November 30, 2018

When EU authorities assigned Greece a 0% credit risk they doomed that nation, inexorable, to suffer a real life Greek tragedy.

Sir, Lord Aldington, defending a Remain writes: “Greek tragedies seldom have a happy ending; they are about inexorable fate. There is nothing inexorable about being wilfully blind to our situation. Integration works on the basis of partnership.” “Enter the tragic Chorus, tearing at their clothes and screaming” November 30.

Indeed, Hear, hear, but let us also not forget that the partnership Lord Aldington supports, caused a real life Greek tragedy. When the European Commission assigned Greece a 0% credit risk, it doomed it, inexorably, to tragically excessive debts, which to top it up, are denominated in euros, de facto not Greece’s domestic (printable) currency.

If they do not get rid of the statist, distortive and dangerous risk weighted capital requirements for banks; there will be many more similar Greek tragedies in EU, and around the world.


@PerKurowski

Hercules Poirot, as a bank regulator, would be much more watchful of the “safe” than of the obvious risky.

Sir, Gillian Tett reminds us that “Any fan of Agatha Christie mystery books knows that distraction is a powerful plot device: if there was a commotion in the kitchen, detective Hercule Poirot would look for a body in the library, or other clues being hidden in plain sight, amid the noise.” “Federal Reserve attack is just a distraction”, November 30.

Indeed, but she could rest assure that Poirot, if cast as a bank regulator, would laugh at his current colleagues who show so much concern with what seems obviously risky, like when they in Basel II assign a risk weight of 150% to what’s rated below BB-, and so little about what seems very safe, like giving only a 20% risk weight to what’s rated AAA and is, therefore, if wrong, truly dangerous for the bank system.

Ms. Tett argues here that President Donald Trump “uses weapons of distraction more effectively than almost any leader before him”

She could be right but also, when GDP and inflation data are fraught with may uncertainties or outright errors, to hear the Fed discussing the “neutral rate”, could also be an intent to distract from the fact that they find themselves in that “dark room” deputy Fed chair Rich Clarida is quoted to have mentioned, and so that they therefore have not the faintest idea about what’s going on, and much less about what to do. 

Sir, when not knowing the answer to a question, proceeding to with a firm voice give an answer nobody is guaranteed to fully understand, also qualifies as a high quality distraction.

PS. That 20% risk weight of the AAA to AA rated, translated to a capital requirement of only 1.6% (8%*20%) which meant the banks were allowed to leverage mindblowing 62.5 times with such assets (100/1.6) which translated in to the cause numero uno for the 2008 crisis. 

@PerKurowski

November 28, 2018

Loony risk-weighted capital requirements block entrepreneurs’ access to fair credit.

Sir, Eric Schmidt writes“Right now, the UK, the EU and the US share a growing problem: we are experiencing a market failure in the way we support entrepreneurs.” “Our narrow view of entrepreneurs squanders talent”, November 28. 

Absolutely! But some market failures are government produced. 

If a bank lends to someone wanting to buy a house, something perceived as safe, the regulators allow it to hold much less capital that if it lends to an entrepreneur, something perceived as risky. 

So if a bank lends to someone wanting to buy a house, something “safe”, it will be able to leverage its capital much more than it can do if it lends to an entrepreneur, something

So if a bank lends to someone wanting to buy a house, something “safe”, it will be able earn much higher expected risk adjusted returns on its equity than it can do if it lends to an entrepreneur, something “risky”. 

But was it always this way? Of course not! This happened when bank regulators introduced the risk weighted capital requirements for banks. That which is based on that truly loony concept that what bankers perceive as risky, is more dangerous to our bank system than that what bankers perceive as safe. 

Since then millions of credit requests have been either negated or if approved, have had to support a higher than needed interest rate. 

Schmidt also writes about the need to “drop the tunnel vision promoted by many academic and professional specialisations”.

Absolutely! I have often argued that had there been: 

a plumber or a nurse disturbing the regulators’ group-think with an innocent question like “what has caused big bank crises in the past?” 

or a professional that had taken a course in conditional probabilities

or someone (incorrectly) quoting Mark Twain with “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”, 

or a golfer asking “why would you assign more handicap strokes to good players taking these away from lousy players like me?”, 

then the 2008 crisis would not have happened… and Lehman Brothers would still be alive and kicking.

God make us daring!

@PerKurowski

November 23, 2018

Which bonds, the high-yield or the low-yield, cause the most sufferings when things go wrong?

Sir, Robert Smith quotes Inge Edvardsen, head of fixed income sales at Pareto Securities with “High-yield bonds offer high returns with associated risks but it is of course unfortunate when our clients suffer losses”, “Dreams turns to Sweden for high-yield deal as UK retailing debt feels strain” November 23.

Similarly Edvardsen could have said “Low-yield bonds offer low returns with associated risks but it is of course unfortunate when our clients suffer losses” 

So let me ask you Sir, which of the bonds, the high-yield or the low-yield, do you associate with clients suffering the most when things go wrong?

I have no doubt; it is the low-yield-low-perceived-risk ones, because these usually attract the highest portfolio exposures at the lowest risk compensation premiums.

But, our bank regulators, they think differently; they think the high-yield-high-perceived bonds cause more sufferings, because those would be the bonds against which they would require banks to hold more capital.

It’s all so dangerously loony to me. Our current bank regulators have clearly confused ex ante risks with ex post dangers, and they have not the slightest idea about what conditional probabilities mean.

Sir, it sure surprises me that you seem to agree with the regulators.

@PerKurowski

November 22, 2018

Worse than Italy “sleepwalking into instability” is the European Commission pushing the Eurozone into it fully awake.

Sir, Jim Brunsden and Miles Johnson writes the European Commission stepped up action on Italy’s rule-busting 2019 budget, warning that its plans to stimulate the economy through increased borrowing, risks “sleepwalking into instability”. “Brussels warns Italy’s budget threatens ‘instability’” November 22.

Of course, as Pierre Moscovici, EU economy commissioner, says: “this budget carries risks for Italy’s economy, for its companies, for its savers and its taxpayers”.

The sad fact though is that reaching an acceptable agreement on the budget issue would still be like papering over Italy’s and EU’s real underlying problems, not solving much.

The European Commission must/should know: 

1. About the challenges the Euro imposed on Eurozone members and that it has, for soon twenty years now, done nothing to resolve. 

2. That, for purposes of bank capital requirements, assigning a 0% risk to all sovereign borrowers within the Eurozone, those who de facto have their debt not denominated in a domestic (printable) currency, is a regulatory subsidy that impedes markets to signal the real costs of sovereign debt; which will necessarily cause many of its members to incur in dangerous excessive levels of public debt.

Before EC face up to these issues and does something real and sustainable about it, though much mightier, it has still not earned much right to lecture Italy.

Just like all regulators and central bankers, believing that what bankers perceive as risky is more dangerous to our bank systems than what bankers perceive as safe, have no right to lecture us on risk management.

EU can’t keep forcing its members to walk the plank, as it did with Greece, and still remain a viable union. Anyone against a Brexit and for a Remain should be very aware of that… that is unless his position has nothing to do with EU and all to do with local politicking.

@PerKurowski

FT, I have two questions and one observation to make about the securitisation and privatisation of student debt in UK.

Sir, Thomas Hale writes that after “the biggest privatisation of student loans…the first of a series of anticipated transactions that stand to create a market for graduate debt in the UK, the parliament’s spending watchdog concluded the government received too little in return for what it gave up”. “Spending watchdog criticises student loans privatisation” November 22.

The Department for Education, DfE, answered it was “confident that we achieved value for money for taxpayers… as Student loans are designed so that borrowers only repay when they can afford to [which] only means many students will never fully pay back their loans”

I have two questions and one observation to make

First question: Before a student has his debt packaged into a security to be sold off to investors, should he not have the right to make a preemptive offer for it? Not that it makes a real difference but, emotionally it might not be the same for some to owe their government than to owe Goldman Sachs  their student debt.

Second question: If taxpayer should receive value for money for all these student loans, should not those who are supposed to help students to repay their debts, the professors, the universities also have some skin in the game? I mean at this moment it would seem they get all the benefits from the students taking on debt, at no cost or risk for them.

I recently tweeted: Have you ever seen a university stating a normal investment disclosure like: “Warning, if you pay us for your studies by taking on debt, you might not earn enough to repay it.” 

Hale writes: “Securitisation, a process where assets are packaged together and sold on as bonds to investors, ranging from pension funds to alternative asset managers”

It is with respect to that I would like to make an observation, namely that of reminding that securitization is basically like making sausages, the worse the ingredients, the higher the profits. So pension funds, please beware!

@PerKurowski

November 21, 2018

Bank regulators from developed countries kicked away the ladder of risk-taking for the developing ones

Sir, Mohamed El-Erian writes: “the global economy is losing momentum and the divergence between advanced economies is growing… the majority of developed economies are yet to adopt meaningful pro-growth measures”, “Faltering developed world economies raise the risks for equity investors” November 21

Sir, Friedrich List in “The National System of Political Economy” 1885[1]wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” 

In a similar way I would argue that the Basel Committee, with its perceived credit risk weighted capital requirements for banks kicked away from the developing countries that ladder of risk-taking that had been the oxygen for helping to get the developed countries where they are.

In 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I introduced a document titled“Are the Basel bank regulations good for development?

In it I tried to explain that prioritizing as it does bank lending to the safer present over that to the riskier future is not how a nation can develop.


But worse, the fact that the developed countries also promote these regulations means they are now reversing their development; and they will also have to confront especially horrible crises… those caused by especially excessive bank exposures to what is ex ante especially perceived as safe, but that ex post turn out risky, against especially little bank capital.


@PerKurowski

[1]List, F. 1885. The National System of Political Economy, translated by Sampson S. Lloyd from the original German published in 1841. London: Longmans, Green, and Company.

November 19, 2018

Italy’s problems are not all of its own making; much is caused by a regulatory mistake committed by bank regulators and the European Commission.

Sir, Franco Debenedettiwrites “The flexibility accorded by Brussels was used neither for reducing the debt, nor for implementing the ‘painful structural reforms to promote growth’ [and] The budget actually under examination by Brussels is all about more public expenditure employed for giveaways and does nothing to improve productivity and growth of the country, “A bargain with Brussels looks unrealistic”, November 19.

He is correct, in that, but he leaves out a crucial element that is an essential part of current realities.

Basel II, approved in June 2004, held that banks as Italy was rated at that time, AA-, needed to hold 1.6% in capital against Italy’s sovereign debt. Currently rated BBB, banks were supposed to hold 4% in capital against that debt. But the European Commission then surpassed those per se already extremely generous and pro statist capital requirements. Through “Sovereign Debt Privileges” it assigned a 0% risk weight on Italy’s sovereign debt; which meant banks did not need to hold any capital against it.

That allowed (or in reality forced) Italy’s banks to end up with a huge overexposure to Italian sovereign debt in Euros, a debt that de facto is not denominated in Italy’s domestic (printable) currency.

What to do? Any solution is going to hurt, but one has at least the right to ask whether Italy, as was Greece, should have to carry the whole costs of a mistake committed by the European Union authorities.

To top it up, there is no way one can improve productivity and growth of any country that distorts the allocation of bank credit to the real economy, as do the risk weighted capital requirements for banks.

@PerKurowski

In a “world full of uncertainties”, how come regulators are allowed to bet our banks on the certainty of perceived risks?

Claire Jones reports that Olli Rehn, a possible contender to replace Mario Draghi opines that Central bankers must have “the ability and agility to manoeuvre though the current world that’s full of uncertainties” “Central bankers face a ‘world full of uncertainties’” November 19.

This is exactly what is wrong, they do accept there are uncertainties all around, but then they are not capable to utter a word when regulators, with Basel II, bet the banks on certainty, by allowing banks to leverage 62.5 times their capital with an asset if only a human fallible credit rating agency had assigned it an AAA to AA rating. 

According to Jones, Rhen agrees with Draghi in that “if Italy wanted ECB help, it had to sign up to a bailout programme from the European Stability Mechanism”. That de facto means that Italy must have to walk the plank as Greece did. 

But, I see not a word about the European Commission “Sovereign Debt Privileges”, that which set a 0% risk weight on Italy’s Euro denominated public debt, that which allowed (or in reality forced) Italy’s banks to overload on that debt. Why should Italy (or Greece), in a Union, have to carry the whole costs of a mistake caused by the Union?

Rhen opines “The only legitimate way of making monetary policy, be it conventional or unconventional, is to look at the economic development in the euro area . . . in its entirety”. He is absolutely right, but then the question is, why have EU not done anything real, in 20 years, to solve the challenges posed by the Euro to the individual nations of that entirety?

Those challenges if not solved, soon, pose a real existential threat to the European Union. Does Olli Rhen really believe that completing a banking union would suffice to take care of that?

@PerKurowski

November 18, 2018

These are the houses that Jack built, baby, and their prices reaches up into the sky

Sir, I refer to Merryn Somerset Webb’s “UK property: The recent gains could turn out to be a huge historical anomaly” House and Home, November 17.

I would argue that more than an anomaly we are living the results of a humanly understandable political mistake of historical proportions, namely that of trying to make houses affordable by means of many preferential conditions.

After society, God knows why, decided that a home owned was much more valuable than a home rented, many different favors were awarded the purchasing of houses, many like those Somerset Webb describes, but also some other much harder to detect.

For instance, regulators decided that since they perceived residential mortgages as very safe, banks would be allowed to hold comparatively little capital against these. Since banks could therefore leverage much more with residential mortgages than with many other assets, banks had higher incentives to give a house buyer, who otherwise would not be able to buy a house, an easy credit.

That easy credit to the first buyer increased the demand of houses, so houses prices in general went up; and so the next time when a second buyer also wanted help to afford the house, you had to supply him with even more easy credit than what you helped the first buyer with… and so up and up and up it goes…

And those who own houses benefit and feel enriched by the increase in the price of houses are happy, while those who have not been able to jump on that bandwagon feel more and more frustrated, because the see their dream of a “real” home being made less and less affordable. That is of course something that the redistribution and polarization profiteers try to capitalize on.

And parents, so as to get their children out of the basement, now have to use their house to obtain the finance needed in order to help their children to make the down payments on the houses they want to buy. The sad story is that if banks had not invested so much in “safe” residential mortgages and had perhaps invested more in loans to entrepreneurs who could give them jobs, the children would have been able to afford, on their own, the lower priced houses. 

And so houses morphed from being only homes into also being investment assets. How much of current high house price is represented by the home value and how much by the easy credit value is anyone’s guess, but it sure would be interesting to see how much of their prices.

Whatever, the moment all those investment assets are to be cashed in by too many at the same time, for instance to cover some retirement costs, it will be ugly, for house owners, and for the banks, and for the taxman who has also been so much financed by the house bubble, in fact it will be ugly for all.

It all makes me remember Alan Price’s “Oh my, my, my, my, my, my, my, it makes you wanna cry. This is the house that Jack built, baby, and it reaches up into the sky”

These were the houses that Jack built... with plenty of easy credit, and which were taxed by the taxman


@PerKurowski

November 17, 2018

Should not a “State of the European Union” analysis be an indispensable document, when searching for a solution to the Brexit vs. Remain quantum entanglement?

George Parker and Alex Barker discussing the “brutal reception in cabinet and in parliament the Brexit withdrawal agreement received mention one cabinet minister saying: “The people who are criticising the deal don’t have any alternative, that was true before the Chequers meeting, it was true before this week’s cabinet meeting and it’s still true now. People can suck their teeth and say it’s a betrayal and talk about vassalage, but they don’t seem to have given any thought to what the alternative might be.” “May heads for a hard sell” November 17.

In terms of Brexit mechanism that might be true, but there is of course also the alternative of holding another referendum, which might provide a Remain instead. 

What I sorely miss in the whole Brexit vs. Remain heated discussions is a “State of the European Union” analysis that would help to bring some perspective on it all, and that could also be useful to all Europeans, independent from what happens down the line.

I say that because I sincerely think the EU is not doing well, and that there are huge problems brewing there, which sometimes, like yesterday, have me thinking that though Brexit is an absolutely awful solution, a Remain could be even worse.

Sir, could you imagine the national embarrassment for Britain to change its mind and go for a Remain, and then finding EU gone? 

PS. Quantum entanglement is a physical phenomenon which occurs when pairs or groups of particles are generated, interact, or share spatial proximity in ways such that the quantum state of each particle cannot be described independently of the state of the other(s), even when the particles are separated by a large distance—instead, a quantum state must be described for the system as a whole.

@PerKurowski

November 16, 2018

Stress tests for banks, performed by mighty regulators, signify dangerous systemic risks, as well as useless predictors

Sir, Caroline Binham reports on how “Andrea Enria, the outgoing head of the European Banking Authority, who is set to become the Eurozone’s top banking regulator, has questioned the value of its stress tests of lenders’ balance sheets, arguing that elements of them are no longer ‘tenable’ and need a redesign” “European regulator questions value of stress tests” November 16.

I could not agree more for two reasons:

First: Stress tests introduce a systemic risk. The fact that banker know their banks will be the object of stress tests causes them to distract their attention from what they might think to be more dangerous, in order to concentrate more on what they think regulators might think more dangerous.

Second: The stress tests are useless since they avoid stress testing many real stresses. In 2003 the United States General Accounting Office (GAO), in its study of the IMF’s capacity to predict crisis concluded, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.

Much of that has to be a consequence of that if IMF forecasts a crisis; it could quite possibly be blamed for detonating that crisis. Similarly, regulators will avoid to stress test the risks they might be blamed for having produced. For instance when will they stress test the banks on the possibility that their risk weight of 0% to sovereign would have to be increased, and the market reactions to that news. Never! They have painted themselves into a corner.

Sir, when it comes to banks, and their regulations, worry much more about what might be perceived as safe than about what is perceived as risky. In that respect, if I were to perform stress tests on banks, I would look to stress test the risks that seemingly would least need to be stress tested.

@PerKurowski

Brexit is sure a bad idea, but how can you be sure Remain is not even a worse one?

Sir, Alex Barker and Jim Brunsden quote Catherine Barnard, a professor of EU law at Cambridge university: “Never before has a treaty been constructed of this kind,” “The EU is a unique organization. What the Brexit process has revealed is just how deep the integration is in reality.” “Accord leaves Britain bound to Brussels” November 16.

On the first, indeed, to for instance adopt a Euro in order to push forward a union instead of letting a union produce a common currency, is a truly strange way to construct a union.

But, on the second “how deep the integration is in reality” I beg to differ. Having a member like Greece walk the plank, especially as EU authorities were most to blame for its problems, is not the doings of a real deep union.

Sir, let me refer to a speech delivered by Mario Draghi, President of the ECB, at the Frankfurt European Banking Congress, given today, “The outlook for the euro area economy”. 

It concluded with: “I want to emphasize how completing Economic and Monetary Union has become more urgent over time not less urgent – and not only for the economic reasoning that has always underpinned my remarks, but also to preserve our European construction.”

I agree, because as is, Italy will not walk the plank as Greece did, and that could bring on the end of the euro, as we now know it, which could bring an end to the European Union, as we know now it, or, clearer yet, as we perhaps really don’t know it.

Sir, whether Brexit or Remain supporters, does not Britain (and all other UE members) have the right to know what “completing Economic and Monetary Union” to “preserve EU our European construction”, which Draghi urges really entails?

Draghi also mentioned “as urgent as the first steps were in euro area crisis management seven years ago”, “The completion of the banking union in all its dimensions, including risk reduction, and the start of the capital markets union through implementing all ongoing initiatives by 2019”

Sir, does not Britain, a nation where banking means so much, have the right to know exactly what that entails so that it banks are not castrated in the process?It is not just me a foreigner asking. Let me remind you that seven years ago, Alex Barker in [Mr. Brexit Negotiator] “Barnier vs. the Brits” wrote about the fears of Sir Mervin King that Brussels reforms would reshape a vital British industry, banking, to the benefit of eurozone rivals.

Draghi also said: “Household net worth remains at solid levels on the back of rising house prices and is adding to continued consumption growth.” 

That is an untrue statement. A much truer one would be: “Household net worth remains very fragile since it rides almost exclusively on rising house prices, as a consequence of the distortion produced by too much and too favorable financing being offered for the purchase of houses. A distortion that helped to anticipate much of the consumption we have seen, but that will come back and hurt house owners, whether by house prices falling, or hurt everyone, by inflation eroding our real consumption power.

Sir, when that happens, and the crisis needs to be managed so as to impede the destruction of all social cohesion, would you prefer to do that on a national level, instead of on the level of a union in which very few know how to sing its anthem?

Sir, I’m no one to give a recommendation but, should not the Brexit vs. Remain discussions refer more fundamentally to the future of Britain and of EU, instead of being turned into another profitable venture for some opportunistic polarization profiteers?

Should not FT inform its readers, in a much more balanced way, of all challenges that lay ahead, not only those of a Brexit but also those of a Remain?

A long time friend and admirer of Britain 

@PerKurowski

November 14, 2018

The risk weighted capital requirements for banks, is the most potent steroid ever for having to suffer some truly bad “Minsky moments”.

Sir, John Plender correctly writes: “If Hyman Minsky were alive today, he would regard the current economic cycle as a testing ground for his instability hypothesis. That which holds the financial system has an innate tendency to swing from robustness to fragility because periods of financial stability breed complacency and encourage excessive risk-taking.” “Complacent investors face a Minsky moment as pendulum swings” November 14.

But what Plender does not mention, perhaps because it belongs to that which shall not be mentioned, is the greatest procyclical pro-Minsky-moment steroid ever, namely the risk weighted capital requirements for banks.

When times are good and credit rating outlooks are sunny, that regulation allows banks to leverage immensely with what’s perceived as safe but, when a hard rain seems its going to fall, and credit ratings fall, all recessionary implications are made so much worse by banks then, suddenly, having to hold much more capital… and since such capital might be hard to find during bad times, they take refuge in whatever is still perceived, or decreed as in the case of sovereigns, to be of less risk… just increasing the stakes


Plender writes: “It is historically atypical in that central banks have been encouraging deflationary threat”. Really? At least with respect to banks they have encouraged these to build up ever-larger exposures to what’s perceived as safe, like residential mortgages, or to what’s decreed as safe, like loans to friendly sovereigns. 


@PerKurowski

November 13, 2018

Should not EU cut its grand bargain with all its over-indebted sovereigns before any Brexit vs. Remain voting took place?

David Folkerts-Landau, the chief economist at Deutsche Bank writes, “An Italian debt crisis poses an existential risk to the eurozone. The current game of chicken is irresponsible. It also ignores the dangers inherent in any financial crisis, the costs of which would dwarf those of having the ESM step in”, “Europe must cut a grand bargain with Italy” November13.

Of course Italy cannot be expected to pay €2.450 billion, meaning over €40.000 per citizen, denominated in a currency that is de facto not Italy’s real domestic (printable) currency. Be sure Sir, Italy will not walk the plank, as Greece had to do.

But of course what Folkerts-Landau writes, “The option of a debt write-down with private sector involvement is also unfeasible”, is not possible either.

One way to solve Italy’s (and Europe’s) sovereign debt crisis as painless as possible could be by using a Brady bond/zero coupon mechanism as used creatively by the US in 1989 during the Latin American debt crisis. I mentioned the use of those bonds to FT in a letter of 2008, “"Après us, le déluge", as did William R. Rhodes in 2012 with “Time to end the Eurozone's ad hoc fixes”.

A complementary tool to help fix Italy’s (Europe’s) banks, as I wrote to FT in 2012, would be to do what Chile did during its mega bank crisis in 1982 namely: a. having central banks issue bonds in order to buy “risky” loans not allowing banks to pay dividends until those notes had been repurchased; b. forcing banks to hold more capital with central banks subscribing shares not wanted by the market with these shares resold over a determined number of years and c. generous financing plans to allow small investors to purchase equity of the banks.

Obviously, for Italy’s (and Europe’s) banks to be really helpful to the real Italian economy, it would be imperative to get rid of the credit risk weighted equity requirements for banks, those which erode the incentives for banks to give credit to those who most could do good by receiving it, like SMEs and entrepreneurs.

What is absolutely true though is that to solve Italy’s (Europe’s) problems, more zero risk weighted loans to the sovereigns, in order for government bureaucrats to allocate the resources derived from bank credit, will just not cut it… no matter how much haircut on Italy’s (or other European sovereign’s) debt you accept.

Europe would need to start the process of helping Italy (and Europe) by getting rid of all current high-shot regulators. Not only would they be too busy, as until now, covering up their mistakes, but also, as Einstein said, “We can't solve problems by using the same kind of thinking we used when we createdthem.”

Sir, I suspect all in FT would vote for a Remain if given a chance, but before doing so, would you not prefer EU authorities to clearly explain to you how they intend to fix the European sovereign debts overhang. That which if not fixed will crash the Euro and thereby most probably also crash the European Union? Sir, would it not look truly silly Remaining in something gone?

PS. It is clear that without the help of those wanting immensely more to save the European Union than to save some cushy jobs, the future of the EU very sadly looks very bleak.

@PerKurowski

November 12, 2018

Aren’t all nations, one way or another, tarred with a similar brush of nationalism?

Sir, Harriet Agnew and David Keohane report that, on the centenary of the end of the First World War, Emmanuel Macron railed against nationalism as a “betrayal of patriotism”, in an implicit rebuke to his US counterpart. “Macron attacks nationalism in Armistice Day rebuke to Trump” November 12.

Macron said: “By saying ‘Our interests first. Who cares about the others?’ we erase what a nation holds dearest, what gives it life, what makes it great, and what is essential: its moral values.” Is that not beautiful? Of course it is!

My problem though is that precisely these days I have been writing that the ending of the First World War, and the Versailles treaty, should provide an opportunity to reflect on the armistice conditions that are imposed on sovereigns, when they have to capitulate because of excessive loads of public debts. This especially because it is usually not only the defeated sovereign’s fault. 

If we look behind most odious debts, we will find surely find odious credits. In the case of eurozone sovereigns, like Greece, odiously dumb regulations too. Assigning a zero risk, as the European Commission did to a nation that is much indebted in a currency like the euro, which is not really its domestic (printable) currency, made absolutely no sense. That meant for instance that German and French banks could lend to Greece against no capital at all, and so, naturally, these banks could not resist the temptation of offering Greece too much credit, and Greece could not resist the temptation of taking on too much debt.

But what happened? The recent armistice conditions imposed by EU authorities required Greece to take on debt, much of it in order to repay German and French banks, leaving it with about a €345 billion debt, more than €30.000 per each Greek, in a currency that as I mentioned is de facto not their own. 

Sir, so I ask is that not just another Carthaginian peace? Viewed this way, no matter how right what Macron preaches is, does he really have the right to throw the first stone on “moral values”? Aren’t all nations, one way or another, tarred with a similar brush of nationalism?

Sir, this is no minor issue. Since Italy would most probably not walk the plank like Greece, the future of the Euro, and of the European Union is at stake… and that is something that those who might rightly defend the Remain against the Brexit, should at least out of pure precaution consider.

@PerKurowski

November 10, 2018

Poor Italy! So squeezed between inept Brussels’ technocrats and their own redistribution profiteers.

Sir, I read Miles Johnson’s and Davide Ghiglione’s  “Italy’s welfare gamble angers Brussels and worries business” November 10, and I cannot but think “Poor Italy”, squeezed between inept Brussels’ technocrats and redistribution profiteers.

“Italy’s welfare gamble”? That welfare which Brussels’ technocrats, for the purpose of bank capital requirements have with their Sovereign Debt Privileges of a 0% risk weight helped finance? Italy’s public debt is now about €2.450 billion, meaning over €40.000 per citizen? 

That 0% risk weight is alive and kicking even though Moody’s recently downgraded Italy's debt to “Baa3”, one notch above junk status and that even though it might not have yet considered that the euro is de facto not a real domestic (printable) currency for Italy. If that is not a welfare gamble by statist regulators on governments being able to deliver more than the private sector, what is? Poor Italy.

But then I read about a government proposal that could increase welfare payments to poor and unemployed Italians to as much as €780 a month but which eligibility and distribution criteria remain unclear and again I shiver. That sounds just as one more of those conditional plans redistribution profiteers love to invent in order to increase the value of their franchise. Poor Italy. 

For me a way out that would leave hope for the younger generation of Italians would have to include a restructuring of their public debt with a big haircut for their creditors; hand in hand with an unconditional universal basic income, that starts low, perhaps €100 a month, so as to have a chance to be fiscally sustainable.

And if that does not help, then Italy will have to count (again… as usual) on its inventive and forceful strictly citizen based “economia sommersa”, something that is not that bad an option either.

PS. Oops! I just forgot that most of that Italy debt is held by Italian banks, so perhaps a type of Brady bonds EU version could be used. Like Italy issuing €2.4 trillion in 40 years zero-coupon debt, getting an ECB guarantee for a substantial percentage of its face value, and allowing banks in Europe to hold these on book on face value; all so that Italy can use it to pay off its creditors could be a shooting from the hip alternative… and then of course have all pray for some inflation to reduce the value of that debt.

PS. I am not the one first speaking about Nicholas Brady, then US Treasury Secretary, approach in 1989. Here is William R. Rhodes “Time to end the eurozone’s ad hoc fixes” in FT November 2012.

@PerKurowski

What’s a rule-based global system worth when the rules are crazy and rulers do not want to discuss these?

How would an ordinary European citizen answer the question: Is Greece a trustworthy borrower? Whatever his answer, what would you think he would say if he was then informed that the European Commission, for the purpose of bank capital requirements assigned Greece, and all other eurozone members, a 0% risk weight? As it is easy to understand that helped to cause the tragic over-indebtedness of Greece and of many other sovereigns, like Italy. 

Sir, you now write, “The Armistice anniversary is a time to reflect that the peace and stability of Europe will require responsible German leadership” “Drawing lessons from the inferno of 1914-1918” November 10.

So let me ask you do you really think The European Commission, the European Central Bank, the European Parliament, all of them, had, responsibly, the lessons of the Versailles Treaty in mind, when they imposed armistice conditions on that capitulating eurozone sovereign debtor of Greece?

Sir, you know that I consider requiring bankers to hold more capital against what they perceive as risky than against what they perceive as safe a total lunacy. Yet, those who imposed the risk weighted bank capital requirements global rule do not even wish to discuss it. Yet, “Without fear and without favour” FT has not dared to ask for an explanation.

The only explanation we have been given about the standardized risk weights imposed on bank by the Basel Committee; those that allow banks to leverage only 8.3 times with assets rated below BB-, and a mind-boggling 62.5 times with assets rated AAA, is “An Explanatory Note on the Basel II IRB Risk Weight Functions” of July 2005.

That document, which totally ignoring conditional probabilities equates ex ante perceived risks with ex post dangers also states, “The model [is] portfolio invariant [because] taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Sir, I must tell you, if that’s the rule-based global system Donald Trump might now be threatening, we should at least be thankful for him shaking up many things that need to be shaken up.

I do not like autocrats in my country, but neither do I like them among the global order rules setter.

PS. In the case of the 0% risk weight of sovereigns in the Eurozone that is made even crazier by the fact that de facto the Euro is not their domestic currency.

PS. Where do I come from? Here is an extract of, “The riskiness of country risk”, September 2002: “What a difficult job to evaluate risk! If they underestimate the risk of a country, the latter will most assuredly be inundated with fresh loans and leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If a country becomes bankrupt due to your mistake, it could drag you kicking and screaming before an International Court, accusing you of violating human rights. If I were to be in the position of evaluating country risk, I would insure that the process is totally transparent, even though this takes away some of the shine of the profession and obligates me to sacrifice some of my personal market value.”

@PerKurowski

November 09, 2018

Any banker, like Goldman Sachs’ Lloyd Blankfein, who does not ask the borrower “What are you going to use the money for?” should not be allowed to be a banker.

Sir, David Crow and Laura Noonan, with respect to the Malaysian financier-cum-socialite known as Jho Low scandal that I know nothing about write, “Goldman has always maintained that it did not know how the proceeds of the bond offering were spent” “Blankfein revelation piles pressure on Goldman”

I guess just like Lloyd Blankfein was not interested in how that notoriously human rights violating regime of Maduro’s in Venezuela was going to use the funds Goldman Sachs provided it, because all he cared about was whether the risk premiums were juicy enough to support his bonus aspirations.

Sir, again, corrupting not some government official but the regime itself, by offering fresh money in return for the possibility of huge returns, sounds to me like something quite punishable by US’s Foreign Corrupt Practices Act (FCPA).

We are now in November 2018, and Mr Blankfein has not found it within himself to yet utter the smallest “Venezuelans, I am so sorry”

Sir, what kind of elite do we have when a Lloyd Blankfein still gets invited to all kind of academic and social engagements? If the elite gives up on holding their own accountable, it is lost. 

@PerKurowski

Why should Donald Trump or Gillian Tett worry about US’s public debt when the experts, the bank regulators, assign it a 0% risk?

Sir, Gillian Tett, making it a Democrat vs. Republican issue, expresses anxiety about the US debt and suggests “a new version of the bilateral Simpson-Bowles Commission” “Investors start to fret about ballooning US public debt” November 9.

Sir, you know the regulators, for the purpose of bank capital requirements, assigned a risk weight of 0% to the sovereign debt of the USA and one of 100% to unrated American citizens (except when buying houses). That translates into that the interest rate politicians see is a subsidized interest rate, not its real cost. That dooms the US public debt to become, sooner or later, unsustainable… and especially so if markets begin to feel the US is losing its absolute military supremacy.

The bilateral Simpson-Bowles Commissionin 2010 presented many important recommendations that should be pursued, but it did not even mention the need to eliminate the regulatory subsidy to public debt.

Sir, unfortunately, getting rid of that distortion is no easy task, as regulators have really painted themselves into a corner. Can you imagine if regulators where to announce that the risk weight of US debt has been increased from 0% to 0.01%?

PS. In 1988, when with Basel I, statist regulators assigned that 0% risk weight the US debt was $2.6 trillion, now it is more than $22 trillion... but what has that to do with anything?
 
@PerKurowski

November 08, 2018

If not in US dollar notes under Warren Buffet’s mattress, what is Berkshire Hathaway’s “$104bn cash pile invested in?

Sir, you conclude that “Regulators and governments would do well to study whether the huge increase in repurchases has damaged business growth and capital formation” “Record share buybacks should be raising alarms” November 8.

Of course they should but let us be very clear, since that has been going on for quite some time so, if they have not done it yet, then shame on them.

For instance in July 2014 Camilla Hall, in “Bankers warn over rising US business lending” wrote, “Charles Peabody, a bank analyst at Portales Partners in New York, has warned that while it is hard to extrapolate what is driving commercial and industrial lending, if it is to fund acquisitions or share buybacks it may not indicate a strengthening economy. “It is loan growth, just not sustainable,” he said.” 

And therein Hall also wrote, “A banking lending executive at a large regional lender said ‘Traditionally banks have been very cautious of that’.”Of course, you and I know Sir that banker should not be throwing the first stone, since bankers too have morphed, thanks to the risk weighted capital requirements, from being savvy loan officers into being financial engineers dedicated to minimizing the capital their bank is required to hold.

Also, in 2017, when discussing IMF’s Global Financial Stability Report, John Plender wrote: “Low yields, compressed spreads, abundant financing and the relatively high cost of equity capital, it observes, have encouraged a build-up of financial balance sheet leverage as corporations have bought back equity and raised debt levels…Rising debt has been accompanied by worsening credit quality and elevated default risk.”

But what really caught my attention today was your reference to Berkshire Hathaway’s “$104bn cash pile [it holds] keeping its powder mostly dry for future deals — if, say, the market correction continues.”

How do you keep that powder dry? Since most probably it is not in dollar notes under Warren Buffet’s mattress, what is it invested in? We know that in accounting terms “Cash” includes a lot of investments, but in the real life, “Cash” does not always turn out to be real cash. In Venezuela you could now fill a whole mattress with high denomination bolivar notes, and still not be able to buy yourself a coffee with it. 

In a world in which regulators have assigned a 0% risk weight to for instance the already $22tn and fast growing US debt, which, if nothing changes, would doom that safe-haven to become very dangerous, is not Cash just another speculative investment?

@PerKurowski

November 07, 2018

Goldman Sachs’ Lloyd Blankfein has also a big question to answer us Venezuelans.

Sir, Brooke Masters writes that when “Sued by the US Securities and Exchange Commission over allegations it had misled clients about mortgage-backed securities… Lloyd Blankfein… launched a top-to-bottom cultural review and spent 18 months visiting clients to reassure them that Goldman had got the message on ethics.” “Goldman Sachs has big questions to answer” November 7.

So Masters rightly asks so what happened as “Last week, the US Department of Justice revealed that two former senior Goldman bankers had been criminally charged with helping to loot 1MDB, a Malaysian state investment fund that authorities allege was victim of one of the biggest frauds of all time.”

Sir, I have my own question. After Mr Blankfein’s much-touted ethics revamp in 2011, what on earth was he doing lending, in May 2017, to a notoriously human rights violating odious regime, namely Venezuela’s Maduro’s?

In fact, as I see it, corrupting not some government official but the regime itself, by offering fresh money in return for the possibility of huge returns, sounds to me as something quite punishable by US’s Foreign Corrupt Practices Act (FCPA).

We are now in November 2018, and Mr Blankfein has not found it within himself to yet utter the smallest “Venezuelans, I am so sorry”

Sir, what kind of elite do we have when a Lloyd Blankfein still gets invited to all kind of academic and social engagements?

@PerKurowski

November 06, 2018

What would happen to German Bunds, denominated in Euros, if Italy refuses to walk the plank like Greece?

Sir, I am not sure I follow Kate Allen’s discussion about the future of German Bunds. It is almost as she was discussing these as denominated in Deutsche Mark. The fact is these are in Euros, the same currency other weaker eurozone sovereign-debtors have their bonds denominated in. For instance, what would happen if Italy refuses to walk the plank like Greece? “German bond buyers bank on smooth withdrawal from QE”, November 6.

The European Union has clearly not dedicated itself wholeheartedly to solve the fundamental challenges posed by the adoption of the Euro by so many of its members, twenty years ago. For instance the European Commission has wasted its time on so many issues of minuscule importance that were really none of its business. As a result that Euro, which was created to unite Europe, might now disunite it. 

So what would happen if the Euro breaks in pieces? I have no idea but, in the case of Germany, if asked, I assume holders of German Bunds would probably accept to convert these into German Neo-DM Bunds. But of course that would also put an end to the eurozone “weaklings” subsidizing Germany’s competitiveness… like what if 1US$ = 0.75 Neo-DM? It would be a whole new ball game for everyone, Germany included!

Sir, as I recently wrote to you, for all those who want a peaceful European Union to thrive, which of course should include both Britain’s Brexiters and Remainers, the acts commemorating the end of WWI, provides an opportunity for important reflections.

In this respect the European Commission, the European Central Bank, the European Parliament, all of them, when imposing armistice conditions on capitulating eurozone sovereign debtors, should do well remembering the Versailles Treaty.


@PerKurowski

November 05, 2018

The people in the poorest part of the US have no reason whatsoever to blame Trump for their desperation… yet.

Sir, Rana Foroohar writes,“It never ceases to amaze me that a man I consider the most venal and rapacious president in history has managed to sell desperate people in the poorest parts of the US on the idea that he is their saviour”, “America’s vote marks a culture shift” November 5.

Why would that be surprising? The people in the poorest part of the US have no reason whatsoever to blame Trump for their desperation… yet.

Foroohar writes,“Most Americans, liberal and conservative, are united in their definition of what constitutes “just” business behaviour — they believe it is about spreading the wealth, and improving worker pay and treatment.”

Really? Would most Americans, liberal and conservative, not believe that what constitutes “just” business behaviour — is first and foremost to create that economic growth that could generate opportunities for them?

Foroohar concludes, “It would be wise for both politicians and business to focus on those ideas that bring people together, rather than those that drive them apart”. 

What does she mean by “And business”? Except for some truly minuscule exceptions we have not seen any ordinary business dedicating itself to driving people apart. That is normally very bad for business. What we sure have seen is way too many politicians, activists and journalists, being in the business of polarization… many of them even very happy of being able to exploit Trump in order to improve the profitability of their franchise.

What would they all be doing, and writing about, was there no Trump? They better thank their lucky star.

@PerKurowski

November 03, 2018

EU, when imposing armistice conditions on your capitulating eurozone sovereign debtors, remember the Versailles Treaty.

Sir, Simon Kuper referring to historical events like the Versailles Treaty writes, “In international relations, treat even your opponents like long-term business partners. You will meet again, and if you hurt them for short-term gain, they won’t forget.” “Lessons from 1918 for today’s world leaders”, November 3.

And Kuper follows it up with, “Peace in the region cannot remain the EU’s selling point. Precisely because Europeans have come to take peace for granted, they now (rightly) ask: ‘What have you done for me lately?’ ”

Sir, if I were a Greek citizen, and perhaps this would soon apply to an Italian too, I would ask and tell the European Union authorities, the European Commission, the following: 

“Why on earth did you assign our sovereign, who you must know that in terms of fiscal sustainability and efficient governing is not the brightest star by far, an absolute zero percent credit risk? That allowed banks all over Europe to lend to our sovereign against no capital at all, something that caused our sovereign to get hold of more and more easy money… until it could no more.

But besides this, what I really want to know is: Even though you have provided some cash flow easing, which helps of course, as it was partly or even mostly your fault, why did you force on us Greeks all that debt and did not ask European banks to share more in the losses? Thanks much to your mistake and your armistice terms, we are now saddled with about €345.000 million of debt, more than €30.000 million for each Greek, and it is all denominated in a currency which de facto is not entirely our domestic currency.

Do you think that newborn Greeks, when they grow up and find out, are going to keep a cool head about all this and be able to sing the EU’s anthem “Ode to Joy” with enthusiasm?”

Sir, in short European “world leaders gathering in Paris next week to commemorate 1918” should reflect on what they might be doing today when imposing unrealistic armistice conditions on those who have to capitulate on not being able to service their sovereign debt.

PS. Sir, as a Venezuelan I can assure you that those looking to bailout those of theirs financial profiteers who provided finance to our corrupt human right’s violating regime, will not find us Venezuelans accepting that without a fight.

@PerKurowski

Bank systems’ “Fifth Risk”: When shit really hits the fan, banks will be holding especially little capital.

Sir, Brooke Masters reviews Michael Lewis’ “The Fifth Risk”, a book that got its titled when John MacWilliams, a former Goldman Sachs investment banker told the author about the “fifth risk”, referring to ‘project management’, the risk society runs when it falls into the habit of responding to long-term risks with short-term solutions.” “Why boring government matters”, November 3.

Well-intentioned bank regulators, wanting to make our bank system safer, and came up with risk weighted capital requirements based on the perceived credit risks. If the perceived credit risks (those that bankers saw and used to adjust to with size of exposure and risk premiums) do not represent the most immediate short-term outlook on risk for banks what does? 

The real long-term risk is obviously that something that was ex ante perceived as safe, and with which banks could therefore build up large exposures, suddenly, ex post turned out very risky. The regulators with their short-term solutions only guaranteed that when shit really hit the fan, banks would stand naked with especially little capital.

Brooke Masters quotes Ronald Reagan with “the nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help’ ”.

Indeed! Just like when regulators told us “we credit rating agencies know all about risks so, with our regulations, we will make your bank systems safer”. As a result they gave us the 2008 crisis, way too much credit for house purchases, and mountains of 0% risk weighted sovereign debt around the world. If only they had stayed home.

Sir, “good boring government” is indeed needed, but beware, few things as dangerous as bored bureaucrats… they’re truly frightening.

@PerKurowski

November 02, 2018

Why is it good for all to allocate their risk premiums adjusted investments according to the needs of their portfolio… except for banks?

Sir, Jonathan Wheatley writes:“Here’s a mystery: if emerging market debt as an asset class has had such a torrid time this year, why has it not suffered more outflows?” And to answer it he quotes Paul Greer, portfolio manager at Fidelity International: “People will look at what they are getting in the rest of the world, and they’ll say you know what? We’re getting paid for the risks.” “EM bonds resilient as investors are well rewarded for risks” November 2.

That which sounds so perfectly logical, is not what the banks can do, since the risk weighted capital requirements take no consideration whatsoever of the risk premiums banks can obtain. 

To top it up, these weights are formally portfolio invariant. Since you might think that because I am obsessively against that regulation I will give a biased version of it, let me extract verbatim the following from the horse's mouth, “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” 

“The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

And the reason given for that mindboggling simplification is: “This characteristic has been deemed vital in order to make the new IRB framework applicable to a wider range of countries and institutions. Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Besides the disastrous effect in our economy the distortion in the allocation of credit, credit risk-weighted capital requirements produce, is to guarantee especially large exposures, to what’s perceived as especially safe, against especially little capital, which dooms or bank system to especially severe crises, like that in 2008.

And this has been going on during 30 years and no one is allowed to ask regulators: Why do you believe that what’s perceived as risky is more dangerous to our bank system than what’s perceived as safe?

Clearly that is seemingly one of those questions that shall not be asked.

@PerKurowski

November 01, 2018

With so much debt in a currency that is really not their domestic one, has Greece really made it to the other side?

Tony Barber opines “Greece is finding its way back to domestic stability and a secure place in the European order” “Greece shows how a maverick nation can recover from disorder” November 1.

Really? Greece debt is around €345bn euros, about €32.000 per citizen, in a currency that for real practical (printing) purposes is not their own?

That is a result of ignoring the fundamental Gordian Knot in European Union, by means of EC’s Sovereign Debt Privileges, that of assigning an absolute zero credit risk to sovereigns in the eurozone who are indebted in a currency that is really not their absolute own.

Britain and Sweden resisted adopting the euro. Had Britain done so, then Brexit would have been a reality almost unanimously supported, a long time ago.

I do sincerely suggest that any Remain proponents, if only to safeguard their own reputation, require a response from EU of how it will go about to unknot that knot, before it brings EU down.


@PerKurowski