August 29, 2017

Crony capitalism, which is really crony statism, includes many crony relations with central banks and bank regulators

Sir, Mohamed El-Erian writes about Jackson Hole meetings 2017: “The symposium left open questions for markets that, given very profitable adaptive expectations, are conditioned to rely on central banks to boost asset prices, repress financial volatility and influence asset class correlations in a way that rewards investors and traders more.” “Yellen and Draghi had good reason for Jackson Hole reticence” August 29.

So instead of relying on the real economy, Mohamed El-Erian, and I presume all his colleagues operating in the financial markets, rely more on what central banks do.

That is so sad, especially since the risk weighted capital requirements for banks, hinders all central bank stimuli to flow where it should. We now have buyback of shares, dividends financed with low interest rate loans, house prices going up, but SMEs and entrepreneurs not getting their credit needs satisfied because the regulators feel these are "Oh so risky!"

El-Erian reports: “Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, president of the European Central Bank — [told] politicians about the importance of financial regulation”

That only happens because politicians have not dared to ask regulators questions like:

Who authorized you to distort the allocation of bank credit in favor of those perceived, decreed and concocted, as “safe”, like sovereigns and AAArisktocracy, and away from the “risky”, like SMEs and entrepreneurs?

Where did you find evidence that those perceived as risky ever caused major bank crisis? As history tells us, these were always, no exceptions, caused by unexpected events, like those ex ante perceived as very safe turning up, ex post, as very risky. 

PS. Do bankers love these crony relations? You bet! Being able to earn the highest expected risk adjusted returns on equity on what is perceived as very safe, must be a wet dream come true for most of them. And besides, by requiring so little capital, and therefore having to serve much less any shareholders’ aspirations, there is much more room for their outlandish bonuses


August 26, 2017

Hallmark; please launch an entrepreneurship channel where all, not just two, live ever after happy because of the successes

Sir, as one who has quite often tried on entrepreneurship adventures and not too often been successful at it, I cannot but say hear, hear to Janan Ganesh’s “Why must entrepreneurs get such a bad rap?” August 26.

The truth is that, except perhaps from some special inventions, nothing produces so much economic benefits we can all enjoy than what the successful entrepreneurs do.

And that is why I am so obsessed against those risk weighted capital requirements sissy regulators have imposed and that force banks to hold more capital against loans to SMEs and entrepreneurs, than they have to hold against the safe AAA rated, as the former had it not tough enough to access bank credit.

Ganesh writes: “The entertainment industry of the world’s most avowedly entrepreneurial nation tends to depict business only to pathologise it.” That’s absolutely right, and that’s why the title of my letter. 

Come on Hallmark, you who have been so good at those chick-flicks that keep my girls fascinated hour after hour; please step up to the plate. Not only we guys are in need of some of the real-tough-it-out flicks.


Janet Yellen, Mario Draghi, ask IBM’s Watson what algorithms he would feed robobankers, to make these useful and safe

Sir, Sam Fleming reporting from Jackson Hole writes “Janet Yellen, the Federal Reserve chair said regulatory reforms pushed through after the great financial crisis had made the system “substantially safer” and were not weighing on growth or lending. … If the lessons of the last crisis were remembered “we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly”, “Yellen warns opponents of tighter financial rules to remember lessons of crisis” August 26.

As I see it Yellen has not yet learned at all that past and future financial crisis have not, nor will ever, result from excessive exposures to what was or is perceived as risky, these will always result from unexpected events, like when that was perceived, decreed or concocted as very safe, turned out ex post to be very risky.

Since regulators do not to want listen to anything else but their own mutual admiration net-works’ risk biases, I wish they would contract IBM’s neutral Watson to ask it the following:

Watson, while considering the purpose of banks as well as the real dangers to our financial systems, what algorithms would you suggest feeding robobankers with?

THEN Yellen, Draghi and colleagues should compare that algorithm with what they are feeding the human bankers with; the portfolio invariant risk weighted capital requirements that assumes that bankers do not see or clear for risks by means of size of exposure and risk premiums charged.

Then these regulators would understand that with their over-the-board incentives for banks to invest or lend to what is safe, like AAA rated securities and sovereigns, like Greece, they are in fact creating those conditions that dooms banks to suffer huge crises, sooner or later, over and over.

Then these regulators would understand that their regulations induce banks to stay away way too much from lending to what is perceived risky, like SMEs and entrepreneurs, something which clearly must weigh heavy against the prospects of our real economy to growth.

Janet Yellen, Mario Draghi, please ask Watson! Perhaps you could find him on LinkedIn 😆


August 25, 2017

Free our economies from risk weighted bank capital requirements; foremost from the 0% risk-weighting of sovereigns

Sir, you write about the “US Federal Reserve and the European Central Bank, facing the relatively pleasant task of withdrawing stimulus after years of good economic growth.” “The Fed ponders the fractious politics of debt” August 25.

Sir, may I ask you, do you really think the economic growth we have seen could be qualified as good considering the immense stimulus given through QEs and low interests? If the growth had really been consistent with the amount of stimulus given we wouldn’t have these qualms about reducing central banks’ “swollen balance sheets”, would we?

And then you favour Janet Yellen and Mario Draghi with, “ECB and the Fed are fortunate in being headed by two competent policymakers”. I do not agree with your assessment. Both of them, when it comes to regulating banks, which is something they do, are simply clueless.

First: Basel II, for the purpose of capital requirements for banks, assigned a risk weight of 20% to what is rated AAA and one of 150% to what is rated below BB-. That clearly assumes that the ex ante perceptions about risks are not cleared for in any way, and that these would therefore be indicative of the ex post risks. That is plain stupid and those unable to understand that are not qualified to regulate our banks.

Second: Sovereign debts have been zero risk weighted while unrated citizens have been assigned a risk weight of 100%. That is unauthorized regulatory back door statism that subsidizes governments’ access to credit, and which is paid for by taxing, for instance SMEs and entrepreneurs, with in relative terms much less and much more expensive access to bank credit.

Third: Those who cannot understand that the risk-weighted capital requirements hinders the efficient allocation of credit to the real economy; and therefore its distortions wastes much if not all of any stimulus, should not have anything to do with QEs.

Fourth: Those who to the “swollen balance sheet built up by quantitative easing”, refuse to add the sovereign debt and the reserves held in central banks that are a direct function of preferential risk weighting, do not understand the magnitude of the difficulties we are facing.

Sir, day by day our banks, thanks to regulators, are dangerously overpopulating more and more whatever perceived, decreed or concocted safe havens there are. Equally dangerous for our real economies, they keep on underexploring the risky bays that could contain the real factors that could help us to a better future, or at least not a much worse one.

Sir, your steadfast silence on these regulatory failures seems to evidence complicity.


August 24, 2017

It is in our best interest to keep Yellen, Draghi and other failed regulators out of tackling financial instability

Sir, I refer to Sam Fleming’s and Claire Jones “Yellen to tackle financial stability at Jackson Hole” August 24. Is the title a Freudian slip? Does “tackle” not refer to a problem, such as financial instability?

I argue that since Yellen, as part of that bank regulatory brotherhood that with risk weighted capital requirements for banks helped to cause financial instability, is simply not capable enough to help out achieving financial stability.

The idea of requiring banks to hold less capital (equity) against what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential houses, than against what is perceived as risky, like SMEs and entrepreneurs, is absolutely cuckoo.

That means that when banks try to maximize their risk adjusted return on equity they can multiply (leverage) many times more the perceived net risk adjusted margins received from “the safe” than those from “the risky”. As a result clearly, sooner or later, the safe are going to get too much bank credit (causing financial instability) and the risky have, immediately, less access to it (causing a weakening of the real economy). 

Anyone who can as regulators did in Basel II, assign a 20% risk weight to what is AAA rated and to which therefore dangerously excessive exposures could be created, and 150% to what is made so innocuous to our banking systems by being rated below BB-, always reminds me of those in Monsters, Inc. who run scared of the children. I wish they stopped finding energy in the screams of SMEs and start using instead the laughters of these.

The report also includes a picture of some activists holding a “We need a people’s Fed”. Yes, we sure do! Assigning 0% risk weight to the sovereign and 100% to any unrated citizen is pure statist ideology driven discrimination in favor of government bureaucrats and against the people. But perhaps the activists depicted are not into that kind of arguments. 

Draghi and Yellen might discuss problems associated to ECB’s and Fed’s large exposures to sovereign that their QEs have caused. If they were honest about the size of the problem, they should in the same breath include all sovereign debts and excess reserves held by banks only because of a 0% risk weight. Sir, if that’s not financial instability in the making what is?

PS. Those in Monsters Inc. all finally figured it out. Our bank regulators in the Basel Committee and the Financial Stability Board have yet to do so, even 10 years after that crisis produced mostly by AAA rated securities and loans to sovereigns like Greece 😩


August 23, 2017

Though benefitting from the Euro, the weaker Euro-nations still pay quite a lot for Germany’s export advantages.

Sir, Paul Clifton writes about the advantages provided to German exports by the fact that other countries help to keep the Euro value down "The euro gives Germany a permanent cost advantage" August 23. That, which is entirely correct, should also have us refer to the disadvantages for those other.

In November 1998, just before the launch of the Euro, in an Op-Ed titled “Burning the bridges in Europe” I wrote: “The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency, which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.”

And in November 2009, in a letter to you I asked about “what it would have looked like if for instance Greece still had the Drachma and Germany the Deutsche Mark… clearly Greece would be able to devalue and use that politically more friendly approach of being able to inflate yourself out of the problems, instead of having to impose Germanic discipline on their citizens.”


August 22, 2017

Will Jackson Hole Conference 2017 also ignore the distortions produced by the risk-weighted bank capital requirements?

Sir, Michael O’Sullivan, when speculating on Paul Volcker’s presence during this year’s Jackson Hole conference, writes that: “he might well look askance at the actions of contemporary central bankers. Volcker was an inflation crusher, a rate-riser (to 20 per cent) and, we can suspect, someone who believed that investors and economies had to bear the consequences of their choices”, “Jackson Hole offers central banks a chance to hand over baton” August 22.

Indeed but we should not forget that the Fed’s Paul Volcker, teaming up with the Bank of England, was the one who promoted the risk weighted capital requirements for banks… those who have, and still are, horrendously distorting the allocation of bank credit to the real economy.

Basel I, with its 0% risk weight, allowed banks looking to maximize returns on equity, to leverage infinitely the net risk adjusted margins, when paid by a friendly sovereign.

Basel II, for whenever an AAA to AA rating was present in the private sector, authorized a mindboggling 62.5 times leverage.

Basel I and II assigned a risk weight of 100% to risky SMEs and entrepreneurs’ allowing these borrowers’ net risk adjusted margins to be leveraged just 12.5 times.

So banks are going overboard lending and investing in what is perceived, decreed or concocted as safe, the present; while abandoning financing “the risky”, the future.

And all this because silly risk adverse regulators just can’t get their hands on the difference between ex ante and ex post risks. When you argue with them that what is perceived as very risky becomes by that fact alone safe, and that what is perceived as safe becomes risky, their eyes go blank… and they ignore you.

Bankers who are having their wet dreams of earning the highest ROEs on what is “safe”, with so little shareholder capital that it leaves much over for their bonuses, also keep an interested mum on this.

Sir, the immense stimulus offered by central banks has been wasted because the can was kicked down the wrong roads of increasing asset prices and government debts, and not down the road of those who can best help us to a better future.

Risk taking is the oxygen of development. God make us daring!

In the name of my constituency, my grandchildren, I can only say, “Damn those bank regulators”


August 21, 2017

Know the difference between ordinary private sector citizens and corporate leaders engaged in crony statism.

Sir, Rana Foroohar writes about “a role for corporate leaders who think about more than share prices… Some are calling on the private sector to take up the mantle of US leadership.” “Business can fill the leadership vacuum” August 21.

Boy, the aspiring Bill Gates and Mark Zuckerbergs of this world just got to love her. But, as I see it, many corporate leaders do not really belong to the ordinary real private sector, they are too much often just representatives and members of the crony-statism sector… as in “I called up Mike Spence, [then governor] reminded him the we were the biggest tech employer…”

Look for instance at those big banks loving it when they can leverage their equity manifold lending to “the safe”, like sovereigns and the AAA rated, and express no concerns at all with the fact that this stops them from lending sufficiently to the SMEs and entrepreneurs.

Do I disagree with Marc Benioff, head of Salesforce, when he states: “CEOs have to be responsible for something more than their own profitability. You have to serve a broader group of stakeholders — from employees to the environment — and when politicians don’t get things right, corporate leaders have to act”? Absolutely not! They have all the right to do so… but, any strengthening of corporatism, should also come with the label: “Warning, allowing corporate leaders to speak out too much for the ordinary private citizen’s interests, might be very dangerous for the health of society.”

PS. As another example look at a Goldman Sachs’ Lloyd Blankfein selling himself of as a responsible citizen, while at the same time he approves of financing dictators that odiously violate human rights. 


August 19, 2017

Tim Harford do not compare hurricane Katrina to our 2007/08-bank crisis. The first was nature the second was manmade

Sir, Tim Harford with respect to the global financial crisis, and referring to the fact that Hurricane Ivan of 2004 should have better prepared New Orleans for Katrina in 2005 asks: “even if we had clearly seen the crisis coming, would it have made a difference?” “Mental bias leaves us unprepared for disaster” August 19.

That is indeed a question, but a more precise one would be: “If we had clearly understood why a crisis had to come, would it have made a difference?”

Here is my simplified version of that issue.

Suppose a SME offered to pay the bank 6.5% in interest rate, which the bank saw as 2% for it’s cost of funds, 3% for the risk of the SME and 1.5% in net risk adjusted margin. Suppose also an AAA rated offering to pay 3.5% in interests, which the bank sees again as 2% for it’s cost of funds, 0.5% in risk premium and so therefore yielding a resulting risk adjusting net margin of 1%.

In all those more than 600 years of banking before the risk weighted capital requirements were introduced, bankers would lend to whom offered the largest risk adjusted net margin perceived, in the previous case to the SME.

But, after Basel II banks could leverage the SME’s offer 12.5 times, which would produce the bank an expected ROE of 18.75%, while the AAA rated could be leveraged 62.5 times, yielding an expected ROE of 62.5%.

Then of course the banks would naturally have to lend to the AAA rated, as not doing so would actually be ignoring their fiduciary responsibility to their shareholders.

So here is the real question. If that distortion in the allocation of bank credit had been duly understood, would it have made a difference? My answer would be a qualified “Yes!” That because, as a minimum minimorum, regulators would have understood that since their capital requirements were (loony) portfolio invariant, they would have to be especially careful with excessive growth of “safe” investments... like those AAA rated securities. 

Harford writes: “10 years on, senior Federal Reserve official Stanley Fischer is having to warn against ‘extremely dangerous and extremely short-sighted’ efforts to dismantle financial regulations.”

Sir, I warn instead against not dismantling entirely those financial regulations that caused the crisis… and that now keep sending all QE and low interest stimuli down unproductive roads.

PS. And not to speak about the 0% risk weighing of sovereigns, that which caused the excessive bank exposures to for instance Greece.


One day, Stanley Fischer, like most current central bankers and regulators, will ask himself, why did I not see that?

Sir, Sam Fleming writes: “Fischer worries about attacks by lawmakers on global regulatory bodies such as the Financial Stability Board, arguing that the rules it proposes are good for the world if everyone adopts them.” “Lunch with the FT Stanley Fischer ‘It’s dangerous and short-sighted’” August 19. Like Gershwin wrote it, “It ain’t necessarily so!”

In November 1999 in an Op-Ed in Venezuela I wrote: “The possible Big Bang that scares me the most, is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

In April 2003 as an Executive Director of the World Bank I argued that Board that "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

And in January 2003, FT published a letter in which I stated: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

Sir, had regulators not introduced their risk weighted capital requirements for banks, made worse by the importance given to some few human fallible credit rating agencies, the 2007/08 crisis would not have happened; and the economy, net of automation and demographic factors, and considering the outlandish stimuli, would not be as stagnant as it is now.

PS. That Op-Ed I referred to above also included: “I recently heard that SEC was establishing higher capital requirements for stockbroker firms, arguing that “. . . the weak have to merge to remain. We have to get rid of the rotten apples so that we can renew the trust in the system.” As I read it, it establishes a very dangerous relationship between weak and rotten. In fact, the financially weakest stockbroker in the system could be providing the most honest services while the big ones, just because of their size, can also bring down the whole world. It has always surprised me how the financial regulatory authorities, while preaching the value of diversification, act in favor of concentration.”

Let me translate that into the current risk weightings. “It establishes a very dangerous relation between risk and the right to access credit. The “risky”, like SMEs, could be providing the most important additions to the real economy, while sovereigns and AAA rated, just because of their perceived “safety”, could bring the whole world down.”


August 18, 2017

In crossroads where some cars are allowed to speed through at 62.5, and other at 12.5, which would cause the greatest accidents?

Robert A Denemark writes: “the financial system provides incentives to engage in risky behaviour that tends toward crisis… It is a good idea to avoid accidents even when there are no traffic laws, but if vehicles collide there can be no official blame. Legitimacy, the focus of the editorial, comes from the recognition of most people that the rules make sense. Do they?” “Financial system itself makes crises likely” August 18.

Do current rules make sense? Let me answer that question this way: In that crossroad where bankers take decisions about credit, regulators allowed bank equity to be leveraged much more with the net margins if these came from “safe” borrowers than when produced by “risky” ones. For instance Basel II, allowed a 62.5 times leverage for the AAA rated and only 12.5 times for SMEs.

Sir, where would you think the biggest and most dangerous crashes could occur?

The 20% risk weighted AAA rated securities, and 0% to 20% risk weighted sovereigns, like Greece, is a good hint for you to come up with the right answer.


Odious debts, odious credits and odious regulations are all yin-yang elements of the financial sector

Sir, M Shepherd, when commenting on Alex Pollock's letter "Sovereign debt has a pretty bad record" August 16 writes that “All too often, debates about defaults on government bonds focus on the borrowers and neglect the lenders.” “The other side of the sovereign debt story”August 18.

Absolutely, and that is why when I write about odious public debt, like that contracted in Venezuela, I always follow it up with one about odious public credit, like those awarded to Venezuela.

But, of course I have to add a point. For instance the immensely excessive public debt in Greece would never have happened had regulators not, for the purpose of setting the capital requirements for banks, assigned Greece a zero percent risk weight.

Those regulators have not been held accountable either, among others because of the network solidarity FT has showed them … in fact they have been promoted to central banks… and our banking system still lives under the distorting thumb of risk weights.


August 17, 2017

In order to find common Nafta ground, US, Canada and Mexico must begin by clearing for robots and automation

Shawn Donnan and Jude Webber quote Robert Lighthizer, US trade representative, having told negotiators. “Thousands of American factory workers have lost their jobs because of these provisions.” “Canada and Mexico rebuke US as Nafta renegotiation starts” August 17.

If Nafta members take notice of what robots and automation has done to manufacturing jobs, in all of their nations, then instead of facing each other as enemies they would be sharing a challenge.

It still amazes me how the recent American elections failed to recognize the job opportunities lost to automation. Had that not happened, Donald Trump would have had to speak about a Wall against robots instead, and would not have become president… not that that would have solved much either.

Jobs lost to robots and automation is not an easy problem to handle as it does produce good results too. If I was Nafta I would begin by asking my partners: “How do we make sure our grandchildren will be able to live surrounded by 1st class robots and smart artificial intelligence and not end up with 3rd class ones and dumb AI? That would be a real positive and constructive challenge for it.


August 16, 2017

Britain, don’t let all your hard and well-earned goodwill in Europe go to waste with dumb Brexit negotiations

Sir, Josef Joffe describes well the kind of goodwill Britain has in Europe. That goodwill is being horribly wasted in the Brexit proceedings, among other by those Remainders that want to get Brexit failures, in order to argue their petty “I told you so” “Brexit Britain has displaced Germany as the land of dreamers” August 16.

Had I been a citizen of Britain wanting decent Brexit negotiations, or one wanting to remain in EU, I would have reached out to all the millions of Josef Josses in Europe with the message of: “The Brexit vote indicates not all is well in EU, what can we do, and how can you help us to convince our fellow country men of not leaving?”

And if that had not opened up new roads, then my minimum minimorum plea would be: “Europeans, make sure your relations with Britain are mot harmed more than necessary by means of leaving Brexit negotiations, unsupervised, in the hands of EU-technocrats who have suffered a love spat or want to show off as though macho negotiators.


Its worse! To central banks’ holdings of public debt we must add that of normal banks holding it against zero capital

Sir, Kate Allen and Keith Fray with respect to the QEs write that “The Fed’s balance sheet has expanded significantly several times in the past, including during the second world war when it soaked up debt sales in a bid to improve market conditions. But the current era is the first time in history that such a large group of central banks has undertaken such a substantial volume of co-ordinated buying over the space of nearly a decade.” “Decade of QE leaves big central banks owning fifth of public debt” August 16.

That’s not the only “first time in history” event. Thomas Hale and Kate Allen, in “Europe weighs potential ‘doom loop’ solution” write “A critical factor in deciding demand for sovereign bonds is risk weightings, which determine how much capital a bank needs against its investments in different kinds of asset. Sovereign bonds in Europe have benefited from a zero risk weighting, making them highly attractive to banks, many of which borrowed cheaply from the European Central Bank to buy sovereign debt after the crisis.”

That should make clear for anyone not interested in hiding it that, to whatever public debts the central banks hold, we must add those that all banks hold only because they are allowed to do so against zero capital. Q. What is a 0.1% return worth if you can leverage it 1000 times? A. 100%

Sir, as I have told you umpteenth times before, in 1988, one year before the Berlin wall fell, that which was taken to be a big blow to statism, bank regulators, through the back door, introduced a zero risk weighting of sovereign debt. The statists have been playing us for fools ever since.

And now, when reality is catching up, they want to package and hide all this public debt in some securities they have the gall to name these European Safe Bonds “ESBies”, issued in order to “make the continent’s financial system safer”. Or, as Gianluca Salford, a strategist at JPMorgan disguises it, to “transport sovereign risk to a place where it’s more manageable”.

Sir, try to sell all central banks’ and banks zero weighted held public debt into a free market and see what rate you get. Taking current artificial public debts for real, or for being revenue neutral rates, or for being risk free rates, or for justifying public investment in infrastructure, is either stupidity or a shameful manipulation of truth. 

Sir, the day our citizens discover what is being done by these statist they will flee all sovereign debts and governments will be left, like Maduro in Venezuela, with central banks that can only print money to keep the can rolling and rolling until…

PS. Mr Salford argues: “Securitisation is not an innately bad thing — it can be used well as a stabilising source” No! If securities are sold at their correct securitized risks they do not provide remotely as much profits as those sold incorrectly offering securitized safety. In other words, suffering from innately bad incentives damns these.


August 14, 2017

Our dear George Banks, having anteceded the Basel Committee, would never have dreamt about current bank bonuses

Sir, Jonathan Ford writes: “As Andy Haldane of the Bank of England points out, there are few ways for banks to bolster their returns to shareholders. One is to loosen underwriting standards and so increase the riskiness of assets they invest in. The other is to squeeze the amount of regulatory capital they set against the investments they make.” “Banking bonuses ought to be dead and buried by now” August 14.

Haldane is wrong about the increase of riskiness of assets, to improve the return on equity that is of little and doubtful sustainable value (bankers have even been fired for that); but he is absolutely correct about the regulatory capital.

When current bank regulators were taken for a ride by bankers and convinced, like for instance with Basel II of 2004, to set the capital requirements against something rated AAA to AA at only 1.6%, meaning an authorized leverage of equity of 62.5, they allowed bankers to earn returns on equity beyond their shareholders’ wildest dreams, and this even after keeping for themselves huge eye-watering bonuses.

Place a 10% capital requirement on all bank assets and those bonuses would immediately begin to vanish in the air as a result of shareholders becoming again important to banks.

As a huge bonus for the rest of the economy, that would also eliminate the current odious distortion of bank credit in favor of “the safe”, sovereigns, AAArisktocracy and houses, and against the risky, SMEs and entrepreneurs.

George Banks (the first)


What’s 100% political correct has not even to be close to real feelings on Main Street

Sir, Gideon Long strangely thinks it is important to quote one obscure member of an unconstitutional assembly that represents perhaps less than 15% of Venezuelans with “If you think of invading us we’ll make [the] Vietnam [war] look small,” and then to describe that this member’s shouts “earned him a rapturous standing ovation”. “Trump threat ‘lets Maduro blame US for his woes’” August 14.

To reaffirm the validity of that Long refers to a poll in which “9 per cent of respondents felt the crisis would only be resolved by foreign military intervention”.

Suppose instead a poll asking: “If foreign military intervention was the only way to get rid of the current regime, (as Long quotes a Venezuelan woman believing) would you approve of it?” The way I read the feelings in my homeland (albeit from a foreign land), that question would be responded affirmative by a majority of Venezuelans.

Of course if that would happen, once the necessity has been removed, Venezuela’s Main Street would most probably, sort of thanklessly, again align itself to more political correct attitudes and blame Yankee imperialism for much. C'est la vie! 

PS. The way Gideon Long transmits information about Venezuela makes me think he might be one of those who can't resist a lefty talking purty.


August 12, 2017

The crisis can of ten years ago was kicked down some roads leading to nowhere

Sir, in your “Ten years on, the crisis leaves a dark legacy” of August 12 you rightly write, “A newly minted mortgage-asset securitisation industry had turned the borrowed capital into very liquid but little-understood securities”; but you so wrongly silence the fact that if these securities were just rated AAA to AA, regulators, with their Basel II of 2004, had allowed banks to leverage their capital (equity) an amazing 62.5 times to 1. If banks only obtained a 0.5% percent margin on these, they would earn a 50% return on equity.

And you recount: “The freeze in money markets hit global banks that had [authorized by regulators] leveraged their balance sheets to astonishing levels. They could not bear the strain… The rest — bank bailouts, recession, central bank intervention — is history. The history is unspooling still”

That’s true, but why is that so? The answer, because our baby-boomer leaders, egged on by failed regulators not wanting to understand or confess their mistakes, were to coward to bite the bullet, and so just kicked the can down some roads. Those roads, because of the distortion produced by the risk weighted capital requirements for banks in the allocation of credit to the real economy, lead to nowhere. If we do not completely eliminate this source of distortion, our capitalism, that which has served the Western world so well, will never regain legitimacy again.

You argue, erroneously I believe: “Financial crises end because market prices for tainted assets are established and credit flows again. In this case, only dramatic action by government made that possible.” On the contrary, had the markets been allowed to act, like what I suggested in 2006 with my letter “Long-term benefits of a hard landing”, we would probably already be clearly out of the woods, and the too big to fall banks would not have just grown bigger still.

Besides Sir, what capitalism do you refer to, that in which bank regulators assigned a risk-weight of 0% to the sovereign, and one of 100% to the citizens? To me that sounds pure and unabridged statism. Could it be you all in FT are devout statists, and that is why you have so insistently silenced my arguments?


August 10, 2017

Amazing how an anthropologist, like Gillian Tett, can believe that our financial markets are driven by lust for risks

Sir, Gillian Tett writes: “if we want to avoid a replay of 2007, we must keep questioning our assumptions — and peering at the parts of the system that seem “boring”, “geeky” and “dull”. Our mental bins can sometimes hold time-bombs” “The next crash risk is hiding in plain sight” August 10.

Indeed! And one of the greatest drivers of such time-bombs is confusing ex ante perceived risks with ex post risks.

But Ms. Tett also writes “Sometimes, market shocks occur because investors have taken obviously risky bets — just look at the tech bubble in 2001”. What? Does FT’s in house anthropologist really believe investors were taking “obviously risky bets”? Was it not much more the illusion of very high-risk adjusted returns that caught the investors’ attention?

But Ms. Tett also writes: “Most investors assume that Treasuries are the risk-free pillar of modern finance”. What? If there is anyone who has really assumed that, it is the bank regulators when they, in 1988, with Basel I, began to assign 0% risk-weights to sovereigns.

Ms. Tett also writes “precisely because the system has become so flush with cash — and seemingly calm — there is complacency; and not just about the dangers of clearly risky bets (say, Argentine bonds), but about the perils of “safe” assets too”.

Not really, the complacency about clearly risky bets is almost non-existent when compared to that related to safe assets.

As an example of riskiness Tett points out “an obscure “Inverse Vix” ETF that benefits from low volatility… the world’s 34th most actively traded equity security…[and] that has returned almost 100 per cent this year. What? Is she really arguing that something which offered the expectations of large returns and that has actually provided almost 100 per cent return this year, is riskier than holding 10 year German bunds yielding certain negative rates?

Sir, it is so hard to understand how Ms. Tett, and most of you, even when acknowledging that “The next crash risk is hiding in plain sight”, seem unable to wrap your minds around the fact that what is really dangerous, for instance to our banking system, is what is perceived as safe… and that therefore the current risk weighted capital requirements, besides dangerously distorting the allocation of bank credit to the real economy, are incredibly dumb.

Sir, were you a part of the inquisition, you would most certainly be prosecuting Galileo.


August 08, 2017

Could the Venezuelan National Assembly sue Goldman Sachs on behalf of Venezuelans for aiding and abetting a dictator?

Sir, Mitu Gulati writes: “a judge could find that the holders of Maduro bonds must have known that they were transacting with an unrepresentative or illegitimate agent of the people… Agency law goes beyond merely voiding the contract between the principal and the third party; a third party who suborns a betrayal of trust by the agent may be answerable in tort to the principal”, “Maduro bonds” Alphaville July 8.

Gulati also writes: “It is the Constituent Assembly itself and all of its works that the post-Maduro government must argue are unauthorized, invalid and illegitimate. And the longer that the Constituent Assembly stays in power, and makes the laws of the country, the more it begins to look like the real legislature”

That begs the question, if a President of USA, like Donald Trump had managed to create something as odiously farcical as Venezuela Constituent Assembly, how long would it take for it to begin to look like the real legislature? 100 years?

PS. A simple but complex question from a humble Venezuelan economist to an outstanding Venezuelan international lawyer


August 07, 2017

Should not regulators know that what is perceived safe has the largest potential of being what’s dangerous for banks?

Sir, John Authers writes: “In January 2007, credit was priced on the assumption that virtually all US sub-prime mortgages (to people with poor credit histories), would be repaid in full. House prices were already falling. Several subprime lenders went bankrupt in early 2007, with no great effect on credit prices. Banks felt obliged to stay in the market”, “Warning signs existed during decade before credit crunch” July 7.

Of course signs of distress in the housing markets were already seen. In August 2006 you published a letter I wrote to you in response to an editorial titled “Hard edge of a soft landing for houses”.

But to say that these credits were based on some direct assumptions or knowledge about subprime mortgages is blatantly wrong. It was strictly based on the AAA ratings that credit rating agencies issued to many of the securities backed with mortgages to the subprime sector.

And Sir, when with Basel II of 2004 regulators had authorized banks to leverage their capital 62.5 times when investing in what carried an AAA rating, but only 12.5 times when lending to for instance SMEs, there were absolutely no incentives to question such ratings. Banks did not feel obliged to stay in the market they loved it.

It all comes back to one of the fundamental mistakes made by current regulators, namely that of believing what is perceived as risky to be more dangerous to the banking system than was is perceived safe.


What the $150bn in US fines paid by banks has caused the real economy, can best be described as financial sadism

Sir, Kara Scannell writes: “Demands for accountability ushered in an era where the US government was willing to penalise financial institutions severely, yet most crisis-related actions were civil rather than criminal and few bankers went to prison” “Banks rack up $150bn in US fines since start of the financial crisis” July 7.

If we use Basel II’s basic capital requirement of 8%, that represents an authorized leverage of 12.5 to 1. If we multiply that number times the $150bn in fines paid by banks, we can see that the real economy might have obtained $1.9tn less access to credit.

And of course, punishing the shareholders of banks that way, must cause the cost of bank capital to increase and, as a result, borrowers having to pay more for loans.

And of course, banks tight on capital, will not lend to what requires them to hold more capital, which currently means those perceived as risky, like entrepreneurs and SMEs, something that can only reduce the dynamism of the economy.

Sir, that is pure and unabridged financial sadism. That amount of killed bank credit potential represents about 50% of the Fed’s current QE balance. Need we say more?

PS. I remember having written a similar comment about 3 years ago.


Why is it so hard to understand Basel I’s 1988 statist regulatory distortion of credit in favor of sovereigns?

Sir, I have written 59 letters to John Plender over the years, mostly about the distortions in the allocation of bank credit to the real economy the risk weighted capital requirements cause. These letters, as well as other 2500 to you, denouncing the serious and fundamental flaws with the Basel Committee’s risk weighted capital requirements, have been basically ignored… let us say censored.

For instance in May 2016 I wrote: “I am amazed John Plender leaves out the fact that… courtesy of the Basel Committee, banks currently need to hold especially little capital against that public debt... for which “the issue of solvency would resurface”

And all that because unilaterally the regulators, in 1988, with the Basel Accord suddenly decided that sovereigns posed no credit risk, and no one protested the statism that was thereby de facto introduced.

To workout our banks out of such bind, will take huge amounts of fresh bank capital and very specialized knowledge, or intuition on how to go about it, without disastrously affecting the bank lending to the rest of the economy.”

And in November 2004 FT did publish one letter in which I wrote: “I also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Now, John Plender writes: “The risk-weighted Basel capital adequacy regime, despite post-crisis tweaking, is fundamentally flawed. Sovereign debt enjoys excessively favourable treatment so eurozone banks stuff their balance sheets with the IOUs of seriously over-indebted governments”, “Lessons from the credit crunch” July 7.

Sir, when in a year or two I might publish a book on my impossibilities to communicate with FT, you or someone in FT will have some explanations to do.

In this world of fake news, shutting up someone who might be denouncing something that could be akin to financial sector terrorism is just as bad.


August 06, 2017

ECB’s Mario Draghi’s star quality would evaporate had he to publicly answer some hard questions on bank regulations

Roger Blitz writes: “Mario Draghi, president of the European Central Bank, will be the star at the annual Jackson Hole symposium in Wyoming this year.” “Weak dollar remains centre stage” August 5.

Sir, if Mario Draghi, a former chair of the Financial Stability Board, and the current chair of the Group of Governors and Heads of Supervision (GHOS) of the Basel Committee, and therefore one of the most responsible for current bank regulations is the star of anything, that is only because he has never been made to fully answer some questions about current bank regulations in public, by his peers or by for instance FT’s journalist.

There are many many questions I could think of, but let me just indicate two:

First: Mr. Draghi. Do you not think that allowing banks to leverage more their equity with the net margins offered by those perceived safe than with those same margins when offered by those perceived risky; which means it is easier for banks to obtain higher returns on equity with “the safe” than with “the risky” does not distort the allocation of credit to the real economy?

If Draghi answers no, then there is nothing to do, as he would be evidencing he is clueless about finance on Main Street. If he answers yes then follow up with: Don’t you think this could be dangerous for the real economy and who authorized you and your colleagues to do so?

Second: Mr. Draghi, obviously current risk weighted capital requirements for banks, more perceived risk more capital, less risk less capital, indicates you the regulators believe that what is perceived as risky, is what is risky for the bank system. So, will you please tell us when there has ever been a bank crisis that has resulted from excessive exposures to what was perceived as risky when placed on the balance sheets of banks? As far as I gather from history all bank crisis, no exceptions, have been caused by unexpected events, criminal behavior or excessive exposures to what was perceived as safe when incorporated on banks’ balance sheet but that later, ex post, turned out to be very risky.

If Draghi answers yes, then he is deaf and has not heard the question. If he answers no, then ask him to explain why Basel II assigned a standard risk weight of 20% to what was AAA to AA rated and a 150% to what was rated below BB- and would therefore not be touched by bankers even with a ten feet pole.

Sir, Mario Draghi at ECB and others at the Fed with QEs and low interest rates, have just been kicking the 2008 crisis can down the road. The risk weighted capital requirements have caused that can to roll on the wrong roads. That is an act of terrorism against our economies.


August 05, 2017

More intelligent but less uncontrollable, or dumber and more controllable robots, that is the real tough question

Sir, you write “some researchers have called for greater “robot transparency” — safeguards to ensure that humans can always grasp what the most sophisticated machines are doing, and why… Robots can help people with their work and unleash social and economic benefits. But they must be trusted, or the humans will vote to take back control”, “Intelligent robots must be trusted by humans” August 5.

Sir, what do you prefer, more intelligent but less uncontrollable or dumber and more controllable robots?

What are we to do if controlling our intelligent robots makes these weaker than those of our future enemies, whoever these will be?

I ask this because the revised version of that Chinese curse that holds "may your children live in interesting times", could very easily be, may your children lived surrounded by 3rd class robots and dumb artificial intelligence. 

So even if “The era in which robots might redesign themselves constantly and advance beyond human understanding, is far into the future” their education, like that of the humans, might very well start in quite early childhood. 


August 04, 2017

The risk weighted capital requirements give banks great incentives to hide risk from their regulators.

Sir, Eric Platt and Alistair Gray write “US regulators have joined investors in voicing concern over risky bank lending… particularly when projections make a company appear more creditworthy… ‘The agencies continue to see cases of aggressive projections used to justify pass ratings on transactions that examiners consider non-pass’… although they said the number of cases was “at much lower levels than in prior periods” “Wall Street watchdogs sound alarm over risky bank lending” July 4.

In good old banking days, around 600 years, before Basel Committee’s risk weighted capital requirements, bankers argued their clients riskiness in order to collect higher risk premiums. Now banks argue more their clients safety, in order to convince regulators that they can hold less capital. That distortion makes the efficient allocation of bank credit to the real economy.

“The Fed and its fellow regulators… give deals a pass or non-pass rating which is then used to build a picture of banks’ lending activities.”

Considering that bank crisis only result from unexpected events or excessive exposures to something perceived, concocted or decreed as safe, and never ever from something perceived as risky, does this pass or non-pass rating activity make any sense? Absolutely not! It is as silly as can be… except for those who earn their livings from working on bank regulations. 

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

“the agencies said that risks had declined slightly but remained “elevated”. Lending considered to be non-pass had fallen from 10.3 per cent to 9.7 per cent of the overall shared national credit portfolio” As I see it, we could just as well argue that where the real dangers lie, increased from 89.7% to 90.3%.

Sir, again for the umpteenth time, without the elimination of the insane risk weighted capital requirements, there is no way our banks will recover their sanity. I am amazed on how you have decided to keep silence on this.