“Careful, take cover, run for the shadows!”

Sir, Gillian Tett in “Why they´re happy in the valley of the shadow banks” June 28 worries because “notwithstanding the fact that the financial crisis largely started in the non-bank sector, or shadow bank world, thus far at least, western regulators have focused most of the reform efforts on the regulated banks”. Where does she get that first part from? And why would she assume that the shadow world behaves worse than the formal regulated one? For instance, there are no regulations on hedge funds, but rarely do you see any of them being leveraged more than 10 to 1, but you sure found regulated banks with a duly authorized leverage of over 50 to 1. Let me be frank, with bank regulators like the current, the only reason why I would place my money in regulated banks, is not because of the regulations, it is for the protections that might anyhow be present… in other words a 110% moral hazard risk.

Right now, even after the recently increased capital requirement of 9 percent to be applied to global systemic important financial institutions, these might still leverage 55 to 1 when lending or investing in what carries a risk-weight of 20%, the same risk-weight that applied for triple-A rated securities collateralized with mortgages to the subprime sector, for lending to Icelandic banks, or for lending to Greece. Sincerely, observing that, any advisor could have all the right to shout out “Careful, take cover, run for the shadows”

God help us, our bank regulators have really been taken for a ride!

Sir, Brooke Masters in “Regulators agree extra bank capital protection” June 27, reports that now the “global systemic important financial institutions”, G-SIFIs, have convinced the bank regulators that, for a mere 1 to 2.5 percent additional capital, to be paid in easy installments until 2019, and to be applied on risk-weighted assets, to formally award them the franchise of “Too big-to-fail”. What a sad day… for us and for all those other banks that at this moment have been deemed “global systemic irrelevant financial institutions”

And let us calculate. Since the risk weights for investments in private triple-A rated securities are still 20 percent that would dilute the maximum basic capital requirement of 9 percent to signify only a mere 1.8 percent and so the “too big to fail banks” could still leverage themselves 55 times to one, when doing that kind of business… and not to speak of what they could leverage when lending to some sovereigns with a zero risk weight. God help us, our bank regulators have really been taken for a ride!

And Jean-Claude Trichet, European Central Bank President, stepping down as chairman of the Basel overseers group is quoted saying “The agreement reached today will help address the negative externalities and moral hazard posed by global systemically important banks”, Sincerely from a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.

We did not have a crisis because of a general lack of bank capital!

Sir, Tony Jackson discusses the “Basel struggle to put bank capital into perspective” June 27. In doing so he evidences how he and most others discussants tend to forget that bank crisis does not result from lack of capital but by the banks doing the wrong type of lending. Suppose all the banks in a nation had 100 percent capital and then lost it all lending to some sovereign, like Greece, would that mean that the taxpayer would have no losses? How do you separate the taxpayers´ wellbeing from the citizens´ wellbeing? Let us never forget that at the end of the day, it is the quality of the lending of banks that matters the most, not their capital.

My point has all the time been that whenever regulators act like risk managers and set different risk-weights for different lending, which will effectively mean different capital requirements on different lending, they are effectively interfering in such a way that will guarantee that the quality of the lending will be worsened. We did not have a crisis because of a general lack of capital we had a crisis because for some type of lending the regulators authorized basically no capital at all.

From a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.

It has nothing to do with anyone being “macho”, far from it!

Sir, John Kay in “How not to measure a business – by its rate of return”, June 22, writes “Bank’s macho pursuit of rates of return led not to efficient companies but to the near collapse of the financial system”.

Forget it! If banks had pursued rates of return by for instance lending to Argentinean railway projects then we could perhaps use “macho”, as is they went for what was AAA rated of for Sovereigns like Greece, because that’s where the wimps of the Basel Committee authorized them to leverage their capital more than 60 to 1.

Kay has not yet understood what happened. I hope he dares to ask himself the following: “If I was a responsible bank regulator, what would cause me to lose most sleep at night, the excessive lending by banks to what was perceived as risky or the excessive lending by banks to what was perceived as not-risky but that could in fact be very risky?

Once Kay has answered the previous question, as it must be answered, and then analyses how the current capital requirements are treating what is perceived as not-risky as if it really was not-risky, then he will understand the monstrous mistake committed by the bank regulators.

Greece, as any nation, is represented by is the sum of its public and its formal and informal private sector.

Sir, Martin Wolf in “Time for common sense on Greece” June 22 makes a clear case for why common sense should not be delayed more than it already has. Even the argument that he qualifies as “right” namely that there is a “net transfer of resources into the Greek public sector” is doubtful if the Greek public sector does not merit such transfer.

A World Bank report states “it has been reported that Greeks already hold EUR 250bn in Swiss banking accounts and that the private-wealth capital outflow from the country is ongoing.” If we were just to suppose that all that private money is invested in public sector debt of Germany and France, and that the banks of Germany and France hold that same amount in Greek public sector debt… the question of who is better off in the case of a Greek public debt default, becomes a truly debatable one, since a nation is, at the end of the day, the sum of the public and the formal and informal private sector.

I mention this since in my country, Venezuela, I witnessed how foreign banks in the late 70s and early 80s trampled on themselves in order to lend to the Venezuelan government and, what finally saved the nation, was that the private Venezuelans did not believe in such nonsense and kept their money in safer overseas investments.

The adjustment for risks is based on the "perceived risk" and NOT the real final and total risk.

Sir, Tom Braithwaite in “Warning on bank rules reform” June 22, writes about the Basel III’s “minimum 7 percent ratio for common equity capital for assets, adjusted for risk” To understand the real significance of that ratio we must be much clearer about the fact that “adjusted for risk” means adjusted for the “perceived risk”, and which does not necessarily have anything to do with an adjustment to the real final and total risk.

Ask yourselves: “If I was a responsible bank regulator, what would cause me to lose most sleep at night, the excessive lending by banks to what was perceived as risky or the excessive lending by banks to what was perceived as not-risky but that could in fact be very risky?”

Once you have answered the previous question as it must be answered, and reflect on how the current capital requirements for banks in Basel II are based on treating what is perceived as not-risky as if it really was not-risky, then you will begin to understand the monstrous mistake committed by the bank regulators.

Control the regulators, do not let them sell “Too big to fail” franchises for a meager 3 percent of additional bank equity.

John Authers writes that “Self-control is the key to an investors life” June 11. He is right but the self-control that we all need and should be able to expect is that of the regulators.

The regulator, even though one of the markets most dangerous sources of imperfection could be the banks trusting the credit rating too much, were not able to control themselves and intervened as risk managers making the capital requirements of the banks a function of the same credit ratings the banks were already looking at. And what disaster that resulted in.

And now, displaying again a total lack of self-control, they want to sell “too big to fail” franchises to (SIFIs/G-SIFIs) banks for a mere 3 percent in additional capital. Not only will 3 percent of additional bank capital end up being almost meaningless in the case of a systemic explosion or implosion of these huge banks, but it is also probable that precisely those too big to fail banks that we least should want to be too big to fail, will be those most likely to exploit the franchise for all it is worth, in order to compensate the additional equity required, in the ways we would least like to see these franchises exploited. 

Of course regulators will argue these franchises will be the subject of special supervision. Who are they fooling? Is it not hard enough for them to supervise these behemoths without labeling them as the most likely candidates for special support?

Just send the regulator geeks packing!

Sir, Sebastian Mallaby in “The Radicals are right to take on the banks” June 8, suggest that the capital requirements for the banks, in order to reserve against the “notoriously treacherous” calculations of the risk-weights, should hold “a further buffer against ‘model error”, aka geeks who screw it up”.

Just in case Mallaby is referring to other geeks, the geeks in this case were the regulator geeks in Basel, who started to play risk-managers for the world setting arbitrary risk-weights based on the perceived risk of default, and that had already been cleared for by the markets. They set for instance a risk-weight of only 20 percent for lending to anything that carried a AAA rating and 100% for lending to unrated small businesses, even though the latter, because they are rightly perceived as more risky, have never ever set of a bank crisis.

The previous utterly confused the whole market, specially the trusting non-geeks, and so the best thing would just to send those regulator geeks packing, and apply one single capital requirement with no risk-weighting.

Too much longing for stability creates the perfect storm conditions for instability

Sir, Samuel Brittan refers to “artificial suppression of volatilities in the name of stability” “The follies and fallacies of our forecasters” May 27. That is precisely what as an Executive Director of the World Bank I was referring to when, in May 2003, in pre-Basel II days, I told a large group of regulators gathered for a risk-management workshop at the World Bank, the following: 

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later. 

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

The regulators did not understand what I was talking about… mostly because they wanted so much to believe in forever stable banks.

PS. As you can see here, the link to Brittan’s article is gone.

A quiz for the candidates to Managing Director of IMF

Sir, as a humble contribution for the selection of the best Managing Director of the IMF may I submit the following little quiz the candidates should answer:

Q1. Which type of bank clients can generate such a massive exposure so as to trigger a systemic bank crisis?

a. Those perceived as risky (small businesses and entrepreneurs)
b. Those perceived as not risky (triple-A rated)

Q2. The needs of which clients do we most expect our banks to attend to?

a. Those perceived as risky with no access to capital markets (small businesses and entrepreneurs)
b. Those perceived as not risky and with access to capital markets (triple-A rated)

Q3. The Basel Committee allows for much lower capital requirements for banks (five times less) when lending to those perceived as not risky (triple-A rated). Based on your previous answers, which would be your most likely opinion?

a. I fully agree with the Basel Committee
b. The Basel Committee might have got it all completely upside down.

Note: The responses of “b, a, and b” would qualify the candidate to proceed to further tests.

Choosing based on merits defined by the group is often another source of dangerous group-think.

Sir I could not agree more with the arguments presented by Martin Wolf when he writes that “Europe should not control the IMF” May 25, summing it all up in the phrase “The person chosen [as managing director of the IMF] should be willing to take the risks of leading… though, of course, that risk-taking leader could be a European.

The recent Independent Evaluation Officer’s report on the “IMF Performance in the Run-Up to the Financial and Economic Crisis” comes to the conclusion that “The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of group-think”.

This would indicate that the willingness to accept and push for diversity in thinking is one of the most important qualities we need to look for in the next managing director of the IMF.

That said, and fully agreeing with the managing director being chosen by the members based on merit, let us not forget that choosing based on the merits defined by the group, could turn out to be just the mother of all sources of group-think.

Save us from these irrational and hysterically risk-adverse bank regulators

Sir, Patrick Jenkins in “State lending targets are grist to the mill of history” (by the way a much too smart title for someone dumb like me) May 23, writes: “Experts estimate that the Basel III rules increase the capital that banks must hold against an average corporate loan by about 30 percent, and by closer to 100 percent for an SME loan”.

Can you now start to understand what I have been shouting about for years that Basel III is only digging us deeper into the hole? What on earth has SMEs, always perceived as risky, to do with this or any other bank crisis? Have not the current capital requirements against SMEs been more than enough? There is only one conclusion we are in the hands of irrational and hysterically risk-adverse regulators! And we will pay dearly for our silence!

Regulators should take the beam out of their own eyes

Sir, Richard Lambert makes a reference to a research paper by Andrew Haldane, the Executive Director for Financial Stability, and Richard Davies of the Bank of England where they evidence an increasing short-termism in the pricing of company shares and conclude by blaming it all on a market failure, “Sir Ralph´s lessons on how to end short-term capitalism” May 23.

Short-termism is indeed a serious problem that derives from human weaknesses, but Messrs Haldane and Davies should start by taking the beam out of their own eyes. The mother of all short-termism is how the bank regulators, on top of how the market favors those perceived as less risky, also, by means of their risk-weights which determine the effective capital requirements for banks, shamelessly layer on their own favoritism of the same.

For a starter that regulatory short-termism created our current crisis by pushing our banks excessively into sovereigns and triple-A rated business. Also those regulations make it much more difficult harder and much more expensive for our small businesses and entrepreneurs to access bank credit… and if that is no short-termism what is?

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

Bank regulators are still acting dumb!

Sir, Tom Braithwaite, Brooke Masters and Jeremy Grant report on the current status of financial regulation in “A shield asunder” May 20.  When discussing bank capital and the calculation of the risk-weights used by the regulators for determining the effective capital requirements for banks, they give new evidence of that bank regulators have still not understood what they did wrong.

The risk-weights, as they are used, translate into higher capital requirements for what ex-ante is perceived as more risky and lower for what is perceived as less risky. And that is so dumb! The lesser the ex-ante perceived risk of default, the higher are the possibilities of a buildup of such an excessive exposure that, if ex-post the risk of default turns out to be higher, could detonate a dangerous systemic crisis. When are they going to get it into their thick skulls that what is perceived as risky poses no systemic risk?

What precisely caused the current crisis? The risk-weight for loans or investments in what had a triple-A rating was set at only 20%, and which meant that when some triple-A ratings turned out to be unjustified, the banks stood there naked with no capital.

PS. For how long is FT going to avoid this extremely serious problem, only because someone might not like the tone of a Kurowski?

The mother of all boundless optimists must be the bank regulator

Sir, John Plender asks “How long before we confront a new financial crisis? Usually a severe shock to the financial system damps risk appetite for some considerable time”, “There are still too many latent triggers of the next crisis”, May 18.  Plender considers that “boundless optimism, excessive leverage and overpriced assets” already places us in “dangerous territory”.

I agree with the conclusion but not with the analysis.  The current crisis was not caused by risk appetite but by regulatory risk-adverseness that stimulated banks to invest excessively in sovereign and triple-A rated securities, and so, a dampened risk appetite, when layered on top of that kind of regulations, can make it all so much worse, so rapidly.

Sincerely if we are to speak about boundless optimists, then the mother of all of them have to be the bank regulators who still arrogantly believe they can manage the risks, by means of imposing their own risk weights on the market… followed closely by those who believe these regulators capable of solving the problems they themselves created. Without any doubt the regulators remain firmly in place as the greatest source of systemic risk

Too well tuned?

Sir, John Plender in “It’s time to rewrite fashionable finance ideas”, May 4, refers to the need for some redundancy in the system so as to be able to respond better to unforeseen events. Below is how I addressed that issue in my Voice and Noise of 2006.

Too well tuned?: Martial arts legend Bruce Lee, whom many people regarded as immortal, died at the age of only 32 of a cerebral edema, or brain swelling, after taking some sort of aspirin. I have not the faintest idea whether that pill actually had anything to do with his death but I have frequently used (or misused) this sad death as an example of how an organism could be in such a highly tuned and perfect condition that it could not resist a small external shock. And I used this metaphor to explain why companies nowadays, pressured by the stock market’s expectations for the next quarterly results; the latest theories in corporate finance as to how squeeze out the last drop in results; and, perhaps, even some bit of creative accounting, might be so well-tuned (no little reserve fat left) that they would not be able to withstand any minor recession. (Whenever I expose this theory, I can see in my wife’s eyes that she believes this is just my preparing an excuse for my growing—ok, grown—midline.)

Risk-weighting is more than a game, it needs a purpose too.

Sir, Patrick Jenkins reports that Lord Turner, chairman of the Financial Services Authority told the Financial Times. “We have spent a lot of time over the past two years devising a standardized definition as the numerator in capital ratios. It would be sensible now to look in more detail at the denominator and examine [the risk-weights], “Drive for global standard on bank’s lending risks” May 3.

Jenkins also writes “Inaccurate calculations of risk-weighting can have a highly disruptive effect on capital ratios, potentially making a nonsense of a global minimum capital ratio.”

The above addresses one of the issues I criticize in the bank regulations coming out of the Basel Committee and that you know I have been for many years now writing to the Financial Times about, but that you also for whatever reason had decided to ignore.

What it does not address though is the problem that even if the risk-weights are perfect, and universally applied, that could just as well bring down the world because the banks would anyhow not be taking the risks we need them to take, if for instance we are going to find jobs for the new generations. And that is what Patrick Jenkins has not yet understood even if he writes “It’s about making regulations worthwhile”, “Time to work out the real odds in the weighting game”, May 3.

I explained that in person to Lord Turner, about a year ago, when I told him he was behaving like a handicap officer on a race track who took off the weights from the best running horses and placed these on the debutants and the slow horses, without telling the bettors and the bookies, and still hoped for a great race.

I also reminded Lord Turner of that there has never ever been a major or systemic bank crisis that has resulted from the banks being involved with what ex-ante was perceived as risky; they have, except for those where illegal behavior was present, all resulted from lending and investing in what ex-ante was considered as not risky.

PS. Sir, I guess you do not have it in you to acknowledge the fact of my relentless lobbying on these issues. Oh had I just been one member of your social network!

Would I have been better off with a Rockville Gazette than with the Financial Times?

You journalist who write about banking regulations, should you not find it somewhat curious at least?

Friend

If you as reporters on finance and bank regulations observe that someone has asked the global bank regulators in the Basel Committee some reasonable questions, for about a decade, and they have not yet been answered, would that not strike you at least as something curious?

The Questions:

Can you think of any major bank crisis that was caused by excessive lending or investments to what was perceived as risky? Is it not so that these crises have resulted from either unlawful behavior of bankers or excessive lending or investment to what was wrongfully perceived as not risky?

No and yes? If so can you explain why bank regulators have set the capital requirements for banks based on perceived risk? Ludicrous as it sounds, would then not totally opposite capital requirements than the current make more sense, like higher capital requirements for what is perceived as not risky, than for what is perceived as risky?

Since we know that the banks already consider the credit ratings when deciding whether to lend or not to a client, what amounts and at what interest rate, is it logical that the regulators t also use exactly the same credit ratings when deciding the capital requirements for banks? Is that not sort of double counting? If you consider good information excessively, does this not distort the value of that information?

We know that one of the prime objectives for our banks is to attend the credit needs of those small businesses and entrepreneurs that are so vital important for the creation of jobs, but who have no access to capital markets and who cannot even afford to get their creditworthiness rated by the agencies. If so does it make any sense to discriminate against the small businesses and entrepreneurs by means of forcing the banks to carry relatively much higher capital when lending to these than when lending to something with for instance a triple-A rating?

And now I ask you, if the Basel Committee and the Financial Stability Board are not able to satisfactory respond these simple questions, do you think they should have the right to dig us further down into a black-hole of regulatory complexity with their Basel III?

Per Kurowski

A former Executive Director at the World Bank (2002-2004)

http://subprimeregulations.blogspot.com/

The Emperor in Basel is freaking naked!

Sir, all general bank crisis, as well as most individual bank defaults, have NOT resulted from lending or investing excessively in something perceived as risky, but from either unlawful behavior, or the excessive lending or investment in what was wrongfully perceived as not risky.

Against that backdrop… can you please explain to me the rationale of having capital requirements for banks based on perceived risk? If anything, should these not then be higher for lending or investing in that which is perceived as not risky?

But No! The regulators in the Basel Committee and the Financial Stability Board, they insist on discriminating against those bank clients and operations their official risk-perceivers, the credit rating agencies, perceive to be risky, or have not looked at... like the small businesses or entrepreneurs we wish and need to have access to bank credit. And, in doing so they also, of course, become the most important pushers of excessive lending or investment in that extremely dangerous zone of what is officially perceived as not risky.

And that is why, frankly, I cannot, for instance, muster as much enthusiasm as you do, for a Mario Draghi.

Is the Basel Committee´s mistake a taboo in FT?

Sir, Aline van Duyn and Nicole Bullock report “Banks braced for knock-on effect of credit ratings” April 29. There, and though they refer to issues such like that the ratings of the banks could suffer because of the close relation with the risks of their respective sovereign, and of outright losses if selling sovereign debt at a loss, amazingly they do not say one single word about the increase in capital requirements for the banks those downgrading in the credit cause, retroactively.

All bad that can happen when lenders have followed high credit ratings and these are suddenly downgraded, are currently compounded by the fact that the regulators use exactly the same credit ratings when establishing the capital requirements for banks. This was the biggest mistake of the Basel Committee, and of which I have written to you countless times. Has it now even become a taboo to discuss that in FT?

Neville Chamberlain’s Munich vs. Regulator Draghi’s Basel

Sir reading your “Draghi does it best”, April 28, makes me want to ask: How come a Neville Chamberlain coming back from Munich with his “Piece in our time” was booted when the war broke out, even though the war was not his fault, while those who came back from Basel with their “Never a bank crisis in our time” are still praised, even when they did cause the crisis?

What kind of intellectual strangle lock do these regulators have on a Financial Times?

Europe needs and merits someone better than Mario Draghi

Sir, when Guy Dinmore, Quentin Peel and Peggy Hollinger report” Mario Draghi poised for ECB job”, April 27, they refer to "his prominence as head of the Financial Stability Board”. Let me remind you that the most adequate name for that board would be the “Financial Fragility Board”. With their artificial and global regulatory construes they are introducing a fragility that has made and will make the financial system more prone to breaking. When you for instance build resistance against earthquakes, more than the basic strength of material you need to consider their flexibility.

Since Mr. Mario Draghi is one of those who so many years into this crisis has not yet understood the immense damage the regulators of the Basel Committee produced, when they considered the credit ratings for the capital requirements of banks, even though these had already been considered when the market and banks set their risk premiums, he does not seem qualified for such an appointment. A Europe that is so messed up because of the excessive build up of sovereigns and “triple-A rated debt, very much induced by the Mario Draghis of this world, needs someone better.

What about accountability? Giving him a promotion? Would you have made a Chamberlain with his “Peace in our time” the War Minister? I don’t think so! But, that indeed seems to unfortunately be the name of the game, in a world where the too big to fail banks are allowed to grow bigger still.

Wimps! Should our banks be as safe and useless as a mattress stashed away in Fort Knox?

In “Protecting finance from its demons”, April 26, you hold, we face the choice of “protecting the economy from finance” or “protecting finance from the economy”. May I ask, and what about finance helping the economy? Is that not what finance is supposed to be all about?

You quote Paul Tucker, the Bank’s deputy governor for financial stability saying that this “prevails where the financial system is sufficiently resilient that worries about bad states of the world do not affect the confidence of the system to deliver its core services to the rest of the economy”. Yeah, yeah, great sound bite, but… which are “its core services to the rest of the economy”? Mr. Tucker and his colleagues should first be clear about that, before regulating, so that our banks do not become some useless mattresses stashed away in a Fort Knox.

In the whole regulation literature produced by the global bank regulators we know as the Basel Committee, there is not one single word about the purpose of the banks, and anyone regulating something without defining its purpose, has no idea about what he is doing.

PS. The original link to this FT editorial does not appear any longer.

To achieve a sensible pricing of risk, you need to avoid any opaque risk discrimination

Sir Francesco Guerrera writes “In the post-crisis world, risk must be sensibly priced” April 26 and of course he is right, because it was not sensibly priced risk that created the current crisis.

It would seem though that Guerrera might not understood it all yet, because, as he discusses the need for margins to be put up by corporate counterparties when dealing in derivatives with the bank; and he accepts that “banks adjust the cost [of derivatives] based on the credit profile of the buyer”, he does not mention the certain risk that margin requirements, if applied in any discriminatory way, will make the price discovery of risk, much more opaque, and wrong.

We need to bring the credit ratings down to earth

Sir, John Authers´ “Easter parade of worries over Uncle Sam´s credit”, April 24, refers to the rating agencies wielding “real power”, but then describes that power only in terms of “affecting the rates at which companies or countries can borrow”; without making any reference to what has yielded the rating agencies the excessive power they posses, namely that the ratings also play a role when defining how much capital a banks needs to have.

It is that the credit ratings are given a double consideration, which has elevated their importance to the skies and brought us the current crisis. Let´s go back to Basel I days, or better yet Basel 0, set one single capital requirement for all bank lending; and then we have brought down the opinions of the rating agencies to something more in harmony with what they really are, a bunch of fallible humans who, had they been laboratories, would have long ago been sued out of the waters for their harmful mistaken opinions.

If not the dollar, then no other fiat currency either

Most of the world´s concern with the dollar is in fact not with the dollar itself but more of the “if not the dollar then what?” type, since, if looking at the forest and not the trees, makes it clear that no country´s fiat money stands a chance to survive a dollar failure. That is how globalized we have become… that is why some non US are even toying with the notion of supporting a tea party, no matter how doubly distant they feel from some of those partying there … no matter they serve corn on the cob instead of cucumber sandwiches… and others buy gold.

Let us suppose the US officially presented to the world the possibility of a 40% haircut on its debt. Would that be the same as an Argentinean haircut? No way José, since the day after the US would again find unwilling willing takers of US debt, and at quite low rates, because it would think that the day after the US imposed some debt ceiling that really became a real roof.

China, India? Good luck Warren Buffett, but we do not have all that much money to afford the luxury of trying.

In truth, if we would still use fiat money, then the Dollar II would still be better positioned than all other.

The Torturer and the Haircut

Sir, your “Europe must use borrowed time well” April 21, reminds us of how scary it is when we see someone calculating with complex formulas a sustainable debt level of a sovereign; just like a refined torturer calculating the pain tolerance of the tortured, to keep the poor bastard from passing out.

Also, who are the least hard for politicians to order a haircut? The sovereigns, their creditors the banks, the current voting tax payers, or the future generation of voting tax payers? Is it so hard to guess?

As always, the race is between postponement and realities-catching-up. As always, we are looking on with masochistic fascination, praying and biting our nails.

If you thing “sustainability” is important, propose something that impacts it sustainably.

Sir, if you really cared so much about “Sustainability” in finance, as you want for the world to see you do, then you would be arguing for capital requirements for banks based on sustainability ratings, instead of the useless credit ratings that distort and leads our bank off into productive nowhere.

If you are short on capital you naturally go where less of it is needed.

Sir, John Plender in “Why the rush by UK banks into property needs watching” April 20, asks “Why the enthusiasm for an asset class that has been a graveyard for lenders in countless busts?” The simple answer is that going there they are allowed to have less capital than when lending to those officially considered more risky, like the small businesses and entrepreneurs.

Plender also quotes Adrian Blundell-Wignall of the OECD arguing “that the Basel risk weighting formulas are based on a mathematical model that does not penalize portfolio concentration”. That is indeed correct, but much more important is to notice that those risk-weights encouraged excessive concentrations… and even the safest of havens can become overcrowded.

What the “mathematical model” (big words to describe nonsense) used by Basel calculating the risk-weights left out was the fact that the banks were already looking at credit ratings when setting their risk premiums and corresponding interest rates. It might seem a small mistake but it has created thousands times more losses than when a technical confusion derived from simultaneously applying metric and English measures made the Mars Climate Orbiter spaceship miss Mars.

Are we to allow Solvency II do to our insurance companies what Basel II did to our banks?

Sir, Paul J Davies in “Capital rules raise fears over insurers’ risk appetite” April 20, though correct in so many aspects sadly makes precisely the same mistake that the Basel Committee did when they established their capital requirements for banks based on officially perceived risk. He says “The higher returns on risky assets ought to be diluted by a higher capital charge in perfect proportion. That ignores that the “higher return on risky assets” he sees is the result of the market already having looked at the same risk information available and adjusted their risk-premiums and interest rates correspondingly.

Is it not bad enough that Basel II drove our banks excessively into what was officially perceived as not risky assets, carrying no capital at all, to now have Solvency II doing the same of our insurance companies?

Though the outlook is for hurricanes you have not yet seen the roofs flying, just yet.

Sir Martin Wolf, as an economist, stubbornly refuses to even consider those financial regulations, or may I dare to say global capital controls, that directed the worlds capital flows so excessively towards creating excessive debts in areas that were officially perceived as not risky, like the US, UK, Greece and the triple-A rated securities in this world. “Faltering in a stormy sea of debt” April 20. Since what the regulators are currently doing is trying to correct for that mistake, instead of correcting the mistake, we should expect a serious case of regulatory overmedication to also strengthen the storms that await us.

Let me take the opportunity to comment on Standard & Poor’s recent grim outlook for the US debt. Given that the US can always by printing repay its debt in nominal terms that must mean that S&P is, I believe for the first time, considering the possibility of collecting on loans in real terms.

Stealing and rent seeking has nothing to do with “social contracts”

Sir, your reporters, on the issue of fuel subsidies, April 19, wrote: “For oil producers such as Venezuela… fuel subsidies are part of the social contract and relatively manageable.”

Venezuela sell’s its gasoline locally for less than 2 US$ cents per liter. Your reporters should never ever confuse blind and irresponsible rent seeking by which, those in power, usually with cars, rob the implicit value of the petrol or gasoline, from those poor and not in power, usually without cars, with any type or form of “social contract”.

Not “bad” bank assets, bank capital heavy assets

Sir Francesco Guerrera and Patrick Jenkins report “Citi in sales of bad assets as Basel III rules loom” April 19. The titling is not that accurate since what is being done has very little to do with whether the assets are good or bad and all to do with whether they require more or less of those capital requirements that Basel tied up our banks with when the regulators decided to become risk-managers themselves. What a sad world!

And how sad too that a Financial Times have yet not said one word after so many letter I have written about that huge regulatory mistake the regulators committed in Basel II when considering the credit ratings for setting the capital requirements even though these credit ratings had already been considered by the banks and the markets when setting their risk-premiums and interest rates.

How long are regulators allowed to persist with their foolishness?

Sir I refer to so many news, about when a downgrading of credit ratings cause much havoc, like for instance Nicole Bullock´s report on April 19 “Muni bond risks grow after S&P’s DeKalb cut”.

It is high time to ask our regulators some basic questions like when they believe banks incur in the risk of lending, when they make a loan or when the borrower is down-rated. Of course, when they make the loan!

And so I ask how long should we allow the regulators to insist on a foolish system with retroactive corrections, based on credit ratings, and which makes the difficulties encountered with a client that turned out to be worse than he was originally rated even more difficult, and not a system of upfront capital requirements independent of ratings.

The truth about the crisis that the different silos, including FT’s, does not want or cannot see.

Sir, if all sovereign and private bank clients were paying the banks exactly the same risk-premiums, then the risk-weights used in Basel II to apportion the basic capital requirements for banks according to the various categories of credit ratings could have been right. But, they don’t!


The banks and the markets already incorporates in the setting of their risk-premiums the risk information provided by the credit rating agencies, and so when the regulators also used the same credit ratings for setting their risk-weights they made these ratings count twice. It was a huge mistake that resulted in:

1. The setting of minimalistic capital requirements that served as growth hormones for the ‘too-big-to-fail’.

2. That banks overcrowded and drowned themselves in shallow waters, whether of triple-A rated securities backed with lousily awarded mortgages to the subprime sector, or of equally or slightly less well rated “rich” sovereigns, like Greece.

3. A serious shrinkage of all bank lending to small businesses and entrepreneurs as lending to these generated, in relative terms, much higher capital requirement, which made it difficult for them to deliver a competitive return on bank equity.

With Basel III, regulators might be trying to correct for this mistake, instead of correcting the mistake. In other words, the Basel Committee would be digging us deeper in the hole where they placed us.

Ireland’s taxpayers?... and what about holding the Basel Committee accountable?

Lorenzo Bini Smaghi argues that since countries like Ireland took decisions aimed at ensuring a more benign environment for their financial sectors, and thereby had representation, “Ireland’s taxpayers must take their share of the pain” April 13.

What on earth is he talking about? This crisis resulted 99 percent because the Basel Committee diluted the basic capital requirements for banks by arbitrarily establishing some minimalistic risk-weights based on the information provided by the credit rating agencies, even though this information had already been cleared for in the market, when setting the risk-premiums. What representation did Ireland and Irish taxpayers have in such a foolish decision of a global rule setting body?

Mr Bini talks also about “accountability” and I just have to ask him where there is any sign of the Basel Committee being held accountable. From what we see, after failing so utterly with Basel II, they are now happily proceeding to dig us even deeper into the ground with Basel III as if nothing happened with their principal regulatory paradigm.

The risk-weights is what most is causing the tumor growth of the ‘too big to fail’

Sir, John Kay in “The nightmare of taking on “too big to fail” April 13, questions the overall adequacy of a 10 percent capital requirement for banks, ignoring that this will much depend on what risk-weights are applied. In this respect we should not ignore that a meager 6 percent capital requirements, applied across the board for all assets, would produce a far smaller too-big-to-fail bank, than a general 10 percent capital requirement that is allowed to be diluted by applying risk-weights for different assets. Take away the risk-weights that the regulators arbitrarily set and which also distort as they take in account what the market has already accounted for, and you will take away the most cancerigenous element that causes the TBTF tumor.

Let banks capitalize on Darwinians benefits too

Sir, John Kay in “The nightmare of taking on “too big to fail” April 13, mentions that Britain’s Independent Banking Commission “has also recognized that the objective of regulation is not to prevent failure” Below how I phrased that in May 2003, when addressing some hundred regulators at a risk-management workshop at the World Bank.

“If the path to development is littered with bankruptcies, losses, tears, and tragedies, all framed within the human seesaw of one little step forward, and 0.99 steps back, why do we insist so much on excluding banking systems from capitalizing on the Darwinian benefits to be expected?

There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

Extracted from Voice and Noise 2006

FT, what is it that you see that I cannot see? Please tell me. I beg you!

Sir if you are capable of understanding that “a bank holding company might have an incentive to seek out riskier assets to compensate for higher equity requirements” how come you cannot understand that it is precisely the same to say that “a bank holding company might have an incentive to excessively seek out the assets that generate the lower capital requirements”, like the triple-A rated or the “rich” sovereigns, and which is what has caused this crisis. “An opening shot at bank reform” April 12.

When the Basel II regulators assigned a 20% risk for the triple-A rated and for slightly less well rated “rich” sovereigns, that meant that they allowed the banks to leverage 5 times more their capital, in order to obtain what was already risk-adjusted interests, when compared to what they could leverage if lending to the normal mortals, like the small businesses or entrepreneurs. Can´t you see it? Or is it something you see that I don´t? If so please tell me. I beg you.

If you account for perfect information twice, you are valuing it imperfectly

Sir, suppose you have perfect credit information… what should you use it for? To set the interest rates you will charge, or to set the capital reserve you should have? If you use that perfect information twice you are valuing it imperfectly. That is the fundamental flaw with the main pillar of the Basel Committee regulations. Because it makes for the same risk information to be accounted for twice, it introduced a totally unwarranted bias in favor of what is officially perceived as “not risky” against what is officially perceived as “risky”.

Unless someone orders that the same interest rate should apply to all borrowers, which I am of course not proposing, then the only valid conclusion is that we must have one sole capital requirement for all lending.

By the way this does not exclude the possibility that the banks need to report what exposure they have to the different official credit risk categories, so as to provide the market a better way to gauge the risk taking of the bank. What happened now, with risk-weighted capital ratios, was that the banks could take on much more risk than what the market (and the regulators) really saw.

To rebalance the flows we need to rebalance the regulations.

Sir, Martin Wolf in “Waiting for the great rebalancing”, April 6, writes about “an ‘uphill’ flow from poor to rich countries, predominantly into supposedly safe assets”. According to Wolf, Mervyn King, the governor of the Bank of England, explains the flow as resulting from “export promotions… a decision to accumulate foreign reserves… and the combination of low levels of financial development with inadequate social safety nets”.

May I suggest that Mr. King, perhaps because of some conflict of interest, left out the most important explanation, namely the incredible push the importance the credit ratings got, when the regulators based the capital requirements for banks on these. All over the world there was only one message going out loud and clear, which was that the credit rating agencies knew what they were doing, and that if you want lower risk you should better follow their triple-A ratings. That the AAA ratings are highly correlated with rich countries, well that is a quite different issue.

Let us hope now that whatever rebalancing must come will include the rebalancing of the regulations of banks, so as to get rid of that arbitrary discrimination in favor of those who are perceived as not-risky and who are already more than sufficiently favored by the markets.

Blefuscu’s and Lilliput’s bank regulators at war

Sir, John Plender’s “UK’s banking climate is making the US look attractive”, April 6, refers to the debate about the basic capital requirements for banks, whether the 7 percent proposed in Basel III or the 16-20 percent championed in this case by David Miles of the Bank of England.

Pure Blefuscu and Lilliput war material. The current crisis had nothing to do with the basic capital requirements and all to do with that these where applied in such a way that discriminated incredibly much in favor of what officially was perceived as having a low risk of default, the triple-As, even though the market already discriminated in its favor.

Three years into the crisis and regulators do no still know what hit them? How on earth can we allow the regulators to produce a Basel III after that incredible box-office flop of Basel II?

“We need to learn how to fail”

Sir, in the first session of IFC’s and World Bank’s “Building Competitiveness” FPD Forum 2011, April 4, titled “Youth, Employment, and Revolution in the Middle East, Amr Shady, the CEO of T.A. Telecom of Egypt, said something like: “US entrepreneurs know how to fail, our entrepreneurs need to learn the skill of failure, so to have access to the resources we can pivot into successes”... That should be applicable to South Africa too.

That is a message that should urgently be conveyed to the Basel Committee for Banking Supervision and the Financial Stability Board where they keep insisting on raising the incentives for banks to lend to what is officially perceived as not risky and to avoid like plague what is officially perceived as risky. With it, instead of having the banks fish for something important and productive in risky deep waters, they make them waste their time fishing in unproductive triple-A rated shallow waters... where they nonetheless overcrowd and drown.

PS. Please free us from imprudent risk aversion 

If Solvency II would be something like Basel II

Sir, in “EU reform plan alarms insurers” April 5, representatives of insurance companies express some reservations about the regulatory package known as Solvency II coming in force at the start of 2013... and I wonder whether some of the insured would have reasons to be concerned too.

I mean if Solvency II for the insurance companies follows the principles of the Basel II applied to banks, then the capital requirements for insurance companies for insuring those perceived as less healthy will be higher than those required when insuring those perceived as much healthier, independently from the fact that insurance companies already charge higher premiums to the first group.

Has anyone heard about some health rating agencies positioning themselves for business?

Where do you get the “more productive” from Mr. Barney Frank?

Sir, Barney Frank in “Greenspan is wrong: we can reform finance” April 4 writes “This combined with the new Basel III capital standards and the ability of regulators to insist on even greater capital, will ensure more prudent and more productive lending”.

One could argue that it might indeed lead to more “prudent” lending, though in this world of Potemkin credit ratings there is of course no guarantee of that. But, what seems a too gigantic intellectual leap is to believe the resulting lending to be more “productive”. There is absolutely not one single word in the whole Basel Committee for Banking Supervision literature that connects the capital standards to the term “productive”, as they are exclusively connected with avoiding defaults. The Basel capital standards are stooped in the banking traditions of providing the umbrella on sunny days and taking it back when it rains.

By the way, it is funny, or sad, to read a US Congressman Barney Frank referring to Basel as a sort of an essential element in bank regulations, and then consider that Basel is not mentioned even once in the over 2000 pages of Dodd-Frank Act.

The Basel Committee makes a shocking confession!

Sir, the Basel Committee for Banking Supervision, speaking for all sophisticated bank regulators around the world, issued today an urgent statement regarding the discovery of a fundamental mistake committed in Basel II and which they now understand was responsible for causing the current financial crisis.

The mistake was that though the markets and the banks were already incorporating the information about the possibilities of default that were contained in the credit ratings when calculating the corresponding risk premiums to set interest rates for their clients, the regulators based the capital requirements for banks on exactly the same credit ratings, and so, unwittingly, accounted for said credit information twice.

The result of it was, of course, the excessive financing of everything that was officially deemed as having a low risk of default, like whatever had swell ratings like Greece and securities backed by lousily awarded mortgages to the subprime sector; and the insufficient financing of whatever was officially deemed as more risky, like the small businesses and entrepreneurs who are vital for maintaining that dynamism of the economy that creates jobs.

The Basel Committee expresses its most sincere regrets for such a mistake and promises to take immediate corrective action.

PS. April Fool´s joke disclaimer: Sorry, unfortunately, the Basel Committee and the sophisticated bank regulators, three years into a crisis of its own making, are still not (publicly) aware of their mistake.

The Independent Evaluation Officer of the International Monetary Fund has recently in an Evaluation Report come to the conclusion that, for IMF at least, “the ability to correctly identify the mounting risks was hindered by a high degree of groupthink…” The reason why the truth of what happened does not come out must probably now be attributed to group-interests.

SDR are just a sort of “In Gods We Trust”

Sir, the Special Drawing Rights of the International Monetary Fund SDRs, although their issuance can provide liquidity, is not really a currency; it is a basket of currencies, a sort of “In Gods We Trust”. If that precise SDR basket became dominant in the market I shiver at the possible speculative frenzy that would happen if the market suddenly perceived the Executive Directors at the IMF were thinking of proposing a different currency composition of the SDR.

I say this because in a world with so many fundamental and real problems I cannot be absolutely 100 percent sure that Joseph Stiglitz “The best alternative to a new global currency”, April 1, is not the most delicate or subtle April fool’s joke ever written. If so... chapeau! If not... well then we would have to see whether the Central Banks of those currencies represented, would really want to relinquish part of their authority to the IMF.

Confusion not only still lurks, it’s getting bigger!

Sir, LEX in “Who knows what evil lurch” March 25, refers to Andrew Haldane, the Bank of England’s executive director for financial stability arguing “The shift form Basel I to Basel II bank capital standards increased the calculations behind tier one capital ratios from six to 200m” and that “this greater complexity failed to prevent an epochal credit crisis.”

Mr. Haldane, it not only failed to prevent the crisis, it caused it. The risk-weights based on perceived risk of default applied under the table to a market that already cleared for perceived risk of default over the table applying their risk premiums shook the Ground Zero of financial markets and created the mother of all confusions.

The premiums applied by the market in order to make the lending or investment alternative equivalent from a perceived risk of default point of view, were then made unequal when regulators ordered different capital requirements for the lending or investments based on the same perceived risk of default. This double counting translated into that the expected return for banks of doing operations with what is officially perceived as risk-free (sovereigns and triple-As) catapulted when compared to the expected returns from what was officially perceived as risky (small businesses and entrepreneurs). As a result our banks have drowned, or find themselves trampling desperately in triple-A waters and public debt.

And then some have the gall to call this massive regulatory failure, a market failure! And Basel III is not correcting for it, and in many ways making it worse. I have been arguing this for years but unfortunately I cannot find the words gentle enough to get through to the regulators… I hope FT and LEX will.

A not so simple simple question to FT

If banks, by means of capital requirements based on the perceived risk of default are given special incentives to go to what is officially perceived as low risk areas and shun what is officially perceived as risky… is it for the rest of us to pick the slack so to balance that all out?

The credit rating agent’s cloister conundrum

Sir, everywhere we turn we read about the impacts of upgrading and downgrading of the credit ratings, as when Jennifer Hughes reports “CLO ratings set to benefit from Moody’s re-evaluation” March 24.

Having given these credit ratings so much importance, should we not also have to construe cloisters where the credit rating agents can isolate themselves from the temptations? But, answering that question let us not also forget that if we isolate the credit rating agents in their cloisters, then it will most probably be us who will fall into the wrong temptations. What a conundrum!

And what about a special intellectual property monopoly tax?

Sir with today´s technology I am not that sure John Lennon will never ever sing another song, as John Kay holds in “It´s mad to give my heirs rights to a student lit crit essay” March 23. But, yes, John Lennon will not write another song, and even if some computer wizards used his old material to generate a new John Lennon song, we can rest assure John Lennon would not appear as the beneficiary of that copyright.

This touches on an issue not covered in John Kay´s excellent article, namely that all or at least most of the intellectual production rights, gets credited only to whom who ran the last leg of the corresponding human relay... and that to top up that injustice, the rest of us have to pay for the protection of these rights. I have often held that revenues that derive from the monopoly rights the society has awarded should be taxed on a higher rate than those revenues someone has to fight for all alone and without a protective shield.

Another FT Special Report on Risk Management in Finance that did not mention the risk of regulations

Sir, you publish a special report titled “Risk Management: Finance” March 22. In it not once do you refer to the fact that the current supreme financial risk managers of the world are the banking supervisors in the Basel Committee, and who so arrogantly assume it is their right to set Ground Zero for the rest of the risk managers.

With their risk-weights in Basel II, these inept nuts, and there really is no other word for them, decided that the banks returns on capital could be dramatically increased, by allowing leverages of more than 60 to 1, as long as they kept doing operations related to an officially confirmed no risk situation, a triple A credit rating.

Paul Davies explains “why there is now a greater understanding that there is little guidance to be found from the past when preparing for the future”. But that is only so because most still refuse to look at the recent past, and understand from it than bank regulators cannot discriminate as they did, and do, by means of capital requirements for banks based on perceived risks, without creating monstrous systemic risk.

Brooke Masters writes “now that regulators have moved to impose tougher capital and liquidity requirements, attention is turning to other systemic risk”, which ignores that it was not the lack of toughness of the capital requirements that mostly caused the disaster but the way how they discriminated. What better evidence is there that the 8 per cent capital requirement in Basel II for what is rated BBB+ to BB- has proven more than sufficient and that it is only in the area covered with AAA to A ratings where problems have surged.

Richard Milne writes “Follow the line of debt to spot the coming crisis” and refers to a possible bubble in the public sector, while not saying one word about the fact that banks can lend to the public sector with infinitesimal capital requirements, as long as these sovereigns are rated AAA to A.

But worst of all, the special report again fails to mention the fact that the market’s risk management already clears for perceived risk of default, which includes of course the credit ratings, by means of deciding the risk premiums to be charged in each case, and making all the alternatives investments equal. And so that when the regulators then come and intrusively layer on their own risk biases on the banks, the only thing they are doing is distorting the financial markets, and becoming themselves the greatest source of systemic risk.

I denounce!

Sir I hereby formally denounce that your financial regulators, in following the precepts of the Basel Committee, are causing damage that could prove to be irreparable to your homeland´s economy.

By leveraging the market´s own bias against risk-taking with their own risk-adverseness, they are directly hurting the resilience and the dynamism of the UK economy, as well as its job creating potential, and which as in all other economies is much a direct function of the willingness to take risks. This occurs when, on top of the risk-premiums already charged by the market, they impose capital requirements for banks that are based on an officially perceived risk already known and considered by the market.

The basic capital requirement for banks in Basel II, 8 percent, has proved to be more than sufficient to cover whatever lending or investment exposure the banks had in what was officially perceived as “risky” and the current crisis resulted solely from the extremely low risk-weights that discriminated in favor of the capital returns of lending or investing in what was officially perceived as “not risky”.

In terms of a health-insurance plan, your current financial regulations require that those rated unhealthy, and even though they because of that already pay higher premiums, have to cover for a larger part of the capital requirements of your insurance companies, with the result of then being able to offer even lower premiums to those rated healthy and that already were paying lower premiums. What kind of system is that and what capital reserve cushion will there be if the health-raters miss some symptoms or if a new disease that attack only the healthy strikes?

It is sincerely laughable to read about stress tests performed on banks by bank regulators that have proven not knowing what they do. What is perceived as risky has never ever set off a financial crisis!

You are the Financial Times… do you really not care… how long will you keep a lid on this argument? Do you really think your country will remain strong with your banks regulated by bureaucratic wimps?

FT is unbelievably inconsistent!

Sir suppose that the market, which includes banks, looks at the credit information, which includes credit ratings, and decides that the risk premium of a triple-A rated company should be 1 percent; and then it similarly looks at a company rated BBB and decides that the risk premium there should be 4 percent.

Now if a bank would have to hold 8 percent in capital for all its assets and therefore be able to leverage its capital 12.5 to 1 it would receive 12.5 percent of risk premiums on its capital when lending to a triple-A rated company and 50 percent of risk premium on its capital when lending to a BBB rated company, and it has deemed these risk returns to be equivalent.

But then comes the Basel Committee and in Basel II tells the bank that in the case of triple-A rated companies it can leverage 62.5 to 1 which means that now suddenly the banks receives 62.5 percent of risk premiums on its capital when lending to triple-A rated companies which in this case is, even on a gross basis, more risk premiums than what is obtained when lending to BBB rated companies.

How can you then reward Boldness in Business March 17, and yet not say a word about the distortive risk aversion of current bank regulations? You are being unbelievably inconsistent.

Did the financial crisis originate from anything officially or unofficially perceived as risky? Of course not! They never do.

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.

Monothematic regulators are really not interested in interest rate risk

Sir, Gillian Tett asks on March 11 “Have we really learnt lessons of 1994´s sharp rate spikes?” The answer must be NO, foremost because regulators seem not the least interested in that topic.

Current banks regulations are 100 percent based on perceived risk of defaults… and so all other risks… like the interest rate risk Gillian Tett points out, or the risk that our financial system does not perform adequately its capital allocation function that I worry about… or the thousand of unknown risks that I lie around any next corner, are all ignored by these monothematic regulators.

Because of way too optimistic expected returns, pension funds will not be able to deliver.

Sir, Martin Wolf writes “Pension reform makes sense up to a point” March 11 and I hope he takes the opportunity to also look in at the rates of return of pension funds used in actuarial valuations.

As an Executive Director of the World Bank (2002-2004) I continuously held that “It really is not possible for the value of investment funds to grow, forever, at a higher rate than the underlying economy, unless they are just inflating it with air, or unless they are taking a chunk of the growth from someone else. Therefore when we observe how many Social Security System Reforms are based on the underlying assumption that the average pension fund will obtain returns of 5 to 7 percent, in real terms, forever, I have to wonder when we are going to use our knowledge, and inform the world that this is just plain crazy.”

And even after the crisis, the world mostly uses those overly optimistic expected rates of returns in… what cheats they are!

PS. The extract is from my book Voice and Noise of 2006, one of which I also then gave Martin Wolf. Unfortunately Mr. Wolf must not have read it otherwise he would not have perhaps wasted so much valuable opinion space on his macroeconomic-imbalances explanations for this crisis, and would have understood better and earlier the monstrous regulatory imbalances.

PS. Strangely it seems this article by Martin Wolf has disappeared from the web.

FT, dare to look beneath the tip of the iceberg!

Sir, Jennifer Hughes in “Bank dip into tool box for Basel III” March 10, insists, as you all do, on keeping her eyes firm on the tip of the regulatory iceberg, without the slightest concern of what lies beneath. She, as you all do, speak about the minimum equity capital ratio as a percentage of risk-weighted assets while ignoring that if these risk-weights are wrong this has no meaning.

For instance, early this morning Spain was still weighted 0 percent and now, as a result of the two-notch downgrading of its credit rating, suddenly its risk-weight has become 20%; and which means, in Basel II terms, that banks will now need a whopping 1.6 percent in capital when lending to Spain... which means that banks will now be allowed to only leverage their capital a meager 62.5 to 1… poor banks!

You need some warning labels on the transparency pills offered

Sir it is not “when citizens do not know how much the governments are paid” in resource revenues that lies behind the real resource curse… it is much more when governments get paid too much, like more than 5% of GDP, 15% of its exports, or 25% of all tax revenues received from the citizens, “Stop digging deep for the kleptocrats” March 7.

In those cases of evident lack of balance of the societal powers, those transparency pills that the Extractive Industries Transparency Initiative offers, will in the best of cases act as placebos, and it the worst, be feeding on those illusions of a better tomorrow that help maintain petrocrats and oiligarchs in power.

Financial rules must do more for development…anywhere!

As a former Executive Director of the World Bank (2002-2004) I am extremely pleased to see Vincenzo La Via of the World Bank speaking up on the development angle of bank regulations. “Financial rules must do more for development countries” March 7. But, as I have done precisely that, for well over a decade, it might be appropriate to remind the readers that this is not a solely a developing country issue.

Even in developed countries those regulations, by blatantly discriminating against those perceived as more “risky”, are doing just as much harm for the development of their own small businesses and entrepreneurs.

Abundant surrealism is present in the discussions on bank regulations and stress tests

Sir, Patrick Jenkins and Brooke Masters report “Europe’s bank regulator attempts to restore faith” March 7. In it we read again experts opining on the basic percentage of capital requirements indicated by Basel III but not a word is said about the risk-weights which in Basel II diluted the banks required capital into nothing. How surrealistic is that?

Is that because no one wants to acknowledge the fact that European banks, while all the credit rating agencies downgrades are of the outlook for the ratings and not of the ratings themselves, are still allowed to lend, for instance to Spain, against zero capital?

Openness is just a placebo when lifting a real resource-curse

Sir, whenever a government receives in net resource revenues more than 5% of GDP, 15% of its exports, or 25% of all tax revenues received from the citizens, the balance of power has been fundamentally altered and real democracy cannot breath. In these cases the transparency of which George Soros speaks of in “Openness can help lift the curse of resources” March 4, is just a placebo. In fact transparency there amounts to little more than allowing the tortured seeing the pliers that is to be used to extract his fingernails.

That Extractive Industries Transparency Initiative, EITI, and that Soros speaks so highly of is without any doubt well-intentioned, but they have no idea of what the real oil-curse is all about. Anyone who did would not, as EITI does, proclaim the principle: “We affirm that management of natural resource wealth for the benefit of a country’s citizens is in the domain of sovereign governments to be exercised in the interests of their national development.”

That principle supports keeping on concentrating oil-wealth in hands like Gaddafi’s, while the only means of breaking an oil-curse of that size is handing over the oil revenues directly to the citizens. But what would a George Soros or an EITI know about that? … at the end of the day they are not really oil-cursed citizens.

PS. I’m from Venezuela. There the government, by means of oil revenues, has come to receive 97 percent of all national export revenues. In such cases you do not live in a nation, you live in somebody else’s business.

Don´t give microfinance a blanket approval!

Sir in “Dhaka´s spiteful attack on Yunus” March 3, you write “microlenders have small margins in spite of their high interest rates… their loans are cheaper than those provided by traditional money lenders, and free of the social conditions attached to credit in feudal relationship” and I must ask… how on earth do you know that?

As a former Executive Director of the World Bank and very interested in the subject I have closely followed the debate on microfinance, and I have quite often found the need to remark on the fact that most evaluations of the sector are geared to establish the profitability of micro-finance and very little or nothing is said about for instance the rates the micro-borrowers have to pay.

There is much good in microfinance but there is also an enormous amount of hypocrisy, not the least among a crowd of those who make a career and a living out of being microfinance groupies. If you like the concept of microfinance, as I indeed do, then hold it to strict standards and do not give it a blanket approval. (Or otherwise accept it as any other kind of non-holy business).

And of course this has nothing to do with approving or condoning whatever is being done to Mohammed Yunus the founder of Grameen Bank, something of which I know too little about to opine.

Sorry FT… it just seems like the same dumb old banking to me!

Sir in “Brave new banking” March 3 you write that “financial markets were guided less by an invisible hand than by the hands of a blind”. That blind was and is the Basel Committee’s paradigm of capital requirements for banks that discriminate based on perceived risks. You yourself say that “More credit is good when channeled to productive investments” and yet that is not what Basel I, II, or III hold… those regulations hold exclusively that more credit is good when channeled to “not risky” proposals.

Patrick Jenkins, Megan Murphy and Haig Simonian report Oswald Grübel, ex of UBS, saying “If in one part of the world you have an 8 per cent capital requirement, and in another part of the world, 19 per cent… you know where the business is going”. He is absolutely correct, just as is: “If in order to lend to small businesses you need 8 per cent capital requirement, but when lending to triple-A rated securities, or Greece you only need 1.6 per cent … you know where the credit is going”

Sir (please get it!) the 8 percent capital requirement established in Basel 1 and II when lending to what is perceived as risky has proven to be sufficient to cover the losses incurred when banks lend to what is perceived as risky, so there is no need to increase those requirements. What originated this crisis lies exclusively with operations a priori perceived as “not risky”. Before that is realized and fully corrected for, which means eliminating all regulatory discrimination that is layered on top of market discrimination … it just seems like the same dumb old banking to me.

Beware of cuddling up too much with comforting regulatory teddy-bears, they could be poisonous.

Sir, John Kay in “Don’t blame luck when your models misfire” March 2, gets to the core of our problems with the regulatory monopoly of the Basel Committee that has been empowered, God knows how.

The Basel Committee instead of as regulators be highly skeptical about anyone’s ability of perfectly understanding and measuring risks, arrogantly took upon themselves to act as the risk-managers of the world and with their risk-weights which caused the capital requirements for the banks to be absurdly low whenever a triple-A rating was involved, they altered Zero Ground and naturally tempted the bankers to enter into the triple-A rated waters where the sharks of the real economy were waiting for them.

During my days as one of 24 Executive Directors in the World Bank (2002-2004) I repeated over and over the arguments presented by John Kay, but no one wanted to really listen, (just like FT doesn’t want to) since the thought of being able to control for risks sounds so comforting no one wants to give it up… and so the possibilities of finding clientele for the next risk controlling potion introduced are of course boundless.

In such circumstance the best we can do is to try to make certain that the systemic risks of any risk-avoidance scheme to which we want to snuggle up sucking thumbs are not themselves larger than the risks we want to be protected from. Unfortunately there are many who have a vested interest in hiding the fact that they sold us a poisoned regulatory teddy-bear.