Free markets were set up to go bad, because of bad bank regulations.

John Thornhill writes: “The global financial crisis of 2008 exploded the ideology that markets always deliver the goods” “Three game-changing ideas to shape the post-pandemic world” Life and Arts, May 30.

Sir, that is the problem, because that is exactly what all those against free markets want us to believe. 

The 2008 crisis resulted from huge exposures to securities collateralized with mortgages to the subprime sector in the USA, turning out risky. 

And those huge exposures were a direct result of: Regulators allowing European banks and US investment banks to hold these securities, if these were rated AAA to AA, which they were, against only 1.6% in capital; meaning banks could leverage their equity an amazing 62.5 times. 

Securitization, just like making sausages, is the most profitable when you pack the worst and are able to sell it of as the best. If you can sell someone a $300.000 mortgage at 11 percent for 30 years, which was a typical mortgage to the subprime sector, and then package it in a security that you could get rated a AAA to AA, so that someone would want to buy it if it offered a six percent return, then you would pocket an immediate profit of $210.000. 

The combination of those two temptations proved irresistible.

To explain the 2008 financial crisis a two pieces puzzle could suffice.

Sir, Tim Harford writes, “Raghuram Rajan, when he was chief economist of the IMF, came closest to predicting the 2008 financial crisis. He later observed that economists had written insightfully on all the key issues but had lacked someone capable of putting all the pieces together”, “How economics can raise its game” June 29.

According to 2004’s Basel II, a corporate rated AAA to AA, could offer banks to leverage their equity 62.5 times (100%/(8%*20%)) with its risk adjusted interest rate, while one rated BB+ to BB-, or not rated at all, could only offer banks to have their risk adjusted interest rate leveraged 12.5 times (100%/(8%*100%))

Sir, I am not arguing whether it is better to be a hard or a soft economist but, any economist looking at that proposition and not seeing it would cause serious misallocation of bank credit, should either go back to school, perhaps to take some classes on conditional probabilities, or go out on Main-street, and learn a bit of what real life is about.

62.5 times leverage? What banker could dare resists that temptation and stay out of competition thinking, what if that AAA to AA rating is true?

PS. That leverage applied for European banks and US investment banks supervised by SEC.

@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

The priority of those who committed the mistakes that caused the financial crisis has been the cover up, not the corrections

Sir, Gillian Tett, similarly to like Martin Wolf wrote a couple of days ago, expresses surprise and concerns for the fact that so many things that were supposed to be corrected or at least bettered after the financial crisis seem worse today. She lists the level of debt and leverage, the market share of TBTF banks, the size of the shadow banks, and that no few bankers directly related to the crisis have been jailed. “Surprising outcomes of the financial crash”, September 7.

But how can one be surprised by so few corrections and betterments when those supposed to correct and better it remain being those who committed the mistakes, and have not been held accountable one iota for their mistakes? 

But how can one be surprised by so few corrections and betterments when in the aftermath of the crisis so many truths were classified as those that shall not be named, and consequently arduously silenced, like for instance:

Lack of regulations: Wrong! Total missregulation. Regulators for their risk weighted capital requirements for banks used the perceived risk of banks assets, those that bankers were already clearing for, and not the risk that bankers would perceive and manage the risks wrongly. They seemingly never heard of conditional probabilities.

Excessive risk taking: Wrong! It was the regulators excessive risk aversion that gave banks incentive to build up excessive exposure to what was perceived safe. Like allowing banks to leverage assets a mind-blowing 62.5 times only because some human fallible credit rating agencies had assigned it an AAA to AA rating.

Greece did it: Wrong! EU authorities did Greece in, when assigning a 0% risk weight to its debt. Is the statism implied in assigning a 0% risk weigh to the sovereign and one of 100% to the citizens discussed? No! There are too many interested in benefitting from crony statism for that.

Sir, Ms. Tett ends with “predictions are best presented with a dash of humility — and the knowledge that what does not happen can sometimes be even more significant than what actually does.”

Indeed but since “that what does not happen” could be much a result from a lack of questioning, to understand it could also require loads of humility from journalists. Capisce FT? 

@PerKurowski

September 2008 when the crisis bomb exploded is not as important as the dates when the bomb was planted

Sir, Philip Stephens writes: “The process set in train by the September 2008 collapse of Lehman Brothers has produced two big losers — liberal democracy and open international borders. Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse”. “Populism is the true legacy of the crisis”, August 31.

I agree with most of what Stephens writes, especially on how “central bankers and regulators, politicians and economists, have shrugged off responsibility” for the crisis. What I do take exception of is for the date of the collapse since much more important than when a bomb detonates, is when the bomb is planted. In this respect three dates come to mind. 

1988 when regulators announced: “With our risk weighted capital requirements for banks we will make our bank system much safer” and a hopeful world, who wanted to believe such things possible, naively fell for the Basel Committee’s populism.

April 28, 2004, when the SEC partially delegated their authority over US investment banks, like Lehman Brothers, to the Basel Committee. 

June 2004, when with Basel II, the regulators put their initially mostly in favor of the sovereign distortions on steroids, like for instance allowing banks to leverage a mind-blowing 62.5 times with assets that managed to acquire from human fallible credit rating agencies an AAA to AA rating. And EU authorities decided that all EU nations, like Greece should, in an expression of solidarity be awarded a 0% risk weight.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

The US 2008 financial crisis was born April 28, 2004

Sir, Janan Ganesh writes: “A financial crisis that was experienced as a fragmented chain of events is being commemorated as just one: the fall of Lehman Brothers, 10 years ago next month",” “Political distemper preceded the financial crisis” August 30.

That is only because the truth shall not be named. In the case of the United States, that crisis started on April 28, 2004 when the SEC decided that the supervised investment bank holding company ("SIBHC"), like Lehman Brothers, “would be required periodically to provide the Commission with consolidated computations of allowable capital and risk allowances (or other capital assessment) consistent with the Basel Standards." 

When the Basel standards approved in June 2004 included allowing banks to leverage a mind-boggling 62.5 times with any asset that have been assigned by human fallible credit rating agencies an AAA to AA rating, or had been guaranteed by an AAA rated corporation like AIG, the crisis began its construction. That in the European Union the authorities also included allowing banks to lend to sovereigns like Greece against no capital at all would only worsen the explosion.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

The US 2008 financial crisis was born April 28, 2004 – and different bank capital for different assets are worse than too little or too much bank capital.

Sir, I must refer to Janan Ganesh’s “Political distemper preceded the financial crisis” August 30, in order to make the following two comments:

1. “A financial crisis that was experienced as a fragmented chain of events is being commemorated as just one: the fall of Lehman Brothers, 10 years ago next month.”

That is only because the truth shall not be named. In the case of the United States, that crisis started on April 28, 2004 when the SEC decided that the supervised investment bank holding company ("SIBHC"), like Lehman Brothers, “would be required periodically to provide the Commission with consolidated computations of allowable capital and risk allowances (or other capital assessment) consistent with the Basel Standards." 

When the Basel standards approved in June 2004 included allowing banks to leverage a mind-boggling 62.5 times with any asset that have been assigned by human fallible credit rating agencies an AAA to AA rating, or had been guaranteed by an AAA rated corporation like AIG, the crisis began its construction. That in the European Union the authorities also included allowing banks to lend to sovereigns like Greece against no capital at all would only worsen the explosion.

Oops! The following part had nothing to do with Janan Ganesh, but all with Lex's "Bank capital: silly old buffer"

2. “Debates over bank capital resemble tennis rallies… On one side of the net you have the big global banks. They say they have plenty of capital and that forcing them to operate with more is a restraint on trade. Pow! On the other side are the regulators, who say more capital is better because you never know what losses you may have to absorb. Thwack!”

But there are some few, like me, who argue that much worse than there being much or little capital, is that there are different capital requirements for banks, based on the perceived risk of assets. Riskier, more capital – safer, less capital. In tennis terms it would be like judges allowing those highest ranked to be able to play with the best tennis rackets, and the last ranked to play with ping-pong rackets. And of course that distorted the allocation of bank credit.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Auditing is important, but what causes a disaster, is more important than how it is being accounted.

Sir, “FT Big Read. Auditing in crisis: Setting flawed standards” of August 2, discusses, among other, the huge divergence of figures in the auditing of the value of derivative exposures of AIG and of Goldman Sachs, even though their auditor was the same, in this case PricewaterhouseCoopers. 

That it was “striking how little was verifiable, that there were few credible market prices, let alone transactions, to support the key valuations”, explains much of the divergence.

Sharon Bowles, former chair of the European Parliament’s economic and monetary affairs committee explains it with: “Accounts have always contained estimates; think of the provisions companies make against foreseeable future losses, but the un-anchoring of auditing from verifiable fact has become endemic.”

That “un-anchoring from verifiable facts” is not limited to auditing. 

Sir, for the umpteenth time, without absolutely no verifiable facts, regulators concocted their risk weighted capital requirements for banks, based on the quite infantile feeling that what was perceived risky must be more risky to the bank system than what was perceived safe. In fact what could have been verified, if only they had looked for it, was the opposite, namely that what’s perceived safe is more dangerous to our bank systems than what’s perceived risky.

With that the regulators assigned to AAA rated AIG, by only attaching its name to guarantee an asset, the power to reduce the capital requirements for investment banks in the US, and for all banks in Europe, to a meager 1.6%. That translated into an allowed 62.5 times leverage. Let me assure you Sir that without this the whole AIG and Goldman Sachs incident described would never have happened. 

As always, what causes the problems is much more important than how the problems are accounted for. Though of course I agree, sometimes bad-accounting could in itself be the direct cause of the problems. 

The article also refers to “the so-called efficient markets hypothesis… that now somewhat discredited theory”. Sir, no markets have any chance to be credited with performing efficiently with such kind of distortions. For instance how verifiable is it now that sovereign debt is as risk-free as markets would currently indicate, when statist regulators have assigned it a 0% risk free weight, and are thereby subsidizing it?

@PerKurowski

Don’t help bank regulators get away from being held accountable for their mistakes by politicizing the issue.

Sir, Gillian Tett commenting on Ben Bernanke, Henry Paulson and Timothy Geithner comments on the 10-year anniversary of the Lehman Brothers collapse writes:“Critics on the right complain that markets have been hopelessly distorted by government meddling” “European banks still have post-crisis repairs to do” July 20.

Frankly, you do not have to be from “the right” to “complain that markets have been hopelessly distorted by government meddling”

In 1988 bank regulators, based the risk weighted capital requirements for banks they were introducing on the nonsense that what was perceived as risky was more dangerous to our bank system than what was perceived as safe. With that they dangerously distorted the allocation of credit to the economy… and caused the crisis.

Would the Lehman Brothers have suffered the same collapse had not the SEC authorized it in 2004 to follow Basel II rules, and it could therefore (just like the European banks) leverage 62.5 times with securities backed with subprime mortgages, if these counted with an AAA to AA rating issued by human fallible credit rating agencies. Of course no!

But here we are a decade later and this major flaw of current bank regulations is not even discussed. What especially excessive exposures to something perceived decreed or concocted as safe are banks in Europe, America and elsewhere building up only because of especially low capital requirements, and which will guarantee, sooner or later, especially large crises? That should be the concern.

But, come to think of it, it could be that Ben Bernanke, Henry Paulson, Timothy Geithner and Gillian Tett, still believe in the story the Basel Committee told them, perhaps because they want so much to believe that a fairy could make banks safe and still be able to serve the economy. 

@PerKurowski

Parent regulators, not even aware they were the ones blowing the bubbles, shamelessly put all the blame on their toddler banks when these burst.

Sir, Tim Harford writes: “As any toddler can attest, it is not an easy thing to catch a bubble before it bursts” “Forever blowing bubblemania” January 13.

That is entirely true. But though we should not expect our toddlers to know it, parents are fully aware that the bubbles their dearest are chasing, were blown up by them, in the clear expectation that these would burst, or delightfully disappear in the skies.

Harford concludes in that “It’s very easy to scoff at past bubbles; it is not so easy to know how to react when one may — or may not — be surrounded by one”

Not entirely true, because that should not excuse the case of parents not even being aware they’re blowing bubbles.

In the western world, regulators, for instance, by allowing banks to leverage their equity so much when financing residential houses, are, no doubt about it, blowing up a house credit bubble that will surely blow up in our face… even though we cannot exactly know when that will happen.

When with Basel II in 2004 regulators allowed banks to leverage a mindboggling 62.5 times their capital, only because an AAA to AA rating was present, it should have been clear to them that they were blowing a bubble. Seemingly they did not. Worse, when then the AAA rated securities backed with subprime mortgages exploded in their face, they should have been able to put two and two together, but no, they put all the blame on the banks, the toddlers in this case. Even to the extent of describing the excessive bank exposures to AAA rated assets, or to sovereigns like Greece who with a 0% risk weight they had decreed infallible, as an irresponsible excessive risk-taking by bankers. They should be ashamed!

PS. Like Harford’s senior colleague I was also very skeptical about Amazon’s valuation. In April 1999 I wrote in an Op-Ed that Amazon had “joined the rank and files of ‘tulipomanias’” Yes, I admit, it is now worth much more than it ever was at that time. That said, and though Amazon is now way more than about books, I still suspect that, long term, because of: “‘shopping agents’ will permit clients to quickly compare one company’s prices to those of its competition, which would seem to presage an eventual fierce price wars, would create an environment that is not exactly the breeding ground for profits that back the market valuations we are now observing”.

But then I also assumed institutional “efforts aimed at prohibiting any monopolistic controls of the Web”, and in this perhaps I could have been way to naïve.

@PerKurowski

When being rightly suspicious about making algorithms powerful let us not ignore that powerful humans could be very dangerous too.

Sir, Tim Harford, agreeing with Hayek holds “Market forces remain a more powerful computer than anything made of silicon.” “Algorithms of the world, do not unite!” December 2.

But when regulators decided to replace the risk assessments of thousands of individual and diverse bankers, with those produced by some few human fallible credit rating agencies; and then allowed banks to increase their bets on these ratings being correct, for instance with Basel II allowing banks to leverage a mindboggling 62.5 times if only an AAA or an AA rating was present, we would have benefitted immensely from having some algorithms indicate them this was pure folly.

Because, in the development of such algorithms, it would not been acceptable to look solely at the risks of bank assets as such, but would have required to consider the risk those assets posed for the banks.

And as a result the algorithms would not have allowed banks to leverage more with safe assets than with risky, that because only assets perceived as very safe can lead to the build up of such excessive exposures that they could endanger the whole bank system, were the credit ratings to turn out wrong.

“An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” expresses: “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 explicit reason given for that inexplicable simplification was: “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, algorithms are precisely designed to combat such complexities.

Yes, “Facebook and Google have too much power” but so did the regulators; and with their risk weighting of the sovereign with 0% and citizens with 100%, Stalin would have been very proud of them.

@PerKurowski

Would current bank regulators have even been allowed to come close to banks in 1899?

Sir, David Palfreyman, Bursar and Fellow, New College, Oxford, UK quotes an article in the Economic Journal (1899) by G H Pownall, advocating that “bank reserves” must be brought up to around 15 per cent on the basis that “To keep adequate cash reserves is a duty that bankers owe the State” and “To let reserves fall too low is reprehensible, and the offence should be penalised”. “Bank capital: an old argument holds good” September 27. 

I wonder what they would have had to say in 1899 about different capital requirements based not on possible ex post risks but only on ex ante perceived risks?

I wonder what they would have had to say in 1899 about a 0% risk weight assigned to the sovereign?

I wonder what they would have had to say in 1899 about a 1.6% capital requirement, meaning an authorized leverage of 62.5 to 1 if only there was an AAA or an AA rating present.

Sir, do you think our current bank regulators would have been allowed to regulate in 1899? I don’t!

@PerKurowski

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.

Sir, Bank regulators should learn about risk compensation and shared space philosophy.

@PerKurowski

To restore real accountability in finance we must start with the bank regulators

Sir, Jonathan Ford writes: “Since the financial crisis, bank shareholders have borne pretty much the whole cost of cleaning up the reputational and legal damage done to the sector... the case must be focused on individuals simply to restore a sense of personal responsibility to finance. Bankers have escaped prosecution partly because of the law itself. There was nothing on the statute book to prohibit the mismanagement of big financial institutions.” “Restoring individual accountability in finance is worthy goal” June 26.

One reason for why that so necessary holding to account has not happened, might be the fact that the bankers “herded into the dock to face the music” could argue the following:

“Your Honor! Our regulators, those who explicitly or implicitly support us, those who tell governments and citizens they have everything under control, with Basel II in 2004, explicitly authorized us to leverage our capital 62.5 times or more whenever an AAA to AA rating was present, like the case of the securities backed with mortgages to the subprime sector, and to leverage even more with sovereign debt, like Greece.”

Sir, if there ever was a need to shame some in relation to the 2007/08 financial crisis, that would be its instigators, namely the Basel Committee and their bank regulating colleagues. Instead, like Mario Draghi, they were promoted.

@PerKurowski

FT, your statement on Cyprus is a disgrace and an insult to our intelligence

Sir, in your “Europe gets real – not before time”, March 26, you write that Cyprus “chose a high-risk strategy of living off a banking system far bigger than the state could support…. A metastasized bank sucked in more funds than it could usually deploy at home… and made a big bet on Greek sovereign bonds… with the complicity of leaders and the acquiescence of a population content to live beyond its means”.

Sir, set in the context of the Basel Committee of Banking Supervision having allowed, by means of Basel II, those Cyprus’ banks to hold Greek bonds against only 1.6 percent in capital, meaning authorizing a mindboggling leverage of 62.5 to 1, your statement is frankly a disgrace and an insult to our intelligence.

And let me remind you that in Cyprus, many of the accounts over €100.000 hold the salaries of those who do not have €10.000 and who of course had not the slightest idea about what lunacy some self-appointed bank regulators were up to… as neither did the sophisticated Financial Times... or did you?

Does Gillian Tett suffer from blind faith in the experts?

Sir, Gillian Tett analyses “The blind faith in wishful thinking” of bankers with respect to those securities baked with mortgages to the subprime sector which collapsed in 2007, March 23. 

But again Tett refuses to refer to what having regulators allowing banks to leverage the expected risk adjusted margins of those AAA rated securities on their equity, a mindboggling 62.5 times to 1, must have done to feed any blind faith. Talk about hype!

The pillar of all Basel bank regulations are the capital requirements based on perceived risk, and which are crazy in that they clear for risks already cleared for. 

Has Tett, as a journalist asked any of the regulators to explain to her the rationale behind those capital requirements, in terms beyond of what that fuzzy “more-risk-more-capital less-risk-less-capital, it sounds logical” provides? 

Is she not curious? Or is it that she herself suffers from blind faith in the experts?

Financial Times, what would happen if you had to charge those you do not like five times more for FT than those you like?

Sir, “what on earth can anyone do to get loans flowing to small business”, asks Gillian Tett in “Big corporate cash piles can help fund small businesses”, February 8. (Since I have explained it to her in so many letters, I might soon think she has a fundamental problem in understanding, and give up on her, but, since I am a very patient teacher, here it goes again.)

Tett argues that some economists blame the decrease in bank lending to small businesses on “tighter capital rules”, This completely fails to describe the argument correctly. The problem is “tighter capital rules” for banks when lending to the small businesses than when lending to what is perceived as much less risky.

What happens now is that a bank can leverage its capital with the net expected margins produced by “The Infallible” much more than what they can leverage those same margins when lending to “The Risky”. For instance Basel II allows a bank leverage of 62.5 to 1 when banks lend to someone with an AAA to AA credit rating, but only 12.5 to 1 when lending to for instance a small business without a rating.

And so when Tett writes “if the capital adequacy rules we loosened, banks themselves would provide loans to small companies” she ignores that what really needs to happen is that capital requirements on “The Infallible” must be brought to the same levels as those of “The Risky”. That is the only way to eliminate what from all points of view is simply a distortive, stupid and odious discrimination against those already discriminated by banks and markets on account of being perceived as “risky”.

In fact that discrimination is something akin to the Financial Times being forced by some authority to sell FT at a price which is FIVE times higher for the readers FT does not like, or know, than the price it normally charges its “friendly FT readers”, and all this according to what some few officially empowered “Worthy of FT´s friendship” raters rate. Would not some FT subscriptions simply disappear?

Did Inside Job do an inside job on The Academy of Motion Picture Arts and Sciences?

Sir, in “Why the public wants its pound of banker’s flesh” March 12, Gillian Tett refers to the Oscar won for best documentary by Inside Job which covers the financial meltdown.

That documentary does not mention even once the Basel Committee for Banking Supervision, that global financial regulator which provided the intellectual back-drop for the more than 60 to 1 bank capital leverages authorized, and which drove the banks into the waters of the triple-A rated securities collateralized with lousily awarded mortgages that detonated the crisis. The only way I can explain that Oscar is by suspecting that the Inside Job did itself an inside job on The Academy of Motion Picture Arts and Sciences.

And by the way I do not care a iota about a pound of banker’s flesh, I would be more than satisfied having the Basel Committee regulators parading down 5th Avenue wearing cones of shame… and of course being banned from regulations forever.

The regulator was the noisiest!

Sir, Justin Baer in “Noise of the financial herd will drown out risk concerns? February 5 writes that the crisis exposed flaws in the way Wall Street measures and limits risks. That might be, but let us never forget that the biggest flaws of them all were those present in the bank regulations of Basel II, which allowed banks to leverage their capital 60 times and more just because a triple-A rating was involved in the operation, like in the case of most of those collateralized debt obligations referred to in the article.

If there was a margin of 1 percent in the operation, then the returns on capital could be catapulted into over 60 percent a year. Talk about real noise!

It is not about the bonuses, it is about the artificial profits from which bonuses are made of!

Sir I am so tired hearing about the discussion about unreasonable and outright shameful bonuses paid without making any reference to the fact that these must be based on outright shameful profit margins that are in large a direct result of regulatory interference, Patrick Jenkins, "Remuneration still the big sticking point", November 18.

If a bank when lending to a triple-A rated client were only permitted to leverage its equity as much as when lending to a small unrated business, namely 12.5 to 1, then the bank, if it made a .5 percent on a loan to a triple-A rated client would generate a 6.25% yearly return on equity, good, but nothing to pay huge bonuses on.

But since the Basel Committee authorized the banks to leverage 62.5 to 1 on these loans, the yearly returns, on supposedly risk-free investments, would with the same margins explode upwards to 31.25% a year, and that is indeed something to pay out huge bonuses on.

Forget about regulating bonuses, regulate the regulators instead.