Should a sanctioned bank like Wells Fargo be allowed to immediately advertise itself as a do-gooder?

Sir, with respect to the recently sanctioned Wells Fargo we can observe that, in order to clean its name, it has now launched, as is typical in similar circumstances, advertising campaigns highlighting its social responsibilities. Should it really be allowed to do so?

Even though Wells Fargo should of course try to do its utmost to compensate their recent bad behavior, I believe it should not be able to advertise itself out of a bad image, for at least two years. A prohibition of that sort would also serve as a great deterrent to others.

And, while being on the subject of modernizing sentences, as a Venezuelan I ask, could the sanctions of those that commit crimes against humanity but have not yet been captured include blocking their presence in social media forever, and perhaps also that of all their immediate families for at least some years?

Of course those criminals could use false names, but who would like to take a (face-recognizable) selfie doing so?

@PerKurowski

Could it be current bank regulators are not held accountable because their mistakes are just too big to fathom?

Sir, Jonathan Ford with respect to Wells Fargo’s “misdemeanors” asks “why supposedly competent managers failed to join the dots”; and correctly states that “one reason why public confidence in Wall Street remains so low… [is that the] bosses are not held accountable” “If no bank is ‘too big to jail’, Wells Fargo bosses must face the music” October 17.

Now with respect to banks, their purpose and their stability, there are two very clear dots:

1. If you allow banks to leverage their equity, or the support they receive from society, more with some assets than with other, then you will distort the allocation of credit to the real economy.

2. What is dangerous for bank systems, is never what is ex ante perceived as risky, but always either some unexpected event, or the build-up of dangerous excessive exposures to something that ex ante was perceived as safe but that ex post turned out not to be.

So, if regulators impose capital requirements that allow banks to leverage more with assets ex ante perceived as safe, then I would hold that is clear evidence of them not being able to connect even the most basic dots. Should they not be held accountable? Of course they should, but they aren’t.

I fully agree with Ford’s opinion that even though “little money was taken” in Wells Fargo’s “misdeeds” being discussed “that doesn’t diminish the bank’s culpability”

But could it be though that some mistakes, like those committed by current bank regulators, are just so big they can’t even be discussed? If so, we, and foremost the next generations, are doomed.

@PerKurowski ©

As banks “pressure employees to hawk products”, regulators pressure banks to odiously discriminate against the risky

Sir, John Gapper writes about “the intense pressure Wells Fargo placed on employees to hawk products” “Wells Fargo reaches the end of its journey” September 22.

But, by means of the risk weighted capital requirements for banks, regulators have placed much pressure on banks to lend to what was perceived, decreed or concocted as safe; because that’s were they could leverage the most their equity; because that’s where they could earn the highest expected risk adjusted returns of equity; and so banks end up with excessive exposures to residential home financing, AAA rated securities, loans to sovereigns like Greece and other such fancy safe stuff.

That created also a de facto immoral regulatory discrimination against the access to bank credit of those who ex ante are perceived as “risky”, like SMEs and entrepreneurs. I place quotation marks around risky because in fact, by being perceived as that, they are never as dangerous to the bank system than what is perceived as “safe”.

Incentives are temptations, aren’t they? 

@PerKurowski

US, when will senators, like Elizabeth Warren, grill bank regulators with the same gusto they grill ban​k​sters?

Sir, I refer to Barney Jopson and Alistair Grays report on how John Stumpf was grilled in the Congress Wells Fargo clear misbehavior “Wells chief savaged in Congress over fake accounts” September 21.

Democratic senator Elizabeth Warren told Mr Stumpf: “Your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds.”

Is senator Warren wrong? Absolutely not, but the grilling, if it does not also include a serious grilling of the bank regulators, is just another pushing all the blame on banks, in order to score cheap populist victories attacking “banksters”.

Here follows just few of the questions the US Senate's Banking Commission should pose regulators.

With your risk weighted capital requirements you allow banks to leverage more their equity, and the support we the society give them, with what is perceived as safe than with what is perceived as risky.

Do you not understand that favoring in this way The Sovereign, The Safe, The Past, The Rich, The Houses and The AAArisktocracy, impedes the fair access to bank credit of We the People, The Risky, The Future, The Poor, The Jobs and The Unrated? Who gave you the right to distort the allocation of bank credit to the real economy this way? Don't you understand with that you have de facto decreed inequality?

In all your regulations where have you defined the purpose of our banks? Does not John A Shedd saying: “A ship in harbor is safe, but that is not what ships are for” also apply to banks? Or is it really that you felt you did not need to do that in order to regulate banks?

Finally, for this first round of questions: Where did you get that funny idea behind all this that what is ex ante perceived as risky, is riskier to the banking system than what is perceived as safe, and that is therefore much likely to cause dangerous excessive bank exposures? Have you never heard of Voltaire’s “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”?

Don’t you see how these regulations helped to cause the crisis? Don’t you see how making it harder than usual for SMEs and entrepreneurs to access bank credit dooms us to stagnation?

By the way, before you go, where do you think we would we be if the credit rating agencies had, so luckily, not fouled up so fast?

@PerKurowski ©

Senator Elizabeth Warren, what about the staggering bad bank regulations that came out of the Basel Committee?

Sir, Patrick Jenkins writes: “Today, Mr Stumpf will face an inquisition at the Senate banking committee. It promises to be a hostile experience — no-nonsense committee member Elizabeth Warren is not known for her love of the banking sector and has already talked of Wells’ “staggering fraud”. “Wells Fargo chief ’s high noon is Senate committee grilling” September 20.

I’ve got no problem with any “grilling” of bankers, give it to them! But, Senator Warren, in all fairness, do not turn it all into another simpleton Bank-Bashing fair, We the People need it to be much more. If anything, look at how the bank regulators set up all the incentives for bankers to do wrong.

Why on earth should we expect bankers to be saints and resist the temptations? Aren’t they supposed to maximize their risk adjusted returns on equity?

What am I talking about? THIS

http://subprimeregulations.blogspot.com/2016/09/if-ever-allowed-following-would-be-my.html

PS. And Senator Warren, why would you agree with those who decreed inequality?

http://subprimeregulations.blogspot.com/2016/03/decreed-inequality.htm

@PerKurowski ©

The CET1 (common equity tier 1) divided by the leverage ratio, gives you a Gross Risk Hiding Ratio

Sir, James Shotter and Laura Noonan, while admitting that “the absolute level of the CET1 (common equity tier 1) is only part of the equation, they do compare Deutsche Bank’s CET1 with that of other banks. “Deutsche focus turns to towering task ahead.” February 10.

The common equity tier 1 ratio is calculated with the bank’s core equity in the numerator and with in the denominator the risk weighted assets, calculated with risk weights not assigned by me. So the safer the assets are perceived or deemed to be, the higher the CET1.

And the Leverage Ratio uses in the denominator the gross value (of most) assets.

As FT should know by now, I have always felt much more nervous about the assets a bank (or regulators) could perceive as very safe than with assets perceived as risky. And so I do give more importance to the leverage ratio than, for instance, to the CET1 ratio.

But the regulators would not allow us data on the leverage ratio, because, in their opinion, that would not reveal the real leverage to us and it would therefore only confuse us. And so they decided to credit-risk weigh the assets, and came up with the CET1 ratio or the slightly more generous Tier 1 Common Capital Ratio.

And of course that made many in the market feel much more comfortable with that the banks were quite adequately capitalized.

But one needs to adapt, and so I felt that new interesting ratios would be found in the market whenever the leverage ratio was published. And among these the CET1 ratio to the leverage ratio-ratio, because that ratio could be said to represent, the Gross Hiding Risk Ratio.

Though I admit I could be using wrong data, I found the following leverage ratios at end of 4th quarter 2015: Deutsche Bank 3.9; Goldman Sachs 5.9; Wells Fargo 8.0; and Morgan Stanley 8.3.

And if we take the CET1 ratios reported in the article and divide these by the leverage ratios we obtain the following Gross Risk Hiding Ratios: Deutsche Bank 2.85; Goldman Sachs 2.19; Wells Fargo 1.34 and Morgan Stanley 1.70

So if these calculations are correct then no wonder why Wells Fargo “is often described as the US’s safest banks [and] there are no [current] calls for a capital raising”… and no wonder Deutsche Bank faces quite bigger challenges.

@PerKurowski ©

Clearly the chief of Wells Fargo cannot tell us the whole truth about the "bad mortgages", so the more reason for us to expect FT doing so.

Sir, Camilla Hall writes “The US is still picking over the wreckage of the financial crisis, in which some mortgage originators willfully ignored underwriting standards to sell as many loan as possible to government-backed institutions and private investors”, “Wells chief warns on mortgage lending” August 27.

What a tremendous loss of short term memory!

First all those lousily awarded mortgages were not sold directly to any government-backed institutions and private investors, but to security re-packagers who were able to confound credit rating agencies so much that they obtained an AAA rating for these.

Secondly the investors were not buying mortgages, God forbid, they were buying AAA rated securities backed with mortgages… something entirely different.

And thirdly and most important, the only reason why there was such an intense demand for these AAA rated securities so that all caution was thrown to the wind, over €1 trillion of European investments were sunk into those securities in less than 3 years, was that Basel II, approved in June 2004, had the audacity of allowing banks to own these securities, or give loans against these securities, holding only 1.6% in equity, meaning being able to leverage their equity a lunacy of 62.5 times to 1.

Fanny Mae? Fanny Mae did not originate one single of these mortgages to the subprime sector. It also mainly got to these through the purchase of the AAA rated securities, when it could not resist the temptation.

No! If history is not told correctly how can we avoid making mistakes?

How do I know what happened? First I had warned over and over again about the risks of trusting so much the credit ratings, and when the crash came… I also took the examinations to be a certified real estate and mortgage broker in the state of Maryland, with the primary purpose of finding out what really happened.

And to hear stories told by small real estate agents being pressured into signing whatever lousy mortgage… because it did not matter… because what was important was that the interest rate was as high as possible and that the terms were as long as possible, since that would maximize the profits when selling it at low AAA rates… and because they would make bundle of commissions that would make them rich… and because “stop asking questions about what you cannot understand”… was something truly saddening.

No Sir, it is obvious that the chief of Wells Fargo cannot tell us the whole truth and nothing but the truth, as that would have to include spelling out that his regulators were stupid, but, therefore, the more the reasons we have to expect FT to do so.

We need to see the hiding-behind-regulatory-risk-weighting index of the banks

Sir Patrick Jenkins and Daniel Schäfer at the end of their “Banks in cash calls to meet Basel III” state the caveat with respect of the numbers shown that “Regulators [will] either raise risk-weightings and/or give more emphasis to nominal balance sheets.” Indeed, but it can also be, like the current crisis has clearly evidenced, that the risk-weights could also simply turn out to be very wrong.

And that is why I consider the illustration that shows Basel III core tier one capital ratios of 12 large banks to be quite opaque. As a minimum, next to each Basel III ratio they should have given us each banks capital to nominal balance sheet ratio.

That way, by dividing the first ratio by the second (or the other way round) we can build an index which allows us to identify how each bank hides behind risk-weights, whether these are calculated by themselves or by the regulators.