February 28, 2014

Capitals of ordinary citizens should also have rights to political asylum.

Sir I refer to your “Close the account on Swiss secrecy” February 28. If I wanted to be politically correct, I guess I would have to loudly shout out a “Hear, hear!”

BUT, I need to add that in the same vein there is political asylum granted for people being persecuted in their homeland, there should also be asylum rights granted to capital when these are being persecuted, beyond reason. Otherwise the closing down of a possibility to hold secret accounts seems a bit like a wet dream of a Global Sheriffs of Nottingham mutual admiration club.

I have no firm idea of how to go about it, but perhaps there could be a Global Council of Citizens, in front of which a citizen could anonymously make a specific country based appeal. When? Perhaps when taxation becomes too high, let us say over 50%; when the government role in the economy becomes too high, let us say 40% of GDP; or when there are notoriously public displays of government waste.

But of course, the capitals of anyone who has held a government office within a period, like for instance the last 20 years, should possess no such rights.

Really, is there anything to be gained by retaining all capitals of all citizens in a country, if all that means is that the capital gets all wasted?

I remember when my country, Venezuela, in February 1983 woke up to a huge financial disaster, mainly as a consequence of the government having acquired too much debt and keeping the Bolívar from devaluing too long. At that moment most politicians swore that the cause of it all was capital flight, and this even when they all must have known that had there been no capital flight, it would all have been wasted. The truth is that the capital reserves built up abroad by some Venezuelans, by quite a few in fact, then allowed Venezuela to recover fairly fast from the disaster… unfortunately only to start the buildup of the next one.

Also, FT, do you really want to close Switzerland down as a haven for secret capital flight when that might only mean promoting other deeper and darker havens?

PS. Granted you might not really know what it is to be living in countries like Zimbabwe.

PS. I recently ended and Op-Ed in my country with the following PS: “In a country in which all those here described injustices are committed, and many more, and on top of it all they print out monstrous amounts of inorganic Bolivars without caring about the inflation that will cause, one could ask: Is not capital flight sometimes a citizen's moral obligation… towards his own nation?

Divorce counselors should urgently remind banks and regulators of the kids, the real economy.

Sir I refer to Gillian Tett´s proposal of having conflict specialists, sort of “divorce lawyers”, handling some of the issues derived from conflicts arising from regulatory differences in different regulatory jurisdictions, “Regulators may disagree but should say who calls the shots”, February 28.

On one hand banks, naturally, want to make as high return on their equity as possible and, on the other, current regulators want banks to avoid taking any risks.

And the result of all the bickering has been that banks are now allowed to earn huge risk adjusted returns on equity, as long as they lend to what for the moment van be perceived as “absolutely safe”, like any “infallible sovereigns”, the housing sector, and the AAAristocracy… so that banks stay away from lending to those perceived as “risky”, the medium and small businesses, the entrepreneurs and start-ups.

And so I would instead hold that it is more urgent to call in divorce counselors so as to remind the parties of the fact that you cannot possibly discriminate this way in the family, the real economy, without it breaking down.

February 26, 2014

Indeed... why not a tax on too-big-to-fail-banks?

Sir, I refer to James Politi’s and Gina Chon’s “Big banks pledge to fight tax on assets” February 26.

In May 2003, more than a decade ago, as an Executive Director of the World Bank (2002-2004), below is what I told some hundred bank regulators gathered at the World Bank for a Risk Management Workshop.

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore 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. But, then again, I am not a regulator, I am just a developer.”

And while you're at it, Mr. Dave Camp, US Congress, House Ways and Means Commitee, look into this too

February 21, 2014

In order to rein in inequality, bank regulations must change too.

Sir, I refer to Professor Robert H Wade’s letter “In order to rein in inequality, market need to change”, February 21. Therein Wade writes: “any serious attempt to rein in income and wealth inequality in the US, Britain and elsewhere has to change the institutional structure of markets so that they are less efficient at sluicing pre-tax income up towards the top”.

That is correct but let us not ignore that at the core of that “sluicing”, lies the number one source of damnable inequality politics, namely that which impedes equal opportunities for all. And in this respect, nothing is sluicing cheap and plentiful bank credit away from the “risky” medium and small businesses, entrepreneurs and start-ups, towards the “infallible sovereign and the AAAristocracy, than the current risk-weighted capital requirements for banks.

And that these capital requirements do by allowing banks to hold much less capital against assets deemed “safe”, than against assets deemed “risky”, which of course means that banks will earn much higher risk-adjusted returns on equity when lending to what is perceived as “safe”, than when lending to what is perceived as “risky”.

And all that odious regulatory discrimination for nothing, since never ever has a crisis of the bank system resulted from excessive exposures to what was ex ante perceived as “risky” these always have resulted from excessive exposures to what ex ante was perceived “absolutely safe” but that, ex post, turned out to be risky.

Sadly though, that regulatory discrimination seems to be of no concern whatsoever for most current “inequality fighters”… (like Professor Joseph Stiglitz)

February 19, 2014

FT’s silence makes it unwittingly a lobbyist for “The Infallible” accessing bank credit on preferential terms

Sir, I refer to Sarah Gordon’s Analysis on a serious lack of bank-credit to SME’s in Europe, “Give them some credit” February 19. And how bad things are is not really clear, because for instance “Published interest rates do not take into account potential borrowers who have been offered loans with high interest rates that they then decline, those who have been refused credit, or those who have simply become discouraged and stopped asking.”

Gordon writes “Banks have become more risk-averse since the crisis, not just to protect their bruised balance sheets but also to meet demands from regulators to improve capital buffers”. And the article also quotes Daniel Cloquet, director of entrepreneurship and SMEs at Business Europe, stating “At the moment, the capital requirement rules basically favor [banks holding] government debt.”

So clearly one of the main obstacle for the SMEs accessing bank credit, something about I have been writing you innumerable letters, are the risk-weighted capital requirements. By favoring so much bank lending to the “The Infallible”, like to some sovereigns and the AAAristocracy, these discriminate against the bank borrowings of “The Risky”.

But even though Gordon refers to a serious of other initiatives to help financing SMEs, some of which, like online crowd-funding mechanisms sound truly marginal… again there is not a word about the need of changing the risk-weighted capital requirements, so as to eliminate the distortions they produce in the allocation of bank credit to the real economy. And, this even though FT must be aware by now that never ever has a systemic bank crisis resulted from excessive exposures to SMEs and similar.

And so I have to conclude that for one reason I cannot really comprehend, the Financial Times does not really care about that capital requirement banks makes it harder for SMEs, and similar “risky”, to access bank credit.

And the truth is that FT’s silence on this issue makes it effectively a lobbyist for “The Infallible” accessing bank credit on preferential terms. I assume it is not on purpose.

February 17, 2014

Bank regulators, Basel Committee, Financial Stability Board, listen to Violet Crawley “Don’t be defeatist, it’s so middle class.”

Sir, Lawrence Summers writes “Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve results. Policies that aim instead to thwart market forces rarely work, and usually fall victim to the law of unintended consequences”, “America risks becoming a Downton Abbey” February 17.

He is right. One reason for growing inequality is that notwithstanding banks already lend less, at higher interest rates and in tougher terms, to those perceived as risky, regulators decided to intervene by requiring banks to also hold much more capital when lending to “risky” medium and small businesses, entrepreneurs and start-ups, than when lending to an “infallible sovereign”, or to the AAAristocracy.

And regulators did that because they were too scared of risk as such and because they never got down to understand: first, that for the banking system, what is truly dangerous is what is perceived as absolutely safe and can therefore generate too big exposures; and second, for the real economy, what is most dangerous long terms is not taking the necessary risks.

And so, if I was to bring Downton Abbey into this issue, that would be by quoting Violet Crawley with her straight to the point “Don’t be defeatist, it’s so middle class.”

February 15, 2014

No Mohamed El Erian, nowadays, extraordinarily dumb bank regulators, are making it all so much worse.

Sir, Mohammed El Erian in reference to banks betting on risky emerging markets holds that “In some ways today’s financial sector is little different from the one I first got to know decades ago… Yet not everything has gone full circle. Regulators and shareholders no longer allow banks to make such risky bets, even though they hold more capital” “Emerging world fashions that change with the seasons” February 15.

What? He must mean regulators no longer allow banks to make such risky bets… because banks are allowed to hold so much less capital when lending to something perceived as “absolutely safe” and therefore have to go where they can earn so much higher risk-adjusted returns on equity.

Banks have always lent primarily to what they have perceived as safe and tried to avoid what seems too risky. The difference nowadays is that regulations are helping banks to build up even larger and more dangerous exposures to what is ex ante perceived as absolutely safe but that could, foreseeable, become very risky ex post… and, when that happens, bank will then be guaranteed to find themselves naked with no capital to defend themselves with.

In other words, not everything is the same, extraordinarily dumb regulators are just making everything so much worse.

February 14, 2014

The “peskiest exceptional” that hit our banking system was dumb Basel Committee regulators.

Sir, the LEX Column, February 14, when referring to French banks, writes about how hard it is to provide a shareholder’s return when “pesky exceptionals keep butting in”.

But, the reality of “pesky exceptionals”, is the primary reason for which banks need to hold capital because if any ordinarily perceived risks are not adequately managed then the responsible banker should be fired or the bank must fail… or both.

Unfortunately that is precisely the big mistake of Basel Committee’s bank regulations… the capital requirements were set not based on the possibility of unexpected “pesky exceptionals”, but based on the ordinary perceived risks of the expected losses.

In other words, with Basel II, we had the misfortune to run into exceptionally pesky regulators; who we now have unfortunately allowed to keep on working on Basel III. In this respect not holding regulators accountable, is also turning us into pesky exceptionals.

With bank regulators like the Basel Committee the real economy needs non-banks.

Sir, I refer to Gillian Tett’s “Titans of finance have moved on from banks” February 14.

There she writes: “What is really striking is the volume of non-bank financing that is quietly being supplied with minimal regulatory scrutiny… Non-banks are swelling in size because they do not face the same regulatory burden as banks, allowing them to turn a profit on business that banks now find uneconomic.” 

That is one way of phrasing it which does not really convey the truth. Banks, allowed to leverage 40-60 times their equity when lending to infallible sovereigns, housing and the AAAristocracy, can hardly be said subjected to a lot of regulatory scrutiny. Quite the contrary, the real market anchored effective scrutiny of the non-banks, is surely larger than that of the regulators scrutiny of the banks.

And neither is it the regulatory burden that makes some bank lending un-economic. It is more the regulatory unburdening, low capital requirements, which has allowed banks to make extremely high risk-adjusted returns on equity when lending to previously mentioned “infallible”; and this has created the incentives for banks to completely abandon lending to the “risky”, like the medium and small businesses, the entrepreneurs and start-ups.

That the growing presence of non banks “worries regulators”, should come as no surprise, since they clearly do not give a iota about if banks allocate credit efficiently to the real economy. No, with bank regulators like the current ones, the real economy is doomed to depend much more on non-banks.

Getting rid of stupid risk-weighted bank capital requirements, that is a dog hair to write home about.

Sir, I refer to Martin Wolf´s “Hair of a dog risks a bigger hangover for Britain” February 14.

There Wolf writes: “It is widely believed that it is safer to rely on private borrowing as a source of demand. An expansion of private borrowing to buy evermore expensive houses is deemed good, but an expansion of government borrowing to build roads or railways, is not. Privately created credit-backed money is thought sound, while government-created money is not. None of this makes much sense.”

What is he talking about? Those whose beliefs are the most relevant in these matters, the bank regulators, they very strongly believe, as they express in the risk-weights which determine the capital requirements for banks, that lending to the government, the infallible sovereign, is enormously safer when compared to lending to anything private, including houses.

Of course, that said, bank regulators also strongly believe, in that much egged on by politicians, that lending to buy houses, is enormously safer when compared to lending to any “risky” medium and small business, entrepreneurs and start-up… those who could help to create the jobs that could pay for the costs of living in the houses.

Do I mind governments building roads and railways? Of course not, but I sure do mind government and housing (and the AAAristocracy) getting much more and cheaper financing than what would ordinarily be the case, only because shortsighted and monumentally naïve regulators think that lending to be safer than lending to the “risky” real economy.

Want to really get rid of the hangover Mr. Wolf? Well then get rid of the current bank regulators, and of their dumb and distorting risk-weighted capital requirements. That is indeed a dog hair to write home about.

PS. Sir, I leave it in your hand to copy or not copy Martin Wolf with this letter, since I do not wish to receive a letter from him telling me again I write too much, or that he already knows what there is to be known, on issues such as the risk-weighted capital requirements for banks.

February 13, 2014

Richard Lambert, before concerning himself with bankers’ education should think about bank regulators’

Sir, I refer to John Gapper’s “There is no such thing as the banking profession” February 13.

There Gapper writes that an option favored, among others by Sir Richard Lambert, head of UK’s Banking Standards Review, “is to encourage bankers to take professional exams and rebuild their sense of pride and identity. Bad bankers might be struck off by professional bodies”

Good idea, but what about the professional exams for bank regulators which right now seems of even urgent importance.

You know Sir I hold this because bank regulators who decide to use perceived risk of expected losses to set the capital requirements for banks, that which is primarily to cover for any unexpected losses, evidence they do not know what they are doing. With their amateurism they not only created this crisis, by making banks create dangerous exposures to what is “absolutely safe”, but they also keep us from getting out of the crisis, by de-incentivizing banks from lending to “risky” medium and small businesses, entrepreneurs and start-ups.

So please, enroll regulators in a Bank Regulations 101 course… as fast as possible. With their distortions they have put the current generation on the track of becoming a lost one.

February 12, 2014

Tax income from protected intellectual property rights at a higher rate than income from when competing naked in the market

Sir, Martin Wolf writes “Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects”, “Enslave the robots and free the poor”, February 12.

And that as you know, is a theme close to my heart. On it I have written to you, to Martin Wolf and to other of your journalists many letter over the years. In fact only last week I wrote you a letter referring to Martin Wolf's article titled just like this one. I did not copy Wolf, and you might have not either.

Though it might very well have been thought of earlier by someone else I started to formally promote such a tax scheme in 2008, by means of an Op-Ed in El Universal, Caracas, titled “We need a tax intellectual property rights’ income”.

Wolf also writes “We must reconsider leisure… let people enjoy themselves busily”.

And that is another theme that I have often written about, as I feel it is of utmost importance for any society to know what to do well with its structural unemployed. As a example you can read “We need worthy and decent unemployments

PS. Sir, I leave it in your hand to copy or not copy Martin Wolf with this letter, since I do not wish to receive a letter from him telling me again I write too much, or that he already knows what there is to be known, on issues such as the risk-weighted capital requirements for banks.

February 10, 2014

Daniėle Nouy, new chair of Single Supervisory Mechanism, should hear out those like me who detest current bank regulations.

Sir, I refer to Sam Fleming´s, Alice Ross’s and Claire Jones’s “ECB Super>regulator prepares to be unpopular” February 10.

Of course, as you know from my more than a thousand letters, I much welcome that Daniėle Nouy “As one of the regulators who presided over the setting up of the Basel II accord on bank capital, which stressed risk-weighted assets as the best measure of a lender’s health… now admits her thinking on how banks are assessed has evolved… and now [at least] believes the leverage ratio¸ which compares a bank’s capital with its entire assets, is also a crucial measure.”

And of course, having held that bank regulators should be faster on the trigger, so that adequate pruning was done, I also fully agree with her opinion of “Let weak banks fail”, as reported on the front page by the same reporters.

But, when Ms Nouy there holds that “One of the biggest lessons of the current crisis is that there is no risk-free assets so sovereign assets are not risk free”, I just can’t refrain from asking, why on earth did it take the current crisis to find out that, when history is so full of examples? Sincerely it is hard to believe that regulators were so naïve to believe that… so one has at least the right to suspect some other motivation.

And also, when Ms Nouy speaks about the “health check” of banks “which will include an asset quality review and stress test”, I get the feeling she has not fully realized the Basel Mistake, in the sense of the worst not being what is on the banks’ books, but what is NOT there, like all the loans to the “risky” medium and small businesses, entrepreneurs and start-ups, which were never made, only because of discriminating risk-weighted capital requirements.

I would dare Ms Nouy to sit down one hour with me to give her a piece of my mind on what wrongs the Basel Committee has made, primarily letting expected losses stand in for unexpected losses, and then on what I believe should be done. And she should not be nervous about that, since I absolutely share all her concerns about “it’s not the best moment in the middle of the crisis to change the rules”… though surely transitioning has to be initiated… without making it worse.

February 05, 2014

And citizens could sue agencies for too good credit ratings of sovereigns, which caused governments to borrow too much.

Sir, I refer to Stephen Foley’s and Guy Dinmore’s “Italy eyes €234bn suit after ratings groups failed to value la dolce vita” February 5. It reminded me of an Op-Ed of September 2002 titled “The riskiness of country risk”.

In it I wrote: “What a nightmare it must be to be risk evaluator! Imagine trying to get some shuteye while lying awake in bed thinking that any moment one of those judges, those with the global reach that have a say in anything and everything, determinates that a country has become essentially bankrupt due to your mistake, and then drags you kicking and screaming before an International Court, accused of violating human rights.

What a difficult job to be a rater of sovereign creditworthiness! If they overdo it and underestimate the risk of a given country, the latter will most assuredly be inundated with fresh loans and will be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If on the contrary, they exaggerate the country’s risk level, it can only result in a reduction in the market value of the national debt, increasing interest expense and making access to international financial markets difficult. Any which way, either extreme will cause hunger and human misery.”

And so what’s more to say. If the Italian Government sues the credit rating agencies for having given Italy too bad ratings, an Italian citizen might equally sue these for having given Italy too good ratings

And after that, what about suing the regulator who with their risk-weighted capital requirements for banks multiplied immensely any signal emitted by the credit ratings?

Those responsible for Basel II should have been made yesterday’s men years ago

Sir, in “The return of yesterday´s men”, February 5, you hold that Jean-Claude Juncker, Martin Schulz and Guy Verhofstadt “will not strike many as representing a genuine choice… for the presidency of the European Commission”. And that is so because these gentlemen represent “a familiar orthodoxy of elite driven integration….that sounds tired and irrelevant to millions of citizens whose lives have been turned upside down by [among other] the collapse of banks”.

Yes, you are most probably correct in your assessment, but why have you not gone out and criticized in a similar way the members of the Basel Committee or of the Financial Stability Board? They with their utterly failed Basel II have had a much more direct role in causing the collapse of banks.

If there had been any type of accountability all these experts would since long be “yesterday’s men”. Instead, they were put in charge of Basel III and, in some cases, like with Mario Draghi, even promoted.

Income derived from protected intellectual property should be taxed at higher rates than income obtained from competing naked.

Sir, Martin Wolf refers to “the role of rental income, particularly from intellectual property” as one explanation of “rising inequality of labor income and of the distribution of income between labor and capital”, “If robots divide us, they will conquer” February 5.

In this respect I would just want to note that for years I have argued that all income which results from an intellectual property that is being protected should be taxed at a higher rate, than any income that is produced by competing in the markets naked.

But I need also to express certain uneasiness with the concept of capital getting more and more rewarded than labor, because the truth is that, currently, because of artificially low interest, very much capital is almost not being rewarded at all. Many pensioners are not receiving what they should be receiving for that capital they worked and saved so hard to obtain.

Finally, with respect to the prospect of robots conquering us, I would hate that to happen, but, on the other hand, these would never ever come up with such crazy notions of basing the capital requirements for banks, those that should primarily be there to cover for unexpected losses, on the perceptions about the expected losses, and much less on these perceptions being correct.

February 04, 2014

William Rhodes, worse than regulatory uncertainties is the current regulatory certainty.

Sir, William Rhodes writes that "many other countries are challenged by the weakness of bank lending to productive, employment-generating investments. The banks are in large measure constrained by regulatory uncertainties." "Major central banks must co-ordinate policy", February 4.

Wrong! Banks, when lending to productive, employment-generating investments are in large measure constrained by regulatory certainties... those that order banks to have much more capital against such “risky” lending than against lending to the less productive “absolutely safe”… those which thereby allow banks to earn much higher risk adjusted returns on equity when lending to something safe-not-productive than when lending to something risky-productive

February 01, 2014

Development is about the poor not needing help.

Sir, Frank Vogl of The Partnership for Transparency Fund writes: “Citizen-led development to ensure the extremely poor in many communities across the globe can receive state benefits – food rations, basic social security, free healthcare access to free schools, without being forced to pay bribes and without being cheated by lowly government officials – is yielding tremendous results”, “Citizen-led development is yielding results” February 1.

That are indeed great welcomed results…but whatever, please, do not call that “development”. Development is about all those extremely poor ending up not needing state benefits.

The purpose of a bank is not to fight Aids, but to make profits serving the financing needs of the real economy.

Sir, Gillian Tett refers to BoA and Bono cooperating in fighting global aids “An unlikely pact in making sweet music” January 1. And Tett also quotes Paul Polman of Unilever arguing that many corporate workers want to “find a higher purpose than just making money” and that banks such as BoA have strong motives to “engage” in innovative ways.

It all sounds very commendable but, if I was a bank regulator, which I am not, I am not sure I would agree or even allow a bank which depends so much on implicit government guarantees to do such things.

And I say so because the real purpose of a bank is to make profits to its shareholders, while serving in the most effective way possible, the financing needs of the real economy. And the truth is that every dollar BoA or other banks would spend in these ways, out their pre-tax earnings, will diminish their capital, and thereby diminish their capacity to lend to medium and small businesses, entrepreneurs and start-ups… something which would help all… including those fighting against Aids.

How sad that elites meet in Davos and are not capable to discuss much more fundamental issues such as why the regulators, when setting the capital requirements that are supposed to cover for unexpected losses, did so based on perceived expected losses. This which has created total havoc in the allocation of bank credit to the real economy is a much more important issue. Yet it is ignored… most probably as it steps on the toes of all bankers making huge risk-adjusted returns on equity when lending to "The Infallible".

Getting rid of the risk-weighting of the capital requirements... that would indeed represent sweet music to all the unemployed youth.