January 26, 2011

And the Oscar for lax risk management should go to… The Bank Regulators!

Sir Tom Braithwaite in “Financial crisis report to blame Wall Street” January 26, reports that “The Financial Crisis Inquiry Commission will on Thursday blame unchecked Wall Street excess for much of the 2008 turmoil, highlighting lax risk management …and insufficient regulation”

I am not fully sure of the reasons the “Republican commissioners refused to endorse the report”, they usually are too Fannie Mae focused, but in my mind the report is fundamentally wrong. If anyone has to receive an Oscar for lax risk management that has to be the Basel Committee who with incredible hubris took upon themselves the role as risk-managers of the world, by means of their capital requirements for banks based on risks and that allowed among others for an insane bank leverage of over 60 to 1 just because a credit rating agency had perceived something to be a triple-A… in a world where we know for a fact that there is an absolute scarcity of true sustainable triple-As.

Since what was clearly pure lousy regulation is classified in the report as “insufficient regulation” then that may indeed be part of the agenda of those who want to regulate us more, and now even want to take care of pro-cyclicality and systemic risk; stubbornly refusing to acknowledge that they as regulators and governments are most to blame for pro-cyclicality and systemic risk. If there was an Oscar for the most intrusive and distorting regulations, that would be well-earned by the bank-regulators too.