December 29, 2011

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? 

December 21, 2011

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

December 13, 2011

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”, 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.

December 12, 2011

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.

December 07, 2011

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!

December 05, 2011

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.

December 02, 2011

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.

December 01, 2011

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?

November 30, 2011

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.”

November 15, 2011

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.

November 14, 2011

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.

November 13, 2011

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!

November 12, 2011

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!

November 10, 2011

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.

November 09, 2011

But the misalignments turned monstrously large only because they were financed.

Sir, Martin Wolf in “thinking through the unthinkable” November 9, quotes Thomas Mayer of Deutsche Bank saying “below the surface of the euro area´s public debt and banking crisis lies a balance of payments crisis caused by a misalignment of internal real exchange rates”.

Yes, the misalignment of the real exchange rates within the eurozone were always in the cards, but the main reason for why they could grow so out of proportion was the fact that it could be financed… and the foremost cause of that were the truly stupid regulations which allowed the banks to finance European sovereigns against little or no capital at all.

I would presume Martin Wolf has many friends among regulators, while I have none, but nonetheless he should have used his column long ago to ask… is it rational to allow banks to finance for instance Italy and Greece, or any sovereign, against basically no capital at all? Had he and his colleagues done that, then perhaps Europe would have had a better chance to nip the current crisis in the bud.

I would be scared too by Michel Barnier…and by Sir Mervin King.

Sir, Alex Barker in “Barnier vs the Brits” November 9, writes about the fears of Sir Mervin King in that Brussels reforms will reshape a vital British industry, banking, to the benefit of eurozone rivals. Would that not be a case of plain vulgar under-the-table protectionism?

I do not know much about the competitive aspects of UK banks but, I would indeed be frightened if the banks of my country were to be even partially supervised by someone who when going to Washington D.C. presented in a brochure, as a success story of his office: “A French citizen complained about discriminatory entry fees for tourists to Romanian monasteries. The ticket price for non-Romanians was twice as high as that for Romanian citizens. As this policy was contrary to EU principles, the Romanian SOLVIT centre persuaded the church authorities to establish non-discriminatory entry fees for the monasteries. Solved within 9 weeks.”

And, if an owner of a small business or as an entrepreneur, classified as “risky” by the regulators, and in need or want of bank credit, I would also be scared witless by someone who even after the world has gotten itself into such enormous difficulties by the excessive bank exposures to what was ex-ante officially deemed as absolutely not-risky, during a conference in Washington, insisted on that his responsibility as a regulator is simply to avoid excessive risk-taking… but, come to think about it… so does also UK´s Sir Mervin King opine. Help!

November 05, 2011

In the name of Europe, America and the Western World, you of the Basel Committee go!

Yes, you wrote to Berlusconi “In the name of God and Italy go!” November 5 and I do not object to even one comma.

But, in the same vein, I would tell all bank regulators even loosely associated with the Basel Committee “In the name of Europe, America and the Western World go! Their treacherous risk avoidance gospel they preach to our banks, if allowed to continue, is going to take Europe, America and the Western World down.

November 02, 2011

And what about the long overdue challenging of the idols of global bank regulations?

Sir, when reading Rowan Williams, the Archbishop of Canterbury’ “Time for us to challenge the idols of high finance” November 2, I cannot but regret he did not include the need to also challenge the idols of global bank regulations. 

These regulators, more than anyone, because of their capital requirements based on ex-ante perceived risk of default, are the most to blame for a world that is sinking dangerously fast, in the overexposure to what was ex-ante perceived as not risky, like AAA rated securities, Greece and many more sovereigns; and the underexposure to those perceived as risky, the small businesses and entrepreneurs. 

If instead of analyzing the pro and cons of a financial transaction cost they had analyzed what those regulations mean to the downtrodden “risky”, in terms of additional burdens, and in terms of gifts to the already favored “not-risky”, they might have understood the real inequalities that are present in the banking system and prioritized their petitions better.

Risk-avoiders can huff and puff but they depend on risk-takers.

Sir, Martin Wolf’s “Creditors can huff and puff but they depend on debtors” November 2, is a great expose on the Janus-faced realities of deficits and surpluses, and also of the too-much-lending and the too much borrowings. 

I just wish Mr. Wolf, and so many with him, could get to understand that precisely the same relation exists between safety-and risk-taking. If the world does not take risks it will not be safe. On the contrary by interfering with their risk-weights based on what they perceived as not-risky they pushed the world into one of the greatest economic crisis ever. 

There is something fundamentally wrong when, for instance a UK bank, is required to have 8 percent in capital when lending to a UK small businesses or entrepreneur, but is (or at least was) allowed to have only 1.6 percent when lending to a sovereign rated like Greece was, which has absolutely nothing to do with the credit rating of Greece being correct or not. 

It really amazes me that Mr. Wolf does not see that risk-avoiders can huff and puff but they depend on risk-takers.

October 31, 2011

More than how the credit ratings are determined, it is how these are used that is important.

Sir, Gene B. Phillips makes some very common sense comments on the proposals in Brussels concerning credit ratings and the credit rating agencies. “Don’t see rating agencies all as one” October 31. That said both Mr. Phillips and all those in Brussels fail completely to identify the most important changes that need to occur, with respect to how those ratings are used by the regulators.

The first is that regulators should concern themselves more with the fact that credit-ratings could be wrong, instead of betting it all, as they have done with the capital requirements based on perceived risk, on the human fallible credit risk raters being correct.

Second, the regulators should have no business using the credit ratings to play risk-managers for the world, by means of assigning the risk-weights that determine the effective capital requirement for banks. Instead they should concern themselves more with how the bankers act and react to the credit ratings.

If the regulators had done that, they would not have placed us in the hole we now are in.

October 29, 2011

Even in very shallow waters one finds regulatory arbitrage

Sir, Gillian Tett in “Baggy surf shorts, ´top freedom´ and the greater cover up” October 29, seems be confessing having engaged in regulatory arbitrage when admitting that she never wore bikini tops in the UK but rarely wore bikinis tops in France”. 

Since Gett, when reporting, seems to be quite happy in general with the rulings of the Basel Committee for Banking Supervision, and this even when those regulations have resulted in serious “malfunctioning”, I wonder whether she might be suggesting we could benefit from a Basel Committee on Beach Dress Code. 

Indeed, that could put some global order on this delicate issue? But also, and from a pure tourism competitiveness point of view, is it really fair that some beaches allow nudity and others do not? I know, I hear you loudly, it depends on the quality of the nudity, but still, could this not be an issue for WTO?

October 28, 2011

Mr. Obama. Does no one inform you about what is happening?

Sir, I read President Barack Obama’s “Now for a firewall to stop Europe’s crisis spreading” October 28, and it makes me wonder about who is supposed to inform the US President about what is happening, as obviously he is not. 

The financial fire started with the AAA rated securities backed with lousily awarded mortgages to the subprime sector, which had become too popular with the banks because, as these were officially perceived as not-risky, they could be purchased against only 1.6 percent in capital, which allowed therefore the banks to leverage their equity 60 times and more, something which of course must sound pure music for the ears of bonuses recipients. 

When that “not-risky” AAA was discovered to be very-risky, the banks had to immediately look for other officially “not-risky” and where they for instance found Greece, and swamped it with credits until Greece also drowned. 

And so now they are looking for new officially “not-risky” borrowers, who they can lend to without much scarce bank capital being required. Therefore, in the current fire, the flames are jumping from one officially-“not-risky” tree to another officially-“not-risky” tree and the last standing officially-“not-risky” tree will presumably be the US dollar and US public debt, but once the flames reaches there, it will also burn. 

The only way to start building a firewall, or to rebuild what has been burned already, is to allow banks to lend to the officially-“risky”, like those small businesses and entrepreneur s and which, as a class, have never ever been the cause of a systemic bank. Mr. President may I humbly remind you of that when the going gets risky, we need so urgently the risky risk-takers to get going.

October 26, 2011

Mario, for God’s sake, cut off the gas

Sir, Martin Wolf calls out “Be bold, Mario, put out that fire…” October 26. And I would call out “Mario, for God’s sake, first cut off the gas”. 

The capital requirements for banks based on perceived risk and the scarcity of bank capital is forcing banks out of anything that is becoming perceived as more risky and into what, for the time being, is still perceived as less risky. This is making the financing of the already perceived as risky so much more difficult while at the same tome creating the excessive exposures that will finally turn the last standing absolutely not-risky into the mother of all risks. Mario Draghi… or whoever… this gas that feeds the fire needs to be cut off, immediately.

On a side note since Martin Wolf writes “The capital to protect the European banking system from big defaults by important sovereigns simply does not exist” I cannot refrain from asking and whose fault is that? Could the regulators who allowed the banks to lend to sovereign against basically no bank capital have anything to do with that?

October 25, 2011

We do not need bold stability, we need bold risk-taking!

Sir, Barry Eichengreen and Raghuram Rajan in “Central banks need a bigger and bolder new mandate” October 25, write “Financial stability must become an explicit objective of central banks, along with price stability” and I just must ask… what is so bold about that? 

The authors also opine the world has been rethinking bank regulations to make economies more stable and that has clearly not been the case. Basel III like Basel II is built upon the pillar of capital requirements for banks that discriminate based on ex-ante perceived risk and it was precisely that which caused this crisis by means of giving the banks those fabulous incentives that led to the buildup of so dangerous excessive exposures to what was ex-ante perceived as not risky. 

No what we need is bold rethinking which starts by asking Central banks and bank regulators to dare to tell us what they believe the purpose of our banks is… since nowhere is that to be found. 

The Western World became what it is based a lot on the willingness of banks to take risks… and especially when the going gets to be risky as now and we need our risk-takers, like small businesses or entrepreneurs to get going, we cannot allow some nannies to turn our banks into veritable wimps in the name of some misunderstood quest for stability.

We are better off with free market vigilantes

Sir, George Soros plan to save the eurozone, October 25, includes for the banks “to take instructions from the ECB on behalf of governments” and “installing inspectors to control risks banks take for their own account”… so that “markets will be impressed”. 

Has Soros gone mad or is he just a communist? Are we supposed to be impressed by our banks being supervised by those who authorized these to leverage their equity more than 60 to 1 when lending to Greece… and now complain about the downgrading of the credit ratings of sovereign? 

Oh no, I think we are much better off with free market vigilantes.

PS. If you have not seen it, here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue!

October 24, 2011

Is it not time for Euro II?

Sir, Wolfgang Münchau, in “How Europe is now leveraging for a catastrophe” correctly paints scenarios so horrendous we wish we all were just having a nightmare. 

What if we could wake up and find a Euro II, with all European governments, Germany included, having given their creditors exactly the same haircut, for instance 40 percent, and used the excessive hair-cut in some countries, to compensate for the insufficient haircut in others. 

Why not? The bank regulations that allowed European banks to lend to Greece against only 1.6 percent capital, an authorized leverage of 62 to 1, and which of course pushed to create Greece’s excessive debts, were not just a Greek idea but a shared European one. 

And if thereafter Europe helps to avoid a repeat… like for instance requiring bankers to put up exactly the same capital when lending to a European sovereign as it has to put up when lending to a European small business or entrepreneur… could we all not wake up, hurting a lot, but at least looking forward immediately to a better future?

October 22, 2011

Should Lord Turner have the right to throw the first stone?

Sir in your “Sustainable banks” October 22 you refer to a speech by Lord Adair Turner in which the chairman of the Financial Services Authority referred to the need for more transparency and less opaque pricing in banking. Right so, indeed… but is Lord Turner the right person to throw the first stone? 

The banks, when lending to those officially perceived as less-risky, like for instance Greece was perceived to be, were allowed to hold much less capital than when lending to those officially held as “risky”, like the unrated small businesses and entrepreneurs in the UK. 

How much in extra interest rates, or in less access to credit, have the small businesses and entrepreneurs have had to pay because of that? Fortunes! Has Lord Turner been transparent about that? 

Has Lord Turner been transparent about the fact that these misguided capital requirements, based on ex-ante perceived risks, are to blame for the current dangerous excessive exposures of banks to what was perceived ex-ante as not risky… and which might even have been turned into risky, precisely because of that regulatory nanny like anti-perceived-risk bias? 

PS. In case you need some reminders, here´s a video that explains a small part of the craziness of our bank regulations, in an apolitical red and blue!

October 21, 2011

Mr. Daniel Tarullo, first, stick to your area!

Sir, according to Robin Harding and Michael MacKenzie, in “Fed urged to weigh new moves to boost economy” October 21, Daniel Tarullo, whose “main area of focus is banking supervision and regulation rather than monetary policy” refers to that the US Federal Reserve “should consider large-scale purchases of mortgage backed securities if the economy does not improve”. 

As most of these securities have already seen their values adjusted in the market, I cannot see what good that would do… unless it is part of a huge plan of restructure all the underlying mortgages in accordance of their market value, not something totally senseless, but that would certainly require a major administrative effort and the consideration of moral hazard. 

Much easier it would be for Mr. Tarullo to concentrate on his area and push, for instance, for the immediate drastic reduction in capital requirements for banks, when lending to any business with total liabilities, for instance, below a level of 10 million dollars. That would be a good way to start alleviating the damages done to all small businesses and entrepreneurs by the fact that bank are allowed to lend to others perceived as not-risky, with much lower capital requirements. 

PS. In case you want more details, here´s a video that explains a small part of the craziness of our bank regulations, in an apolitical red and blue!

Hollywood would never have allowed Basel III after the Basel II magna flop

Sir, Kishore Mahbubani writes “Now we know that bankers produced no economic value. Instead they produced financial weapons of mass destruction that almost destroyed the world… European bankers… ignoring common sense… lent money to Athens on the assumption that Greece was as solvent as, say Germany”, “To become rich is great but to pay taxes is glorious”, October 21. 

That shows precisely what happens when the whole truth is not allowed to surface. It was the bank regulators who, when they allowed the banks to leverage differently their equity, by means of capital requirements based on ex-ante perceived risk, Basel II, which created what I have called the AAA-bomb… a truly massive weapon of mass destruction. 

It was those regulations which allowed banks to stock up on Greek sovereign debt against only 1.6 percent capital, a leverage of 62.5 times, while at the same time forcing banks to hold 8 percent when lending to small businesses or entrepreneurs, a leverage of 12.5 times, which gave the incentives to created the huge exposures to where all bank crisis occur, namely where the risk is ex-ante perceived as almost non-existent. It was those odiously distorting regulations that short-circuited the markets… and still keeps these from functioning. 

And because this is silenced, we allow the same producers of the failed Basel II, to produce Basel III, with only minor changes in the script. Friends, Hollywood would never allow such a thing. No, to be able to hold bank regulators accountable, that is what would be really glorious.

Even the most perfect monetary union would not withstand what attacked the Europe and the Euro

Sir, Steve Rattner holds with respect to Europe that “today’s crisis is structural… stemming from the euro’s flawed design. “Look to America for lessons in sharing currency” October 21.

The same week the euro was launched, in an Op-Ed, I predicted all the problems that could arise, with one notable exception. What I did not predict was the possibility of having bank regulators allowing the banks to leverage 62 times, at least, when lending to the European Sovereigns. And that my friends, is an attack that not even the most perfect monetary union could have defended itself against. 

To honestly recognize that is a must, in order for Europe to understand that it was not really the Euro or Europe which failed, to avoid the self-doubts, so as to be able to regain the confidence necessary to move the Euro and Europe forward.

October 19, 2011

The Basel bank reforms are just the continuation of a failure

Sir, Brooke Masters, while reporting “Countries fail to enact Basel bank reforms” October 19, writes: “Basel II is seen as having contributed to the 2008 banking crash by allowing banks to understate risk and hold too little capital against unexpected losses”. 

“Allowing banks to understate risk”? What is she talking about? If you read the risk-weights assigned by the regulators in the Basel II documentation you would find, for instance, a risk-weight of a mere 20 percent for a sovereign rated like Greece was during its build up of public debt, and which allowed banks to hold only 1.6 percent in capital when lending to Greece, and which therefore allowed the bank to leverage their capital 62 to 1 when lending to Greece. It was, without any doubt, the regulators who understated the risks! Don’t let them get away with that! 

It is also reported there that the “risk-based structure remains an essential tool of the stricter Basel III framework which includes higher capital requirements”. I do not want to be a party pooper but, let me remind you that the stricter and higher the basic capital requirements for banks are, the worse the dangerous distortions produced by the discriminating risk-weights. 

That some countries fail to enact the reforms is not that surprising, since what’s really incredible is that so many of these allow the same producers of the utterly failed Basel II to produce Basel III, while keeping the same script faults.

To stand a better chance of a sunlit future, we must pour sunlight on the truth.

Sir, Martin Wolf in “There is no sunlit future for the Euro” October 19, writes with respect to the banks holding Greek debt, “Fools who lent money, without asking questions, deserve to share in the pain.” That is undoubtedly true, but not focusing with the same impetus on the role of the regulations in building up Greece’s excessive debt, impedes the truth from coming out. The fact was that during the whole period of Greek debt buildup, banks were authorized, by Basel II, to leverage their capital 62.5 times to 1 when lending to Greece. That meant that banks were able to make immensely higher risk-adjusted returns on equity when lending to Greece as compared for instance when lending to a European entrepreneur; and that mean that Greece was required to pay lower interest than would have been the case without that regulatory interference with the market. 

Why do I after hundreds of ignored letters to the Editor of FT about this, insist on sending them. Simply because I know that the basic level of capital requirements for banks had nothing to do with this crisis, it was the specific capital requirements after the risk-weights that caused it. You might find a solution to a problem without knowing its real cause, but, it is so much easier when that real cause is recognized. So let us start by pouring sunlight on that! 

Wolf makes sensible suggestions for the increase by governments of the capital of banks. But, lowering the capital requirements for banks, especially when these are very high given the current scarcity of bank equity… could provide the same results. I am indeed curious as to why Wolf, who supports increased fiscal spending, even in light of huge public debt and enormous deficits, does not support allowing the banks to do their lending job easier.

October 12, 2011

A market adjusted very risky sovereign debt could be less risky than an AAA-rated sovereign debt.

Sir, Patrick Jenkins, Ralph Atkins, Peter Spiegel and Alex Barker in their “Europe’s banks face 9% capital threshold” write that according to the European Banking Authority’s board of supervisors, “banks should be made to raise their core tier one capital ratios – the key measure of financial strength even after absorbing write-downs on the value of their sovereign debt holdings.” 

Here are two questions: Should the credit rating be the same for a debt acquired at its nominal value of 100% than the credit rating of that same debt for someone who acquired it after for instance it has been discounted in the market for the credit risk to be worth only 50 percent? Or, could not a BBB rated debt acquired at 50 percent be safer than an AAA rated debt valued at 100 percent? 

In answering them, you will understand why the bank regulators have placed us in a hole and why they only keep digging us deeper in it. 

You can have the regulators measuring the risks, not recommended, or you can have the market doing that, but, what you cannot do, under no circumstances is to use and add those both measures simultaneously, and expect to obtain something reasonable. 

October 10, 2011

Stefan Ingves, defends a bank leverage of 33 times to 1. Why?

Brooke Master reported on October 10 that Stefan Ingves, the new chairman of the Basel Committee for Banking Supervision said: “It all boils down to capital ‘the ultimate brake’ If you don’t have enough simple common equity you will run into problems… If one looks at banking systems running into troubles, you almost always find ex-post facto that there was too much leverage”. On that we all agree. 

But then, ipso facto, Ingves says, “I find it hard to argue that you would need to go above leverage of 33 times”… and I, as a tax-payer, as one of the ultimate picker-uppers, or at least as a grandfather to one, must ask, why on earth that high? Why not 12 to 1 for example? 

If Stefan Ingves wants to defend a 33 times bank leverage he is of course in his right, but the least we can do is to ask him to explain the purpose of that. Is it so that banks can help us to create jobs? In that case would it then not be better to reserve that bank lending power for the small businesses or entrepreneurs, instead of wasting it on those perceived ex-ante as having no-risk and who, almost by definition, must be the largest suppliers of those dangerous “unexpected losses” he speaks of?

Or could it just be that the whole purpose of our banking system has been reduced to have banks making profits? If it is so, how vulgar of the regulators.

October 09, 2011

Jean Claude Trichet (and Mario Draghi) should not to be condoned by FT

Sir, you hold that “Trichet leaves Europe in his debt” October 8, as the responsibility for “reckless bank lending”, “rests largely with national politicians and policymakers”, and I must most firmly disagree. 

Jean Claude Trichet, as the President of the European Central Bank, must have been much more aware than the politicians of the existence of the outrageous bank regulations which allowed European banks to leverage 62.5 to 1 and more their equity when lending to almost any sovereign in Europe or investing in triple A rated securities… and he should be held accountable for that, something which equally applies to the incoming president of ECB Mario Draghi. 

If you harbor any doubts about what I am saying, just go back to the hundreds of articles between 2008 and 2010 where your own reporters spoke of the banks having reasonable leverage ratios, completely fooled by the zero and 20 percent risk-weights applied by regulators and that was hiding humongous risky bank exposures.

September 17, 2011

And what about the elite of rogue regulators?

November 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”… and so they did! 

The bank regulators decided that banks were to be allowed to leverage their capital much more when earning the risk-adjusted interest rates from those perceived as “not-risky” than when earning those same interests lending to those perceived as “risky”, which caused trillions of dollars in losses from investments in AAA rated securities collateralized with lousy awarded mortgages, and the trillions of dollars in excessive bank exposure to the “not-risky” sovereigns that are blowing up all around us. 

John Gapper writes about “A revolt against the risks of elite international finance” September 17, but, among the international elite, he fails to include the rogue regulators and who, by keeping their risk-weighting in Basel III, arrogantly keep on playing the role of risk managers for the world.

September 14, 2011

Mr. Regulator, tear down this Basel wall

Sir, John Kay writes “Without ringfencing it will soon be a case of ‘here we go again’, September 14. May I suggest that instead of thinking about ringfencing, we should be thinking more about tearing down walls. 

Basel bank regulations built a wall that, with its capital requirements, arbitrarily discriminates in favor of what is dangerously perceived as “not-risky” and against what wimpy regulators consider the dangerous “risky”. 

This wall drove the world to a crisis, by means of generating excessive bank exposures to what was ex-ante perceived as “not-risky”, and is stopping the world from getting out of it, by making it harder to enlist the help of the “risky”, the small businesses and entrepreneurs. 

Therefore, for the benefit of the future, Mr. Regulator, tear down this Basel wall!

September 12, 2011

Basel regulations should be anathema to “the Land of the Free and the Home of the Brave”

Sir Tom Braithwaite and Patrick Jenkins report that JPMorgan chief says bank rules are “anti-American”, September 12. Jamie Dimon is more right than he probably knows, and, also, the anti-Americanism of Basel regulations, started long before Basel III. Just consider the following: 

By allowing banks to leverage more their capital when earning the risk-adjusted-interest-rate from those perceived as “not-risky” than when earning the same rate from those perceived as “risky”, regulators introduced a silly and unproductive risk-adverseness that is not compatible with “the Home of the Brave” 

Allowing banks to leverage immensely more their capital when lending to sovereigns like the USA government, than when lending to American small businesses and entrepreneurs, is communism, and absolutely not compatible with “the Land of the Free”

The Vickers Report, like the Basel regulations, would benefit from defining the purpose of banks.

The current crisis was caused, almost entirely, by regulators arbitrarily setting risk-weights which allowed banks to lend or invest in sovereigns and what was triple-A rated with truly minuscule capital, 1.6 percent or less. As the Vickers Report keeps the notion of capital requirements based on risk-weighted assets, it does not protect against what it needs to protect.

Here is a question that I dare John Vickers and his colleagues to answer. Why should banks be allowed to leverage their capital more when earning their risk-adjusted-interest-rates from what ex-ante is perceived as the “not-risky”, than when earning these from the “risky”? Does that not mean that the “risky”, like the job creating small business or entrepreneurs, will then need to pay the banks higher interest rates than would otherwise have been the case without regulatory intervention? Or vice-versa that the “not-risky” will benefit from lower interest rates than the market rates? 

It is high time to stop thinking in terms of “buttressing the banks” and start thinking in terms of “buttressing the role of banks in the economy” For instance, is not the risk of an economy without jobs for our youth much riskier than having some banks failing?

September 09, 2011

Getting rid of the regulatory discrimination against the “risky”, that’s what the world most needs to boost growth.

Sir, it is sad indeed when in Timothy Geithner’s “What the world must do to boost growth”, September 9, more than 3 years after the crisis started, we still do not read a word about the importance of eliminating the arbitrary regulatory discrimination against bank lending to job creating small businesses and entrepreneurs, and which is all based on the utterly silly notion that these borrowers are more risky.

September 03, 2011

But how can we sue the devil who tempted?

Sir in “Suing the banks”, September 3, you write “Those who made the mortgage mess should be accountable”. Indeed, and so I ask, where can we sue the guiltiest of all, the bank regulators? 

The regulators, by permitting the banks having minuscule capital, only 1.6 percent, when lending or investing in what was ex-ante perceived as “not-risky” and had managed to hustle up a triple-A rating, offered the apple that tempted the market and doomed us to this mess. Without it there would never ever have been such a demand for those lousy mortgages.

August 21, 2011

“No ordinary man could be such a fool”

My daughter Alexandra, an art fanatic, on hearing my explanation about the mistake of the Basel Committee pointed me to “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings. Boy was she right! 

In that book Dolnick makes a reference to having heard Francis Fukuyama in a TV program saying that Daniel Moynihan opined “There are some mistakes it takes a Ph.D. to make”. And he also speculates, in the footnotes, that perhaps Fukuyama had in mind George Orwell’s comment, in “Notes on Nationalism”, that “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

And that comprises about the most appropriate explanation I have yet seen so as to understand why our bank regulators were able to commit their huge mistake that got us into this financial and economic crisis that threatens the Western World. No “ordinary man” would have told his children to beware about what he knew his children were afraid of, and stimulated them to go more where they wanted to go as it seemed safe… which is precisely what the current capital requirements for banks do when they are quite sizable whenever the perceived risk of default is high and small or even inexistent whenever the perceived risk of default is low. 

And then, just like to force down our throats, Dolnick writes “Experts have little choice but to put enormous faith in their own opinions. Inevitably, that opens the way to error, sometimes to spectacular error.” All of which now leaves me with the problem that also “no ordinary” FT reporter can come to grips with believing that experts could be such fools.

August 13, 2011

What brain made bank regulators commit their so expensive mistake?

Sir, Gillian Tett in “The unmasking of our inner reptiles in times of crisis” August 13, writes about Professor Andrew Lo, of MIT segmenting our brains in the reflexive “reptilian”, the emotional “mammalian”, and the rational “hominid”. Tett also quotes Peter Atwater with respect to that a present “sense of insecurity is fostering a wider, longer term shift towards ‘narrow’ horizons.

Our bank regulators, by focusing too much on bank borrowers’ current credit ratings, without caring a iota about what such excessive focusing could imply for the banks’ medium and long term exposures, clearly regulated using a very ‘narrow’ horizon. There is no doubt that such an expensive error must have sprung out from a deep sense of insecurity but, what is not entirely clear is, what brain of the regulators was responsible for it, the “reptilian” or the “mammalian”, as the “hominid” was clearly not.

When the going gets risky, the risky should get going!

Sir in your “Financial markets at their wit’s end” August 13 you hold that in the midst of all turmoil “credit market stayed relatively robust. Much sovereign debt in fact rallied”. 

Currently banks facing scarcity of regulatory capital are forced to go where the capital requirements are the smallest. If you want to call that something related to a robustness of the credit markets I guess you have not asked the opinion of those bank borrowers whose access to bank credit is being severely curtailed because lending to them requires a lot of that capital. 

It is vital for the economy that the natural risk-takers, the “risky” small businesses and entrepreneurs, have access to bank credit in competitive terms, and that it is not monopolized by those belonging to the regulatory “safe” franchise, the sovereigns and triple-A rated. Any levelheaded regulator would, in an emergency like this, long ago have reduced substantially the capital requirements for banks when lending to the “risky”, instead of sometimes even allowing a very risky zero capital when lending to some of the “safe”.

August 12, 2011

Why would cash-rich investors need bank intermediation?

Sir, Gillian Tett wonders why “Faced with a choice between betting on the safety of US government, or its banks, cash rich large companies and asset managers are choosing the former”, “Cash-rich investors are choosing crazy Treasury” August 12. 

What kind of silly question is this? Since the banks in these days of scarce bank capital would just turn around and also choose “crazy Treasury”, because that does not require any capital of them, why would cash-rich investors need intermediation?

When are you going to wake up that via bank regulations which favor public borrowing over any other kind of borrowing we are being embraced by communism? And, by the way, FT’s silence on all this is very suspicious to me.

August 05, 2011

Europe´s single market is not worth the Western World going down.

Sir, would you design an economic package that included a tax on small businesses and entrepreneurs to be used to subsidize a job creation program run by the government or the interest cost of triple-A rated companies? Of course not, but this is precisely what the bank regulators have done, by discriminating the capital requirements of banks based on the ex-ante perceived risks of default and which have already been cleared for by the markets.

That stupidity messed up the whole interest rate signaling system, creating excesses in public and triple-A rated debt and bank credit scarcity for the “risky” but most dynamic participants. The result is a crisis that we cannot get out of, without scrapping completely those bank regulations.

And so to read Jonathan Faull the Director General of the Internal Market and Services of the European Commission defending Basel III, with arguments like that any criticism of it amounts basically to sabotage against Europe´s single market, makes me angry, to say the least. “Brussels strikes right balance on bank rules” August 5. 

I have always supported Europe´s single market but if that requires having to live under obstinate and dumb bureaucrats who can topple the whole Western World, then the price for it is much too high.

August 04, 2011

America, though undeserving, should remain a triple-A

Sir, Roger Altman in “Why America deserves to stay a triple A” August 4, argues as if a triple-A rating has something to do with a pure absolute and objective risk-free reality. Of course it hasn´t, and it can never thought have been meant so... except perhaps by some truly in the “In God we trust” minds. 

The reason why America, though quite undeserving, should remain a triple A is that if America is downgraded, all other countries would then also have to be downgraded, and the credit rating agencies would have to start adding letters to classify the bottom. 

July 28, 2011

Even the safest haven could become dangerously overcrowded

Sir, Richard Milne’s “Beware of safe havens when seeking next financial crisis” July 28, makes reference to the truth that “Risky assets do not cause crises. It is those perceived as being safe that do” and to the immense regulatory bias in favor of the “not-risky”, especially the good sovereigns and the triple-A rated, and against the risky, like the small businesses and entrepreneurs.

(Mr. Milne must know, because of the emails he has received, that those arguments is part of the criticism that, at no irrelevant personal cost, I have for many years voiced quite lonely about the bank regulations that came out of Basel II. In this respect I must say that I am indeed surprised and disappointed that he makes no reference to that in his article. Had I been a PhD from his own Alma Mater, he would not have dreamt of ignoring me.)

His analysis is quite accurate and so I guess the cat is out of the bag. How on earth can the bank regulators explain what they did pushing dangerous “safe assets” and, especially, how can they defend that they mostly want to insist in doing just the same?

That said the article fails to point out the real fundamental mistake committed by the regulators and which is that they blithely ignored the fact that the markets already clear for the safe-haven perception when it sets the risk adjusted interest rate. And so, when the regulators also based their capital requirements for banks on exactly the same safe-haven perception, they turned what is a natural and reasonable pursuit of a safe haven, into an unnatural and unreasonable stampede in search of a safe and profitable haven… and even the safest haven can turn into mortal traps, if they become overcrowded. Milne mentions “Follow the debt” as to where investors should be looking for trouble. I have since 2003 told regulators “Follow the AAAs” as to where the next bank crisis will be.

Milne quotes Professor Geoffrey Wood of Cass Business School calling the “push by regulators for banks to own sovereign debt” as “premeditated theft”, but in my AAA-Bomb blog I have for a long time called that sheer communism.

Finally what Milne also fails to point out, perhaps because the implications are so frightening is that, given that huge regulatory bias in favor of sovereign debt, we really do not know what the underlying real interest rates of public debt are… and so we are in fact flying blind with dysfunctional instruments.

July 27, 2011

Alan Greenspan, silently fade away, please

Sir, Alan Greenspan writes “Had banks and other financial entities maintained adequate equity capital-to-asset ratios before the 2008 crash, then by definition no defaults or contagion would have occurred as the housing bubble deflated…. Bank management, currently repairing their flawed risk management paradigm…”, “Regulators must risk more to push growth” July 27. What on earth is Greenspan talking about? 

If the regulators, like Greenspan, had not decided that the capital requirements for the banks were to be set in accordance to the perceived risk of default of each individual asset, then those triple-A rated securities backed with lousily awarded mortgages to the subprime sector, and which in essence became to coffin of the housing bubble, would not even have existed. 

Of course any safety buffer comes at a cost, but also, if that cost is not shared equally, the final real cost could go up exponentially. In this case the regulators, by discriminating against those perceived as “risky”, like the small businesses and entrepreneurs, have, just like the Lilliputians tied up Gulliver, effectively tied up the Western World in an arbitrary and defeatist risk-adverseness, and that we must urgently break away from. 

Greenspan, as the other regulators, after what they´ve done and in much are still doing, have no right to sermon anyone about the need of risk-taking. He, for his own good, should just do as old soldier are said to do… silently fade away, instead of hanging around trying to impose on history their version of their Basel-Waterloo. I hold this because in order to understand the real need for risks, you have to be able to understand the real dangers of risk-aversion.

July 25, 2011

The “arbiters under fire” should be the bank regulators.

Sir, unfortunately, Aline van Duyn and Richard Milne, in “Arbiters under fire”, July25, fail to clearly identify the reasons why the current bank regulations based on credit ratings are so utterly wrong and make a decoupling such an urgent matter. Those reasons are in short the following: 

1. The market already considers the credit ratings when setting the risk premiums for a borrower which means that also using the same ratings when setting the capital requirements for banks give these ratings an exaggerated weight. Any information, exaggeratedly considered, is made wrong even if originally right. 

2. Regulators do not need to be concerned with credit ratings being right they should only worry about these being wrong. In this respect designing capital requirements for banks that are based on the credit ratings being absolutely right is absolute madness. 

3. Heisenberg´s uncertainty principle coming into play… the more precise you try to measure the creditworthiness of a borrower the more you might affect that same creditworthiness. 

4. The more you try to assure yourself the credit rating agencies perform their duties right, the more you are bound to trust them and consequentially the more fragile will the resulting financial system be. 

I am and have never been a bank regulator, but March 2003, in a published letter to the Financial Times 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”. Those arbiters who should really be under fire are the bank regulators.

July 22, 2011

The Dodd-Frank Act stays stubbornly on the wrong course towards the regulators no-risk Utopia.

Sir, Barney Frank writes in reference to the Dodd-Frank Act that “it allows financial institutions to perform vital of accumulating capital and making it available to the productive elements in our society, while minimizing the likelihood of irresponsible practices that contribute little to productive economic activity”, “We are on course to stop a new financial crisis” July 22. 

That is not true. As long as regulators keep indulging in that irresponsible regulatory practice of arbitrarily discriminating, by means of different capital requirement for banks, in favor of those perceived as “not-risky”, like the triple-A rated and the “decent” sovereigns, and against those perceived as “risky”, like small businesses and entrepreneurs, nothing has changed, since the course towards the regulator´s no-risk Utopia remains steadfastly the same.

PS. Loony bank regulations explained in an apolitical red and blue!

Global warming and bank regulations

Sir, Philip Stephen in “Spasm or spiral? The west´s choice”, July 22, analyzes the current problems of the west. His analysis would have benefitted from a better understanding of global warming, because anyone looking for evidence of it, would have noticed that, for instance in terms of bank regulations, the parallel that used to define a banana-republic has move northward and has now reached Basel. 

I say this because it is evident that only banana-republic styled regulators could have concocted regulations that allow banks to hold extremely little capital when lending to what is perceived as not-risky, as measured by the officially outsourced risk-Kommissars, the credit rating agencies, when compared to the capital required when lending to the “risky”. 

Any non-banana-republic bank regulator would have known that the perceived risks of default were already cleared for by the markets, and that these capital requirements would only exaggerate the reliance on some ex-ante perceptions, which would of course have calamitous consequences, sooner or later. 

And, of course, the politics in the west, are also of course acquiring the standard characteristics of the banana-republics.

July 21, 2011

The “risky” must unite! Their risk-adjusted dollars should be worth just as much as others.

Sir, Joseph Stiglitz, in “Now the central bank must act” July 21, makes a reference to “risk-adjusted interest rate”. That is good. I thought our 2001 Nobel Prize winner might have no idea of such concept. And I say that because of the following. 

Stiglitz was the Chair of The Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System. That Commission in its report of September 2009 and though finding that “Regulators need to be aware of distortions in capital allocation when provisioning and capital adequacy requirements do not accord well with actuarial risks”, fails to point out with sufficient clarity the odious and arbitrary discrimination present in bank regulations. 

According to Basel II, when $1 in risk adjusted interest rate is paid by highly rated sovereigns or a triple-A rated client, it can be leveraged on bank equity 62.5 to 1, while the same $1 in risk adjusted interest rate, when paid by less well rated sovereigns or “risky” small businesses and entrepreneurs, is only authorized to leverage bank equity 12.5 times to 1. It is inexplicable that regulators could find some risk adjusted interest rates are five times as good as others. 

The consequences of such regulatory madness, something which by the way is still going on, is to drive the banks excessively into the arms of what is ex-ante perceived as not-risky and away from what is perceived as risky; and that is why banks have drowned in exposure to triple-A rated instruments and “strong” sovereigns, and that is why bank lending to not so well rated sovereigns, small businesses and entrepreneurs, is either drying up completely or has to be done with much higher compensating interest rates. And that is plain crazy! 

The “risky” must unite! Their risk-adjusted dollars should be worth just as much as others’. 

PS. Loony bank regulations explained in an apolitical red and blue!

July 20, 2011

It was naïve bank regulators who never contemplated the possibility of the credit ratings being wrong.

Sir, bank regulators, not me, told banks that if they lent to sovereigns such as Greece, and could obtain a 0.4 percent risk and cost of transaction adjusted margin, then they would be able to earn 25 percent on their capital, because since they were only required to post 1.6 percent capital against that lending they could leverage 62.5 to 1. A small business or entrepreneur, since lending to them required 8 percent in capital, which allowed for a leverage of only 12.5 to 1, would have to pay 2 percent in risk and cost of transaction adjusted margin to the bank in order to provide the bank the same return on equity Greece did… for some time. Could there be any doubt of why banks went overboard lending to sovereigns, like Greece. 

John Kay, in “American lessons in how to run a single currency” July 20, answering “Why were interest rate spreads in Europe so small?” writes that “Many participants simply did not care about default possibilities”. That is not precisely right. The correct answer is that bank regulators did not care about the possibilities of the credit ratings being wrong, and therefore ordered no reserve contingencies for that event, which should of course have been expected to occur, sooner or later. In other words we had scandaliciously dumb bank regulators, but the worst, is that they are still allowed to regulate as if credit ratings can never be wrong.

I invite to see the loony bank regulations explained in an apolitical red and blue!

July 15, 2011

President Obama and the US Congress are debating the debt ceiling blindfolded

Sir, with respect to the current debate in Washington on lifting the US debt ceiling it is important to reflect on the fact that had there been no quantitative easing programs, or bank regulations that favor so much sovereign debt, the interest rates on US debt would have long ago been so much higher so as to make perhaps this debate completely superfluous. 

In essence, because of the interference, the President and the Congress they do not know what the real market interest rate is on the US public debt, and they are therefore debating blindfolded.


Sir, bank regulators who presume being able to make our banks safer by assigning different capital requirements on lending based on the perceived default risk of the borrower’s, apply voodoo-regulations. 

Because capital requirements make banks lend excessively to “good” sovereigns and to whatever had a triple-A rating, and they also keep us from perceiving the real market rates free of regulatory interference, we are now immersed in a huge crisis. 

That even FT keeps on trusting those same voodoo-regulators just shows the tremendous allure their voodoo-promises have.

PS. Loony bank regulations explained in an apolitical red and blue!

July 13, 2011

The vicious communistic styled bank-regulatory circle

Sir, John Plender, in “Time for eurozone policymakers to grasp the nettle” July 13, makes reference to a “vicious circle [between government and banks] at the heart of the eurozone”.

It is the vicious communistic styled bank-regulatory circle that has been present before our eyes for many years, of which I have written so often about, but that all, you included, preferred to ignore. That circle goes like this:

“I, the Government, commit to give the credit rating agencies strong evidences that I will support you, the big banks, so that you, the big banks, can get good ratings and raise funds cheaply.

And I, the Regulator, commit to set zero or very low risk-weights so that you, the banks, do not need to hold capital when lending to the government… of course for as long as you allow us to keep our jobs.

And you, the big banks, you just do as the incentives and the disincentives tell you to do.

And so we, the Government, the big banks and the regulators will live forever happy… until the scheme collapses and citizens and taxpayers find out what we have been up to.”

The conclusion, Governments and communistic bank regulators de-facto conspired and colluded in order to have our bank savings nationalized.

July 12, 2011

Bank regulators should read up on Heisenberg´s uncertainty principle.

Sir, Mark Carney and Fabio Panettame discuss the growing sovereign risk in “Why banks and supervisors must act now” July 12, since “the risk-free status of sovereign debt is now in question”.

Let us be clear, although concepts like “risk-free interest rates” and similar have been used as theoretical shortcuts for many practical purposes, the only ones who have ever formally awarded a risk-free status to sovereigns, or to anything else for that matter, are the bank regulators with their naïve zero percent weightings of sovereign, which imply that banks needed to hold no capital at all when lending to “risk-free” sovereigns. 

Those mindless capital requirements turned into the cancerogenous substance that originated this crisis. This is the mistake that must be first formally acknowledged by the regulators, so that we can then begin the adjustment process needed to grow out of this hole, instead of allowing the regulators to dig us even deeper into it.

What a pity that regulators never applied Heisenberg´s uncertainty principle, then they would have understood that just measuring the present credit ratings, even with the maximum precision possible, would determine the future credit ratings… in ways they were not capable of understanding.

PS. Loony bank regulations explained in red and blue!

July 07, 2011

The confidence in the dollar and USA’s defense capabilities are as connected as they can be

Sir, when Sebastian Mallaby in “American power requires economic sacrifice”, July 7 discusses USA’s spending on defense he fails to mention one important related question namely… how much of the world’s clearly extreme confidence in the US dollar depends on the US conserving at least the appearance of omnipotence? My answer would be “much much more than what you think… this is really terrain where realpolitik reigns”. 

In this respect any defense savings that comes, for instance, from not fighting useless wars will be acceptable, but any saving that leads to a perception of a lessened military readiness of USA would become extremely expensive, as a result of the dollar being worth less, or the markets demanding higher interest rates to hold US public debt.

“Unwittingly”… or simply stupidly and irresponsibly?

Sir, Charles Goodhart in “Basel marches down wrong path to tackle systemic risk” July 7, writes “Regulation may unwittingly have actually added to procyclicality and systemic fragility by encouraging similar behavior.” Seriously, where goes the border line between “unwittingly” and either stupidly or irresponsibly?

In January 2003 the Financial Times published a letter I wrote which ended with “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.” And if that was clear to me, an ordinary strategic and financial advisor, that should have been perfectly clear to bank regulators. 

The regulators bet the health of the financial sector on capital requirements for banks based on the credit ratings being right, instead of taking the precautions to safeguard the financial system for when these ratings would, sooner or later, be wrong, and now we are all paying the price of it. 

Sir, if FT’s “Without fear and without favour” motto means anything to you why do you insist on being so lenient with the bank regulators? If it had been many bridges collapsing because of structural design flaws, I am sure you’d gone after the engineers responsible of that. Is it really so that a BP management can be held accountable but a Basel Committee not? It is truly amazing to see basically the same bank regulators keep on regulating with basically the same faulty paradigms... and an FT keeping mum!

June 28, 2011

“Careful, take cover, run for the shadows!”

Sir, Gillian Tett in “Why they´re happy in the valley of the shadow banks” June 28 worries because “notwithstanding the fact that the financial crisis largely started in the non-bank sector, or shadow bank world, thus far at least, western regulators have focused most of the reform efforts on the regulated banks”. Where does she get that first part from? And why would she assume that the shadow world behaves worse than the formal regulated one? For instance, there are no regulations on hedge funds, but rarely do you see any of them being leveraged more than 10 to 1, but you sure found regulated banks with a duly authorized leverage of over 50 to 1. Let me be frank, with bank regulators like the current, the only reason why I would place my money in regulated banks, is not because of the regulations, it is for the protections that might anyhow be present… in other words a 110% moral hazard risk.

Right now, even after the recently increased capital requirement of 9 percent to be applied to global systemic important financial institutions, these might still leverage 55 to 1 when lending or investing in what carries a risk-weight of 20%, the same risk-weight that applied for triple-A rated securities collateralized with mortgages to the subprime sector, for lending to Icelandic banks, or for lending to Greece. Sincerely, observing that, any advisor could have all the right to shout out “Careful, take cover, run for the shadows”

June 27, 2011

God help us, our bank regulators have really been taken for a ride!

Sir, Brooke Masters in “Regulators agree extra bank capital protection” June 27, reports that now the “global systemic important financial institutions”, G-SIFIs, have convinced the bank regulators that, for a mere 1 to 2.5 percent additional capital, to be paid in easy installments until 2019, and to be applied on risk-weighted assets, to formally award them the franchise of “Too big-to-fail”. What a sad day… for us and for all those other banks that at this moment have been deemed “global systemic irrelevant financial institutions”

And let us calculate. Since the risk weights for investments in private triple-A rated securities are still 20 percent that would dilute the maximum basic capital requirement of 9 percent to signify only a mere 1.8 percent and so the “too big to fail banks” could still leverage themselves 55 times to one, when doing that kind of business… and not to speak of what they could leverage when lending to some sovereigns with a zero risk weight. God help us, our bank regulators have really been taken for a ride!

And Jean-Claude Trichet, European Central Bank President, stepping down as chairman of the Basel overseers group is quoted saying “The agreement reached today will help address the negative externalities and moral hazard posed by global systemically important banks”, Sincerely from a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.

We did not have a crisis because of a general lack of bank capital!

Sir, Tony Jackson discusses the “Basel struggle to put bank capital into perspective” June 27. In doing so he evidences how he and most others discussants tend to forget that bank crisis does not result from lack of capital but by the banks doing the wrong type of lending. Suppose all the banks in a nation had 100 percent capital and then lost it all lending to some sovereign, like Greece, would that mean that the taxpayer would have no losses? How do you separate the taxpayers´ wellbeing from the citizens´ wellbeing? Let us never forget that at the end of the day, it is the quality of the lending of banks that matters the most, not their capital.

My point has all the time been that whenever regulators act like risk managers and set different risk-weights for different lending, which will effectively mean different capital requirements on different lending, they are effectively interfering in such a way that will guarantee that the quality of the lending will be worsened. We did not have a crisis because of a general lack of capital we had a crisis because for some type of lending the regulators authorized basically no capital at all.

From a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.

June 22, 2011

It has nothing to do with anyone being “macho”, far from it!

Sir, John Kay in “How not to measure a business – by its rate of return”, June 22, writes “Bank’s macho pursuit of rates of return led not to efficient companies but to the near collapse of the financial system”.

Forget it! If banks had pursued rates of return by for instance lending to Argentinean railway projects then we could perhaps use “macho”, as is they went for what was AAA rated of for Sovereigns like Greece, because that’s where the wimps of the Basel Committee authorized them to leverage their capital more than 60 to 1.

Kay has not yet understood what happened. I hope he dares to ask himself the following: “If I was a responsible bank regulator, what would cause me to lose most sleep at night, the excessive lending by banks to what was perceived as risky or the excessive lending by banks to what was perceived as not-risky but that could in fact be very risky?

Once Kay has answered the previous question, as it must be answered, and then analyses how the current capital requirements are treating what is perceived as not-risky as if it really was not-risky, then he will understand the monstrous mistake committed by the bank regulators.