March 14, 2015

FT, do you not realize the urgency we have to get rid of the current bunch of dangerous and failed regulators?

Sir, John Dizard opines that “the advent of negative yields for the best European government or corporate issuers… is the breakdown of the policy world’s response to the global financial crisis”; and he quotes a European bank’s credit strategy saying: “We have searched through the records and asked the ECB how they think their [asset purchase strategy] will work, and there is no evidence they know the answer” “Investor should embrace the inherent contradictions of quantitative easing” March 14.

Indeed that is truly scary stuff, but it is what I have been writing to you for over a decade. Mario Draghi and colleagues, simply have not the faintest idea of what they are doing.

The negative interest is just one tip of the iceberg. The real intellectual breakdown came in 1988 with the Basel Accord, Basel I; followed up in 2004 with Basel II. At that moment, regulators, with their risk-weighted equity requirements, ordered bankers to perceive safe assets as safer yet and risky assets as riskier yet.

The banks, consequentially, started to compete with pension funds, widows and orphans in chasing too much what was perceived as safe and evading too much what was perceived as risky. Sir, please, what do you think caused problems with AAA rated securities, Iceland’s banks, real estate in Spain, or lending to Greece, that they were perceived as risky? Of course not!

Now we have run out of safe assets, but regulators still pay banks with low equity requirements to go for these, and now, by means of Solvency II, they want even to impose that same stupidity on insurance companies.

What will happen? That the real “risky”, like SMEs, will still not have access to bank credit because, as Jeremy Stein of Harvard has argued, banks are too busy “getting high quality stuff by swapping, or ‘transforming’ it, with low quality paper”… to keep the regulators happy and pass stress tests that will allow them to pay dividends and repurchase stock. How crazy can it be?

Do you not realize the urgency Europe and the whole world has to get rid of the current bunch of dangerous and failed regulators?

PS. Dizard write "Regulators and politicians are insisting that risks be taken without taking risks". That in a nutshell is the message I have sent FT in more than a thousand letters, but that it has preferred to ignore.