The first lesson from Greece for the eurozone… the existence of loony bank regulators!

Sir, Martin Wolf asks “What does Greece…this small, economically weak and chronically mismanaged country…tell us about the eurozone?”, “Much too much ado about Greece”, February 15. 

Well, the first thing it clearly tell us, is that the eurozone banks have been in the hands of loony regulators… who allowed the eurozone banks to leverage with Greek public debt 62.5 to 1. Without it, Greece would not have been able to ramp up as much debt, no matter how bad and fraudulent its accounting. 

And the second thing it tells us, is that the accountability and good-governance within the eurozone is basically non-existent. It is basically the same regulators who produced the failed Basel II, which are now in charge of producing Basel III with only minor changes in the script, except of course for those regulators that have been promoted. There has not even been the slightest hint of the bank regulators having been Sarbanes-Oxleyed. 

PS. Europe, if doctors can be sued for malpractice, why can’t bank regulators?

Please, do not dig us deeper into the sophistications of risk management!

Sir Michel Schrage in “How to sharpen banks´ corporate governance” November 18, tells us “that the most important governance reform in financial services would make risk management the explicit duty of the board.” “insisting that directors be more conversant in and accountable for risk.”

As someone who knows quite a bit about risk management and that also, while an Executive Director served on the audit committee of the World Bank, drowning in Sarbanes Oxley procedures, I feel this is a very dangerous approach that could lead to an over-specialization of the boards which would, sooner or later, end up with some extremely sophisticated blinds leading some quite expert blinds.

No, what we need is a much diversified board of directors, where before any approval all directors have to certify, in writing, that they fully understand what they approve. What cannot fully be understood, by reasonably intelligent Directors, without a PhD in financial risk management, has absolutely no place in any financial institution that has the benefit of a public lender of last resort.

This is especially so because financial studies of financial risk management does not guarantee knowing about all the risks of life in general, such as the possibility of credit rating agencies suddenly not knowing what they are up to and sending us, the herd, away into crazy directions.

And with respect to the “too big to fail” the solution is simple. A tax on size, because the bigger they are the more it will hurt when they fall on us, as they will, sooner or later.

What is lacking in the Sarbanes-Oxley Act

Sir, Requiring all senior management and board members of companies to disclose publicly what they understand and what they do not understand of the business they are in charge of would do wonders for corporate governance, especially when we start hearing so many cries of ‘I did not know’. For instance, when using sophisticated financial instruments such as derivatives, we could suddenly realize that no one upstairs has a clue of what they, the experts downstairs, are up to, and this could be a quite instructive for the market and the credit-rating agencies when they assess the risks of a corporation.

By having clues I do of course not refer to any specific know-how needed to take apart and put back a carburettor, as very few would be able to do that, and in fact I am not even sure carburettors any longer exist. No, what I refer to is whether they to have a good working knowledge of some basics, like how a car drives, how it brakes, how much petrol it consumes, and what to do if a tyre explodes or an airbag suddenly inflates.

To oblige recognition and acceptance of where the buck really stops both in theory and practice and before mishaps occur could also be useful for shedding light on some systemic risks that, like lava in a volcano, might be building up dangerous pressures underneath the world of finance. It could also provide immediate relief to all those executives living out there, burdened with the constant stress of having to feign that they are in the know.

Sarbanes Oxley SOX corporate governance accounting