September 13, 2015

Judge Jed Rakoff. Do you not know the Home of the Brave prohibits discrimination against those perceived as risky?

Sir, in Lunch with the FT of September 13, Kara Scanell describes Jed Rakoff as: “A leading authority on white-collar crime, he has made headlines for demanding greater accountability in cases of alleged Wall Street fraud and for launching a one-man mission to prevent banks from dodging responsibilities for the financial crisis…. Rolling Stone magazine calls him a ‘legal hero of our time”.

Had Judge Rakoff known about the false signals, the incentives, and the distortions built into the portfolio invariant credit-risk-weighted capital requirements for banks, he would be ashamed of going after bankers, as he would instead, I he really is a hero, have gone after the bank regulators.

Imagine allowing banks to hold only 1.6 percent in capital, which means over 60 to 1 leverage of equity when lending to sovereigns and the AAArisktocracy, while only a 12 to 1 leverage when lending to the “risky” entrepreneurs and SMEs. As if there was no “Equal Credit Opportunity Act (Regulation B)? But, then again, there might not be any interested in enforcing such Act.

PS. Of course I am not referring to the natural discrimination of the risky that calls for banks to prudently charge higher risk premiums. I am referring to the artificial regulatory discriminations that has no prudence basis whatsoever... since what is really dangerous for banks is what is perceived as safe but that can turn out to be very risky.