August 01, 2012

Sometimes, when the sunrays are dangerous, finance might be better off in the shadows.

Sir, Sebastian Mallaby in “Finance must escape the shadows” August 1, writes “the explosion in securitization was partly a response to a global craving for safe assets”. The question he needs to respond to though, before drawing any sort of conclusion, is how much of that was natural market craving, and how much the result of artificially induced appetite stimulation, such as allowing banks to hold these securities, if highly rated, against very little capital. 

With regulators who allowed banks to leverage their equity more than 60 to 1 when holding AAA securities or lending to Greece, we might all have been better off if all our banks had remained in the shadows, instead of exposing themselves to that kind of dangerous type of sunrays. The shadows, if not just fraudulent, would never ever have permitted such leverages. In fact Sebastian Mallaby’s own “More Money Than God” offers, in the case of the hedge funds, a great defense for finance to sometimes remain in the shadows. 

Now when Mallaby writes “Wherever you come down on these questions what is really striking is their absence from the public square”, there I cannot but agree wholeheartedly and express the same concern. Indeed you just need to see how FT have ignored or minimized this problem… and that cannot just be because it was little censored me who alerted FT about this in hundreds of letters.