January 28, 2010

Without understanding the regulatory arbitrage one cannot get the real measure of the banks

Sir John Gapper in “Volcker has the measure of the banks”, January 28, quotes Viral Acharya, a professor at New York University’s Stern School, saying that “the crisis was caused by a ‘general underpricing of risk’ that led many banks into taking on more trading and investment risk to boost their returns”.

“Underpricing of risk”... by the banks? No! Who really underpriced risk were the regulators when they allowed the banks to hold less capital when “holding triple-A mortgage-related derivatives”, and which thereby artificially increased the returns of these assets. In other words the banks were receiving what they perceived as good returns only because of regulatory arbitrage.

I am truly amazed how, now soon two years into the crisis, some experts can still not see what some of us knew was going to happen, before the crisis happened. Without understanding the role regulatory arbitrage had in the crisis, forget about Volcker, Acharya, Gapper or anyone else getting a grip on any real measure of the banks.

January 26, 2010

First reform the regulators!

Sir I agree fully with Martin Wolf when in “Volcker’s axe is not enough to cut banks to size” January 26m while referring to the latest reforms of banks proposed by Obama presumably upon suggestions of Paul Volcker deems these to be “in important respects, unworkable, undesirable and irrelevant to the task at hand.”

As Wolf implies, what seems to have been ignored is that huge financial losses can cause huge economic damage independently of whether the government has guaranteed them or not… and so having some small capable of failing banks surviving when a huge shadow sector, formal or informal, goes bankrupt, can also provide for calamitous economic effects and in fact even create similar fiscal problems if tax bases are eroded.

The number one golden rule financial regulators should apply is that of “doing no harm” and that was exactly the golden rule regulators violated when, with their silly capital requirements for banks based on risk, they empowered too much some few human fallible credit rating agencies to presumptuously serve as the global experts on risks… which caused the world to go over the lousily awarded mortgages to the subprime sector cliff.

The proposed reforms do nothing to solve the problem above; which evidences that the first and most urgent reform that is still required is the reform of the regulators. Throw out the current bunch of them! We cannot afford having the needed reform of the financial regulations hijacked by those wishing to hide their blame in causing the crisis.

January 22, 2010

Regulations should not confuse the market.

Sir you say in “A declaration of war on Wall Street”, January 22, “The government’s key policy lever should be to make sure that institutions hold enough capital to reflect the risks that they run and the threats that they pose to the rest of the financial system.”

You are right about “enough capital” but very wrong when you expect these “to reflect the risks” because that is exactly how you drag the regulator into the type of risk discrimination game that provided the wrong set of incentives by artificially increasing the attraction of the AAA rated instrument and which led to the current crisis.

Set a general capital requirement for all type of activity of banks, which could fluctuate somewhat depending upon where in the economic cycle we find ourselves, and then let the market act upon that. Do not allow the regulators to confuse the market with their risk discriminations.

Other financial reforms are much more needed than rebuilding of Glass-Steagall styled walls.

Sir “Obama’s bank plan is a start” by Viral Acharya and Matthew Richardson, January 22 though describing in much detail the “highly geared bet on credit, especially tied to securitised pools of residential non-prime mortgages” misses out so completely on putting forward the two main causes for the disaster that one almost become suspicious about the intentions.

First, the explosion of the “securitised pools of residential non-prime mortgages” happened because those securities achieved AAA ratings and what can be better than to sell long term high interest mortgages as AAA safe investments. A 30 year 11 percent mortgage of US$ 300.000 if sold to yield 6 percent is valued at US$ 510.000 providing a US$ 210.000 immediate profit.

Second, for the banks to hold these AAA rated securities on their books they had, courtesy of the regulators to put up only 1.6 percent in equity, compared with the 8 percent of equity required when lending to small businesses, entrepreneurs or ordinary citizens. No wonder that “When the market and liquidity risk materialised as a result of the collapse of housing prices, they had no capital cushion to bear it”

And what have those causes for the disaster have to do with “the lack of Glass-Steagall-style restrictions”? Almost nothing!

And now I can’t find the link to this article!!!???

January 21, 2010

International coordination is not necessarily good coordination

Sir Gillian Tett writes “during the past few months, dozens of faceless bankers and bureaucrats have been scurrying around, in joint international committees, trying to hammer out regulatory solutions to matters such as bank structure, capital charges or derivatives regulation. And as they have done this dull, complex work, their guiding mantra has been the need to act in a coordinated fashion”, “Pitchforks take on Terminators”, January 21.

But the world does not need dozens of faceless bankers and bureaucrats hammering out dull and complex regulatory solutions in closed smokeless rooms. That is exactly why they can concoct such utterly silly ideas like allowing banks to hold only 1.6 percent in equity just because a credit rating agency opines someone is worthy an AAA rating, and by this effectively authorize 62.5 to 1 bank leverage.

If it is this kind of international coordination that might be endangered by the politicians, then this can only be a welcomed evolution. Just let us make sure the pitchforks go after the Basel Committee, the producers of the financial “Terminators”.

January 19, 2010

The eurozone is heading towards a marriage of convenience... at gunpoint

Sir Martin Wolf’s “The Greek tragedy deserves a global audience”, January 19, makes it perfectly clear that, with respect to the eurozone, its members now face having to make a more profound commitment... or get off the pot.

It will be interesting to observe how it will all play out and though I prefer not to lay any bets on any outcome, if I absolutely had to do so, it would be on first Greece defaulting and thereafter the rest will scramble to enter a marriage of convenience... at gunpoint. You see the fact that “stuff happens” is not worth that much until the stuff has really happened.

January 18, 2010

The real riggers were the regulators and perhaps now the taxman

Sir Philip Stephens in “How the big banks rigged the market” January 18 considers that the reason for the huge profits of some banks is that “they have been operating as natural oligopolies”. Given that much of the strength of the most profitable banks did derive from favourable regulations, the term unnatural oligopolies might describe better what really happened, in which case the real riggers were the regulators.

And let us also remember that one of the largest sources of profitability over the last years has been that of packaging high risk loans and, with a little help of their friends the credit rating agencies, selling them off as low risk loans, and this has really nothing to do with how the market is structured.

To now try to correct for the above by imposing taxes on the banks, sounds like rigging it also in favour of the taxman. The real question we have is... when will the banks be rigged in favour of the economy growth they are supposed to assist us with? Never?

January 15, 2010

We need a new morning, before darkness sets in!

Sir Gillian Tett holds that “Deleveraging out of the debt mire will be an unsavoury task” January 15 mostly because “it remains a very open bet whether western voters will accept austerity without a backlash”.

Good for her, that kind of opinions are exactly those needed in order to start to prepare a debt resolution plan that makes sense for future generations... since what least makes sense is to hang on to something unsustainable just because that is the right thing to do. Anyone proposing the "hang on and let’s work it out" route should first establish how much of a tax on his wealth he is willing to contribute for such a dignified purpose.

The value of a clear morning no matter the storm during the night should not be underestimated. I would prefer my children to work for their tomorrows than to pay for our yesterdays. And if the young find some resources to take care of us baby-boomers then that would be a much welcomed and appreciated bonus.

Who puts obscenity limits on the taxman’s bonuses?

Sir in “Obama attacks ‘obscene bonuses’” January 15 it says that the President pledges “to recover every single dime the American people are owed” from the government support given to the banks.

Sounds fair, but unfortunately he will not be recovering those amounts from those who made the money on the crisis, that’s long gone now, but from the future depositors and borrowers who will have to pay for it all by means of receiving lower returns and paying higher interest rates.

Our banks should be efficient financial intermediaries, not fiscal cash-cows, and the government should collect its taxes only from the final economic growth that banks have helped to foster. It is indeed worrisome to see how, instead of correcting the regulatory actions which has helped the banks to generate monstrous margins the taxman seems more set upon participating in the feast.

Iceland’s puts no end to this type of sagas

Sir I agree with Martin Wolf that having to pay for the Icesave cost the way it has been presented by the British and the Dutch governments is extraordinarily onerous and should not be imposed on future generations of Icelanders, “How the Icelandic saga should end” January 15.

Unfortunately I do not believe that the easier way out that Wolf hint at mentioning paying 90 percent of that money with the assets of Landsbanki is feasible as I am sure there has to be many other creditors lining up for the same purpose.

If I was Iceland, I would not try to solve something insolvable and would mostly at this moment just buy time, in the certainty that Iceland’s recent financial saga will soon be just another saga among many other similar tragic sagas.

No one likes being told they are laggards

Sir Joshua Chaffin reported on January 15 that Günther Oettinger, Germany’s nominee for the European Commission concluded from what happened in Copenhagen during the discussion on climate change that the European Union isn’t big enough for ‘world authority’. Nonsense, even a butterfly has influence if it knows how where and when to flap its wings.

In order for Europe to gain more influence in environmental matters it needs to get rid of that we are greener than thou and besserwisser attitude because the rest of the world, when trying to open up a space for the environment in the midst of so many other urgent main-street problems, surely must find it quite fastidious always being told by the Europeans that they are irresponsible laggards in being green.

When Oettinger is then quoted saying “We need a paradigm shift and to explore solar, wind, ‘smart grids’ and other alternative sources of energy” in my mind he is just proving my point. Climate change needs to be fought with more sturdy global tools and not only with European toys.

January 08, 2010

How do we make sure there is no hanky panky?

Sir in reference to your “Apocalypse later” January 8 may I draw your attention to a recently released Consultative Document by the Basel Committee titled “Strengthening the resilience of the banking sector”. This document in my opinion evidences that the regulators refuse to assume their responsibilities or to accept that their regulatory paradigm of different capital requirements for different “perceived risk” is utterly faulted, and keep on digging us ever deeper and deeper in the hole of us mortals understanding less and less about how our banks are regulated.

Among other the document states that “The Committee is introducing a global minimum liquidity standard for internationally active banks”. This would mean that this category of banks will now have a different set of updated regulations that will imply they are especially safe and so these banks will most certainly need to pay less for deposits and equity, and so these banks will now enter almost formally belong to the “too super big global banks too impossible to fail”.

Sir, how on earth is the world at large supposed to make sure that no hanky panky is going on between the now too super-big banks and the too global and too little accountable to anyone Basel Committee?