003, “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds” and, in October 2004, “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? 

Occupy Wall Street? No! Occupy Basel! (Perhaps occupy the Financial Times too!)

PS. This post was made before I realized that the reality was even so much worse because, instead of applying to Greece the 20% risk weights Basel II would have ordered EU authorities assigned Greece a 0% risk weights and so European banks, when lending to Greece did not have to hold any capital. How crazy is that?

PS. At the end of the day the EU authorities kept total silence about their mistake and blamed Greece for it all. No solidarity. What a Banana European Union.

The blame lies squarely with the regulators not with the credit rating agencies

Sir, Quentin Peel in “Agency’s debt warning provokes angry response” December 7, reports that Christian Noyer the president of Banque de France held that “the rating agencies were one of the motors of the crisis in 2008. 

Mr. Moyer should know better, the motor of the crisis, were the ridiculous low capital requirements for banks allowed by his regulating colleagues in the Basel Committee based on the credit ratings, as if these were infallible and as if doing so would not incentivize the growth of dangerous exposures to what was ex-ante perceived as not risky. 

In January 2003, while being an Executive Director of the World Bank, the Financial Times published a letter where I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”. But it looks like Mr. Noyer and his colleagues did not know that!

We were thrown back into the Dark Age... by the Basel Committee

Sir, Tony Jackson’s “Why talk of a coming Dark Age is a touch overdone”, December 5, reminded me of Peter L. Bernstein who in Against the Gods (John Wiley & Sons, 1996) wrote that the boundary between the modern times and the past is the mastery of risk, since for those who believe that everything was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. 

Ironically, we might now be thrown back into the Dark Ages, because of bank regulators who thought themselves Gods, and assigned minimal or even zero percent risk weights, those used when determining the capital requirements for banks, to what they thought were the infallible, the triple-A rated and the solid sovereigns.

Europe, the Basel Committee should and needs to be blamed for the crisis.

Sir, Wolfgang Münchau goes to the core of the European issue when he writes that its leaders’ narrative, which reduces the crisis to a failure of fiscal discipline, is probably the underlying reason why all their crisis resolutions efforts have failed so far”, “France and Germany look set to fudge it yet again”, December 5.

Indeed, had the European leaders understood two letters that I wrote and were published by FT, the narrative would be quite different, in fact Europe could perhaps not even be facing this crisis.

The first letter, January 2003 said “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”. The second, October 2004, “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector [sovereigns]?

From the content of those two letters it is easy to understand that no matter what intrinsic and real problems the eurozone has and no matter the natural fiscal indiscipline of politicians in general, Europe would not have faced this crisis had the bank regulators in Basel known better.

PS. Who did the eurozone in?

Small and frequent tremors might help to keep the big one away.

Sir, Roger Altman concludes “We need not fret over the omnipotent markets” December 2, with “There may be more frequent market crisis. We should not rush to conclude that they will end in tears”. I would word it differently, the more frequent the market crisis, the less the probability it will end in tears. 

In May 2003, as an Executive Director of the World Bank (just 1 of 24) I made the following comment at a workshop for bank regulators at the World Bank: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises. Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size” 

In my country, Venezuela, when it trembles just a little, many of us applaud, because we feel that small tremors might help to keep the huge ones away.

Right or wrong should not be a calculated risk.

Sir, John Gapper should be congratulated for clearly opining that “Judge Rakoff is just doing his job”, December 1. Judicial deal makings, aka settlements, introduce risk calculations in matters of what is right and what is wrong, that can rot even the strongest society. 

I just wish there would also be a Judge Rakoff out there who would be willing to question the right of the regulators to place a layer of arbitrary discrimination of those perceived as “risky”, on top of the natural market discrimination that already exist against them. In other words, what constitutional right do regulators have to decide that a bank needs to hold substantial capital when lending to a citizen, but needs no capital at all when lending to an infallible sovereign?

What the IMF should tell the Basel Committee

Sir, Martin Wolf in “What the IMF should tell Europe” November 30, writes “Fiscal indiscipline did not cause this crisis. Financial and broader private sector indiscipline, including by lenders in the core countries, was even more important.” Again, Martin Wolf refuses to acknowledge that most of that “indiscipline” was caused by the incestuous group-think that afflicted bank regulators and made them come up with truly senseless regulations. He should consider that his call for “ruthless truth-telling” applies to him too. 

What I would urge the IMF to use its portent voice for at this moment is to instead of advising Europe advising the Basel Committee, telling it:

"You allowed the banks to lend to ´infallible sovereigns´ and ´super-safe´ triple-A rated privates with little or no capital at all, and, as a result, the monstrous exposures that turned safe-havens into dangerously overcrowded havens were generated... But now is not the moment to make up for all the capital that should have been in place when banks booked their assets, not when the risks were discovered… and so allow all the banks to keep their current exposures backed with whatever bank capital was originally required from them… so to permit that all new bank capital is not to fill holes but can be used to back new operations… but which all have to meet the same basic capital standard no matter what the ex-ante perceived risk is.”

Baloney Mr. Chan! What the Western World most needs is to free their banks of their stupid regulations.

Sir, I know that the current crisis, and that has until now mostly affected the Western World, was primarily caused by the bank regulators who innocently thought they were doing us a favor, by creating artificial incentives for the banks to generate dangerously excessive exposures to what they officially perceived as “not-risky”, like the triple-A rated securities and “solid” sovereigns, while, equally dangerously, hindering the banks to attend to the credit needs of the “risky”, the small businesses and entrepreneurs. This the regulators did by means of their silly capital requirements for banks based on ex-ante perceived risks of default of borrowers. 

That is why I truly feel upset when, silencing my voice, you allow Ronnie Chan the space to argue that “The west is now in many respects too free”… and that perhaps the United States might be better off leaning more towards China’s ways, “The west is in danger of frittering away its freedom” November 15. 

What a baloney! What the west most needs is to free their banks from their current regulations. If the United Sates does collapse and therefore China does not collect it investments or can export more to it, I wonder where Mr. Ronnie Chan would prefer to be… in the United States or in China? I know for sure where I would like to be and I also hope those in the Financial Times are clear on that too.

Yes, ease the rules on small business loans, by eliminating the regulatory discrimination against these.

Sir, Patrick Jenkins and Brooke Masters on November 12report that Andrew Haldane, the Bank of England’s executive director of financial stability opines that “regulations that potentially constrain lending to small businesses should be eased [made less capital intensive] when the economy is suffering”. That is a marvelous opening for someone like me who has been for more than a decade clamoring to eliminate the regulatory discrimination against small businesses, though I would of course want that to happen at all times and not only when the economy is suffering. 

Andrew Haldane, with much honesty also says “At present [the risk-weights] are calibrated to the risk of a bank. In future they need to reflect returns to society”. Yes Mr. Haldane that is what they should have done all the time. 

What is really sad though is to read a senior regulatory specialist at a global bank saying “You can’t just change risk weightings at whim because what really matters is that risk is priced correctly”… this specialist, as most other specialists, has still not been able to figure out that you cannot price risk correctly when different risk-weights are imposed on different assets… and that is what have us all now drowning in the ocean of the ex-ante perceived as not at all risky assets.

Can we get us some good and courageous technocrats please!

Sir, Tony Barber writes “Enter the technocrats” November 12, and that could be good unless of course it is the failed technocrats who are entering… and frankly most of the European and American technocracy, in the area of finance, have failed miserably. 

Technocrats who never understood, and still fail to understand, that the risk-weights used for determining the capital requirements for banks that based on ex-ante perceived risk of default, were layered on top of the banker’ own risk-weights, which drove the banks to create dangerously high exposures to what is officially perceived as “not-risky”, are not worthy being called technocrats… no matter how revered they are in Brussels. 

At this time, when we all need the risk-takers to work for us, they are being choked by the lack of access to bank credit… just because these failed technocrats believe them to be risky. Come on, these were the regulators who believed sovereigns to be safe! Are we still supposed to blindly follow their courageous calls for entering their land of no-risks? 

These wimpy technocrats –bureaucrats, who demonstrated even less courage than many politicians, and who are in fact more responsible that most politicians for this crisis, do not seem to be the leaders we now need!

FT, I dare you!

FT, I dare you, following your motto “without fear and without favour”, to mark to market the bank regulators, like you so valiantly do with fallen Berlusconi in “Public Liability”, November 12. 

For instance, how many billions in lower interest did the regulators subsidize governments with, by allowing banks to hold zero or minimal capital against loans to their solid sovereigns? How much of the excessive sovereign debt is the direct result of such regulatory bias? How much bank lending to “risky” small businesses and entrepreneurs did not happen because these had to pay higher rates to make up for not being treated equally favorable?

In November 1998 in an Op-Ed titled “Burning the bridges in Europe” and that had to do with the fact there was no route out of the euro I wrote “That the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive.” 

That Op-Ed clearly shows that I predicted what is now happening, but, what I was not aware of at that time, because I am neither a banker nor a regulator, was that the bank regulators were going to impose such a sick and really communistic capital controls in favor of their governments. Shame on them!

The rawest deal women entrepreneurs get in access to bank loans has nothing to do with their gender

Sir, Noreena Hertz writes that “Women are getting a raw deal in business and in finance” November 10, and bases that opinion on a study about the differences between women and men in terms of access to bank loans. She holds that if there was to be less discrimination more women entrepreneurs would be able to help out the economy, and she also makes reference to the possible legal consequences for the lenders.

She might be right, but, whatever discrimination women entrepreneurs are subject to because of their gender, pales in comparison to the odious arbitrary regulatory discrimination they are subject to because they are officially perceived as “risky”, and therefore the banks are forced to hold many times more capital when lending to them than what they are required to have when putting their money in triple-A rated instruments or sovereigns.

Since the “risky” are already discriminated against by banks in terms of interest rates, amounts, maturities and much other, the above amounts to layer a discrimination on top of a discrimination… something akin to asking the banks to hold more capital when lending to women.

If Noreena Hertz really wants to help she should first aim at the regulatory discrimination and once that idiocy dis taken care of, then she might perhaps request banks to be required to have somewhat less capital when lending to women, to compensate for the remaining discrimination.