July 31, 2014

FT, How can you allow such a blatant misrepresentation of financial history?

Sir, Alice Ross reporting on the Landesbanks in Germany refers to “the disastrous lead in to the financial crisis that saw ill advised investments in US mortgage backed securities”, and it is just another monstrous example how financial history is being miswritten, “Bank balance” July 31.

And we are also told of how former or current board members… went to trial accused of failing to disclose the risks involved in buying certain asset-backed securities in 2005.

If I had been the defense lawyer at that trial, I would just have called one of any German bank regulators who had been involved with the approval of Basel II in June 2004, and asked the following questions.

Q. Is it not so that a bank was authorized to acquire AAA rated securities against only 1.6% in capital meaning they could leverage their equity 62.5 times to 1.

A. Yes

Q. Is it not so that allowing such a monstrously high leverage signified that the regulators trusted almost unlimited the capacity of the credit rating agencies?

A. Yes.

Q. Would it have been reasonable for a German bank to travel to US and go through the AAA rated securities in detail knowing that the credit rating agencies which the regulators so much trusted had already done so?

A. No.

Q. If those securities had turned out to be worthy of the AAA rating but the directors of one bank had foregone the opportunity to earn its shareholders huge returns on equity while other banks were doing so, would the shareholders not have thought of firing these directors?

A. Yes.

Your honor, for the bank to under those circumstances have purchased those AAA rated securities was not in any way shape or form an ill advised investment. What was though clearly ill advised, were these bank regulations. I rest my case.

Who is going to prosecute the bank regulators?

PS. It was absolutely clear something like this had to happen… You yourself published a letter of mine in January 2003, in which I wrote “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. Friend, please consider that the world is tough enough as it is.”