September 15, 2014

The Financial Times “a better newspaper for the modern age” missed the financial story of the century.

Sir, I refer to your new look as described in a special FT supplement on September 15.

Mark Twain said, so we are told, that bankers are those who lend you the umbrella when the sun is out, but want it back, immediately, when it looks like it is going to rain.

But for the Basel Committee bank regulators that was not enough, and so they told the bankers, if you lend while the sun is out, meaning to someone perceived credit risk wise as “absolutely safe”, then we will reward you by allowing you to hold much less capital (equity) than if you lend to someone when it rains, meaning some perceived as risky.

And so, if bankers were risk adverse before, they were now castrated… and of course they started to sing in falsetto accumulating extremely large exposures to what was officially perceive as “absolutely safe”, like AAA rated securities backed with mortgages to the subprime mortgage sector in the US, real estate in Spain and “infallible sovereigns” like Greece.

But, as if those regulations were not risk adverse enough, most financial commentators insisted on an excess of testosterone in the financial system, and so no corrections were made, and all those “risky” medium and small businesses, entrepreneurs and start ups who are the tough risky risk-takers we need to get going when the going gets tough, were left without having fair access to bank credit.

And about this story, the de-testosterone-mania that has affected and almost conquered the banks in the western world, the Financial Times has kept mum. And not that they were not informed about it. Truly amazing!

PS. Does this all mean that I would be against banks being well capitalized and therefore more risky? Of course not, requiring players to put plenty of their own skin (or something more specifically related :-)) on the line, increases the need for testosterone, as well as the need to know how to simultaneously control it.

Let us aim for bankers capable of that reasoned audacity that can help our economies to move forward and avoid that risk aversion which only guarantees they will stall and fall.

Europe, why should chief executives of businesses with cash on hand take risks when banks are officially paid not to?

Sir, Sarah Gordon quotes Chris Gentle with: “Who is owning the growth agenda? It should be chief executives, but they have not been rewarded recently for taking risks. The danger is that Europe will lose competitiveness in the long term?”, “Europe shuns growth in favour of ‘safety first’” September 15.

What’s strange about that? Why on earth should chief executives of businesses with cash surpluses invest and take risks when banks, those who should be the forefront in financial intermediation, are officially ordered not to take risks.

Europe, for some decades now, has actually paid its bankers to avoid risks, by allowing them to earn much higher risk adjusted returns on equity on exposures officially deemed as safe like to infallible sovereigns, the housing sector and the AAAristocracy than on assets deemed as “risky”. And of course that stalls any economy.

Europe, the safety of your banks, though important, is only a subset of the safety of your real economy.

Sir, Wolfgang Münchau writes: “The wisest course of action is to appeal to those who are concerned about Europe’s declining influence, and who are open minded enough up to see the casual link between narrow-minded national economic dogmatism, poor economic performance, and declining geopolitical influence”, “Divisions behind a continent’s declining influence” September 15.

Indeed! But how hard it is for most to understand that possibly the narrow-minded national economic dogmatism that most causes poor economic performance, is the credit risk weighted capital requirements for banks

Not many decades ago, in Europe and elsewhere, banks decided what amount of credit to award to borrowers based on who offered to pay them the highest interest rates adjusted of course for perceived credit risk. And for the purposes of those decisions, the capital cost for the banks were the same for all borrowers. And that helped banks to allocate credit in the real economy to those who could produce the highest economic returns.

But then in July 1988 some besserwisser busybodies, in something know as the Basel Committee on Banking Supervision decided that banks needed to hold much less capital (equity) for some assets, because these were perceived as safe. 

And that meant of course that the banks would earn much higher credit risk adjusted returns on what was perceived as safe than on what was perceived as risky… and so the allocation of bank credit was not any longer based on who produced the highest return, but on who produced the highest return on capital (equity) adjusted for risk weights.

Simplified, initially safe assets were defined as: loans to (good) sovereigns, with a risk weight of 0 to 20%; “loans fully secured by mortgage on residential property that is or will be occupied by the borrower or that is rented” with a risk weight of 50%; and all other assets were given a risk weight of 100%.

In June 2004, with Basel II, all those other assets were awarded risk-weights between 20 and 150% depending on their credit ratings. And in Basel III the risk weighted capital requirements survive, though there is a minimum capital floor for the total of all assets, the leverage ratio.

And so, of course, banks are not longer allocating bank credit efficiently. In essence they are giving much too little credit to what is perceived as risky, which means financing too little future, while giving much too much credit to what is perceived as “absolutely safe” which in essence means mostly refinancing the past, and, under such circumstances it should be clear that Europe cannot go anywhere else but down.

Münchau correctly states: “It is only when you take a global view that you can spot what is wrong”. How sad then he is unable to take that global view which clearly indicates that the safety of banks, though important, is only a subset of the safety and sturdiness of the economy.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

September 13, 2014

On allocating resources, why does the undercover economist care more about donations than bank credit?

Sir, I refer to Tim Harford’s “Ice bucket challenge: the cold facts” September 13.

In it he refers to the problem that many very well intended donation drives, for all types of individually very worthy causes, may not, in aggregate, reflect the best use of donations.

Who is to decide? Harford suggests: “GiveWell, an organization that aims to give donors the information they need to make the most effective donations”, a sort of donation effectiveness rating agencies. But, Harford would of course not go to the length of making donors have to heed the opinions of GiveWell, as that would of course give GiveWell a power that, sooner or later, it would be tempted to abuse.

But in banking that happens! Even though banks considered credit ratings and other risk information when deciding to whom to lend and at what rates, the besserwisser risk adverse Basel Committee decided that it had to intervene, and with its credit risk weighted capital requirements, it much favored bank lending to those already favored, “the infallible”, which of course meant that those who already had less access to bank credit, “the risky”, would have that even more restricted.

And so the question that remains is… why would the undercover economist Tim Harford care more about the efficient allocation of donations, than about the efficient allocation of bank credit?

FT, why do you suggest Eurozone should follow faulty visionaries like Mario Draghi?

John Kenneth Galbraith, perhaps in all of his books, writes about how we so often, perhaps always, fall into the trap of in awe believing that having a big fortune or holding really important posts in the world of banking, goes hand in hand with great knowledge on economic and financial matters.

That came to mind when I read your mindboggling favoring title “Draghi’s vision for Eurozone growth” September 13.

Vision? What vision, for ECB to inject hundred of billions of euros buying the least risky tranches of some asset-backed-securities, for the governments to take on debt and spend more freely, and for some countries to do some structural reform in the labor markets? Is that a vision? No way Jose!

Clearly the above could help to create some growth, but it would only be of an illusive type of obese growth, which leads to nothing sustainable, which instead requires to be sustained at all time, and which is never to be able to repay what finances it.

For sturdy muscular growth to have the slightest chance to return, the Eurozone, like other, must remove that huge boulder that lies in the way of banks being able to efficiently allocate bank credit to the real economy, namely the risk adverse credit risk weighted capital requirements for banks.

Mario Draghi, as a former chairman of the Financial Stability Board, is one of those directly responsible for the absurd vision that by allowing banks to earn much higher risk adjusted returns on assets perceived as absolutely safe than on assets perceived as risky, all would be fine and dandy. That just ended up with too much credit to sovereigns like Greece, and too little credit to Greek small businesses and entrepreneurs.

Sir, have you not seen enough of where these faulty pipers of the Basel regulations have lead us, so as to insist we should keep follow their “visions”? FT, wake up, have no fear!

September 12, 2014

Reckless (and dumb) bank regulators, with their distortions, are a drag on the economy

Sir, I refer to Anat Admati and Martin Hellwigs letter “A reckless banking industry is a drag on the economy” September 10.

What an unfortunate title. The drag on the economy that banks are causing now, has nothing to do with them being reckless, and all to do with reckless risk-adverse regulators who de facto decided, with their credit risk weighted capital requirements, that banks should not lend to the risky, even at the risk of lending too much to the infallible.

And of course banks need to hold more capital, meaning more equity, as Admati and Hellwig suggest. Were the regulation of banks to be left to the market, with the market paying the consequences of bank failures, it would be very hard to imagine bank equity leverages more than 10 to 1. Compare that with the allowed 62.5 to 1 leverage when lending to Greece authorized by this generation of loony regulators.

And of course banks need to hold more equity, but, let us not ignore the fact that the journey from undercapitalized banks to well capitalized banks is a journey full of dangers to the real economy. Just for a starter, before requiring banks to hold more capital, we need to eliminate the credit-risk weighing of capital, since otherwise the distortions will become even more intense.

Finally with respect to all those fines paid by banks… I just wished the judges had not been so masochistic as to ask for those fines to be paid in cash, against equity, but had asked these to be paid instead in voting shares, priced at current market values.

September 11, 2014

Are those who lend to a morally bankrupt government not just as morally bankrupt themselves

Sir, FastFT reports “Venezuela bonds yields are shooting higher” September 11.

It refers to a recent article by Ricardo Haussman’s and Miguel Angel Santos’ that said: “The fact that [the government] has chosen to default on 30 m Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of moral bankruptcy”.

And FastFT states “Investors are clearly little concerned”… something which is quite ok with me.

Most investors in Venezuelan debt, perhaps all, have for a very long time been perfectly aware that things in Venezuela were not as they should be, but they have decided to look away, because of the high risk premiums offered. And so as I see it, they are just as moral bankrupt.

And I repeat questions I have often made: Would it be right to buy bonds to finance the building of concentration camps... if the price, the risk premium, is right? Where do you draw the line on what is morally admissive lending? Where do you draw the line on what kind of intermediation fine reputable investment banks can do before they become morally repulsive?

The way I see it, the world, at least us citizens, need good governance ratings and ethic-ratings, much more than what it needs credit ratings

Mario Draghi… you are personally responsible for any ECB liquidity injections in Europe being just wasted away.

Sir, I refer to Stefan Wagstyl’s “ECB presses on with securities plan” September 10.

Mario Draghi, as the former chairman of the Financial Stability Board must be aware that, because of the risk-weighted capital requirements, all those borrowers who have the misfortune of ex ante being perceived as risky from a credit point of view, independently of how important they could be for the European economy, and for European job generation, will not have fair access to bank credit.

And so therefore banks will by means of their credits not be able to allocate any ECB (or fiscal deficit) liquidity injections efficiently to the European economy.

And one of the reasons for why this distortive regulatory lunacy introduced 10 years ago with Basel II survives, is the quite natural but still highly irresponsible reluctance of regulators to admit their mistake.

And that is why, I at least, hold Mario Draghi personally responsible if any ECB liquidity injection in Europe is just wasted away… and this even though he might not care one iota about it, as he sure must be surrounded by so many other who support his ego by daily reaffirming his magnificence.

September 10, 2014

Credit risk-weighted capital requirements make it impossible for banks to price risk

Sir, I refer to Howard Davies’ in FT’s A-List, “Dilemma of defining risk” September 10.

There Davies states: “Regulators accept that banking necessarily entails risk. Their view, however, is that banks should know what risk they are taking on, why they are doing so, and should ensure that risk is priced properly”.

Indeed, it should be so, but it is not! 

Regulators, by using credit risk weighted capital requirements for the banks, not only send the message that they do not believe banks know what risk they are taking on, and worse, much worse, they make it completely impossible for banks to price risk properly. As is, banks price risks adjusted for the capital required, and that distorts all.

Regulators have yet not understood that the risk they must be concerned with has nothing to do with the credit risk of a bank’s exposure and all to do with how a bank manages those credit risks. Today they act like a nannie helping a child to cross a street looking only at the traffic light and not looking at the kid.

What should regulators do? Fix some capital requirements in order to cushion for any unexpected losses. But for the unexpected, you cannot, as regulators, by their own admission have done and do, use the expected.

To me it is surrealistic to read Douglas Flint expressing how the main preoccupation of bankers is “to protect themselves and the firm from future censor” by regulators when it is the regulators who should hang (illustrative… I think) for their mistakes. 

As is Basel II and III risk weighted capital requirements for banks is a true regulatory nightmare.

Neither Martin Wolf’s nor Mario Draghi’s ”whatever it takes” includes what is most urgent for Europe

Sir, Martin Wolf holds that ”Europe has to do whatever it takes” September 10, and that is indeed correct.

But Wolf’s “whatever it takes”, just like Mario Draghi’s, does not include what is the most urgent for Europe.

And that is getting rid of the distortions that the credit risk-weighted capital requirements produce in the allocation of bank credit. And that might have to include temporarily reducing the capital requirements for banks on exposures to what is perceived as risky.

For instance Christopher Thomas in “Power of Draghi ABS plan questioned” quotes various analysts for instance saying: “banks are already awash with liquidity… they hardly need more money… ABS supply… can only come through capital relief that makes it more profitable for banks to lend to small businesses in the first place without then having to hold lots of capital against those loans”

The day Europe begins to think of capital requirements for banks in terms of risks to Europe, to its economy and to the creation of jobs for its young, well that will be the day it will begin seeing light again, and fully understand what its bank regulators did wrong.

I understand Draghi’s reluctance, since that would require him to admit he was profoundly mistaken while being the chairman of the Financial Stability Board.

But, Martin Wolf’s?

PS.Basel II and III risk weighted capital requirements are a regulatory nightmare.

September 09, 2014

Regulators like FSB’s Draghi, placed heavy weights, on what central bankers like ECB’s Draghi, now want banks to carry.

Sir, I refer to Patrick Jenkin’s “Question hangs over Draghi’s latest salvo on lending” September 8.

In it, with respect to the ECB purchase of asset backed securities, planned in order to free up banks’ balance sheets” so that banks lend more to business, Jenkins writes: “Selling the highest quality, least risky tranches… still leaves the issuing banks with the lower-grade portion of the securitization”.

But though Jenkins refers to the obstacle of rules on capital, he does not make clear that it is precisely those “lower-grade” tranches of the ABSs, and the lending to business, which is by far what is most affected by those capital rules and which, by the way, are not really “post crisis” rules but Basel II rules.

The irony is that Mario Draghi, when during many years the chairman of the Financial Stability Board, supported the very nonsensical credit risk weighted capital requirements for banks; those which now impedes him as chairman of the European Central Bank, to perform his duties. And of course, he does not want anyone now to notice how dumb he has been, since that would lead many to ask, “If so, why on earth was he promoted?” 

What a Shakespearian tragicomedy!

If Venezuela defaults, two have tangoed, an incompetent government and highly irresponsible lenders.

Sir, I refer to John Paul Rathbone’s “Call for default underscores Venezuelan incompetence” September 8.

In it Rathbone analyses Ricardo Hausmann’s and Miguel Angel Santos’ recent “Should Venezuela default?” where they so correctly argue that Venezuela’s government, though being current on its debt service, has already de facto defaulted in so many ways on “its people”, something which signals a “moral bankruptcy”.

Venezuela’s government has clearly shown absolute incompetence, the highest disdain for Venezuela’s constitution and for instance, according to Human Right Watch, has also committed crimes against humanity. And facts like gasoline-petrol being given away at US$ 1 cent per gallon, 278 times less than the price of milk… makes all of the above as evident as can be.

But, let it us be very clear, all equally points to highly irresponsible lenders who do not care one iota, as long as the price, the risk-premiums, are right.

Rathbone reminds us that “Venezuelan bond yield on average 12.3 percentage points more than US treasury”. Let us then suppose a bond issue yielding 20% that is going to finance the building of some concentration camps. Where do you draw the line on what is morally admissive lending? Where do you draw the line on what kind of intermediation fine reputable investment banks can do before they become morally repulsive?

As I have been arguing for some time, anyone investing in a bond that (when rates are as low as the current) pay for instance 4% more than the risk free rate, should know he is buying morally questionable pre-defaulted bonds… and that he must renounce to the possibility of having the cake and eat it too, meaning aspiring to get 100% of risk premiums and 100% of principal.

As a Venezuelan citizen let me also remind all that currently the government receives directly 97 percent of all the nation’s exports and, while so, as I see it, has no right to take on any debt whatsoever.

PS. During the Venezuelan default in the 80s I asked a foreign banker “How come you lent especially much to this entity that is emblematic of all non-transparency, corruption and mismanagement in Venezuela?” His answer was: “At the end of the day it is all going to be government debt, and this entity pays the highest interest rates”. I felt like slapping his face, I wish I had!

September 08, 2014

For carpet bombing to work everything must have a chance of being hit.

Sir, Wolfgang Münchau writes “even if we disagree on the precise causes of the present downturn, we can still find a common and effective policy response”. “What Draghi must do next to fix Europe’s economy” September 8.

Yes that could be possible, but only if the real cause for the downturns was among the causes being disagreed on. But it is not!

The pillar of current bank regulations, as Münchau should know by now, is the credit risk-weighted capital requirements, those which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky.

And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main Street.

And so when Münchau, with respect to different choices of how liquidity could best be provided in Europe, concludes that “carpet bombing would be much safer bet”, something with which agree, that is currently impossible. For it to happen the bombs would have to be allowed to also hit those perceived as being more risky than others in terms of credit risks.

Is the economic establishment really dumb or, much worse, playing dumb and conspiring? Draghinomics or Drachulanomics?

Sir when I read “Economists hail birth of ‘Draghinomics” September 7, and see the photo included, I know the establishment is circling the wagons, as all whose members therein referred to are, by defending Mario Draghi, only defending themselves.

The pillar of current bank regulations is, as you should know, the credit risk-weighted capital requirements, which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky. And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main Street.

To therefore speak well of any sort of injection of liquidity in Europe, whether by governments or the ECB, before removing that huge unsurpassable boulder that hinders banks from allocating credit efficiently to the economy, is pure dangerous nonsense.

Yes, the establishment dutifully speaks about needed “structural reforms”, but it never includes a reference to the above, to what the economy most needs.

I do not know really know whether the Establishment is truly dumb and doesn’t get it, or is just making out to be dumb. For their sake I pray it is the first, because the second option would make them co-conspirators against the chances of our young ones being able to access the new generation of jobs, which only the financing with reasoned audacity, or intelligent risk-taking, can provide for.

With respect to the future being sucked out by regulatory risk aversion, and remembering that Mario Draghi was for years the chair of the Financial Stability Board, we might perhaps better talk about “Drachulanomics”.

Does Lawrence Summers really think risk adverse bureaucrats can deliver “bold reform”?

Sir the pillar of current bank regulations is, as you should know, the credit risk-weighted capital requirements, which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky. And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main street.

And so you can understand how frustrating it is to read Lawrence Summers finding room to include “policies to promote family-friendly work” in his list of needed structural reforms essential to increase productivity, and not including the need of correcting the above mentioned regulatory distortion, “Bold reform is the only answer to secular stagnation” September 7.

“Bold reform” Ha! How can clearly overly risk-adverse bureaucrats carry out that? They only know about throwing money at problems.

PS. As Summers also refers to the need of “infrastructure investments” we should not forget that there is a prior need of making sure those “infrastructure investments” are done efficiently, in terms of costs.

September 05, 2014

Europe, are you sure Mario Draghi has a clear idea of what he is doing? Scary question eh?

Sir I refer to the latest ECB/Draghi measures “to save the eurozone from economic stagnation, as reported and commented on in several ways in FT on September 5.

In the Short View James MacKintosh writes “they should… perhaps encourage mortgage and business lending”. Mortgage lending, yes, business lending, NO! Because business lending requires banks to hold much more of that extremely scarce bank capital than what mortgage lending does.

In fact anyone that in Europe, with added liquidity and lower interests tries to help medium and small business, entrepreneurs and startups, to gain some access to bank credit, without considering eliminating completely the considerable differences in capital requirement for banks when lending to these “The Risky” than when lending to “The Infallible”, has no idea of what he is doing. Scary eh?

But perhaps Draghi knows. When Claire Jones and Christopher Thompson, in “Draghi pins hopes on ‘orphan child’ plan” write about asset backed securities and capital charges and that “Mr Draghi said that decision was in the hand of independent regulators and beyond central bank’s control”, it sure sounds like the former chairman of the Financial Stability Board is trying to wash his hands.

And you argue “Purchases of asset-backed securities will only make a difference… if loans are genuinely taken off strained bank balance sheets, freeing space for new lending”. I ask, what kind of new lending are you referring to? I guess all the bank lending we would see would be that which requires them to hold little capital.

In fact, I suspect that most of what that part of the ECB exercise would achieve, is to dress up the banks before the oncoming asset quality review and stress tests… Might ECB be getting nervous about what it might find? Indeed, ignorance is often bliss!

September 04, 2014

We must expel regulators who only think of banks as mattresses to stash away savings

Sir, Martin Wolf, naturally reluctant to make a reference to all my letters to him about risk-weights that we have discussed over the years, writes: “An important part of higher capital requirements is that these should not be based on risk-weighting. In the event, the risk weights used before the crisis proved extraordinarily fallible, indeed grossly misleading” “Call to arms” September 4. 

He approximates, but he is still far from comprehending the fundamental problem with risk-weighting… it is indeed proving very difficult for him. The most serious problem with the risk-weights is that even if they are accurate, even if they do not (momentarily) mislead, they will still be distorting the allocation of bank credit in the real economy, and thereby setting up the worst of the calamities, not the destruction of the banks, but the destruction of the real economy.

Again, for the umpteenth time, you cannot allocate bank credit so preferentially as the risk weighing based on credit risks causes, to what is perceived as absolutely safe, in detriment of what is perceived as risky, and expect the economy to keep moving. Risk-taking is the most fundamental part in keeping an economy going forward, without stalling, and falling.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

So the most urgent action we must take is to remove from regulating our banks those who only think of banks exclusively in terms of a more secure mattress to stash away our savings… and for the time being at least, I am sorry to say those still include Martin Wolf.

Some fifty years ago we saw the photo of Nikita Khrushchev and Swedish Prime Minister Tage Erlander in a little rowboat close the shore, discussing. This year we saw Angela Merkel, David Cameron, Mark Rutte and the host Fredrik Reinfeldt, doing the same, in the same place, and in the same or a similar boat… but now they were all wearing life-vests. 

And just the other week we heard of a team being sued in the US because of some head injuries sustained by someone …playing soccer… and I fret for the destiny of this new manic risk adverse western world in which my grandchildren will have to live.

September 03, 2014

ECB´s Mario Draghi needs to do an act of contrition, for history to be more lenient on him…perhaps

Sir I refer to Claire Jones “Draghi’s new deal”, September 3.

In it Jones writes “The message: Paris and Rome must reform their economies, removing barriers to the creation of business and jobs”.

Well Mario Draghi, as the former chairman of the Financial Stability Board, and therefore much responsible for current bank regulations, should be ashamed of himself. 

I say this because perhaps no barrier stand as high against the creation of business and jobs, than the current credit risk-weighted capital requirements for banks, which have only to do with the short term stability of banks (not the long term) and not one iota with the creation of business and jobs.

It must be demolished, so that bank credit can again flow in fair terms to the “risky” medium and small businesses entrepreneurs and start-ups, and without whose help no economy can move forward.

Were Draghi in an act of contrition, to confess his mistake, and help to "tear that wall down", history might be more lenient with him… though that might be difficult considering how much of Europe’s youth might have already been condemned to form part of a lost generation only because of the regulators' so idiotic and so dangerous risk aversion.

When discussing sovereign debt restructuring, let us begin with the beguine

Sir I refer to Martin Wolf’s “Holdouts give vultures a bad name” September 3.

Without opining on the sovereign debt problems of any particular country (like in this case Argentina’s) I have often said we need more clarity in the terms we use.

For instance any sovereign debt holder who acquired the debt at moments when it paid low risk premiums, and the debtor country seemed to be going in the right direction with sustainable debt, should be classified as a bona fide sovereign creditor.

On the opposite side, any debt holder who acquired the debt at moments when it was paying high-risk premiums, because the debtor country was deemed to be going in the wrong direction, towards unsustainable debt, should be classified as a speculative sovereign creditor.

And there are no clearer frontiers between those two categories, than the implicit risk premiums at the moment of investing in that debt… for example 400 basis points over the lowest rate paid by sovereigns for similar debt.

And I believe that, if a country needs to renegotiate its debts, the speculative holders should not expect to have the cake and eat it too, meaning collecting high risk premiums and full capital. For instance, any interests collected over a certain base risk premium defined, should first be deducted from principal owed, in order to allow for some justice with respect to the bona-fide creditors.

The above is not intended as a fully thought out solution, especially when we know that many speculative debt holders could dress up their positions as bona-fide, but at least it also helps to remind us that, both among hold-outs and restructured there could be good and not so good creditors.

But I say all this because just as important, or even more important than any restructuring of sovereign debt, is to send the right signal about when these debts were originated… as so much of renegotiated sovereign debts should never have really come into existence.

I believe us citizens who suffer bad governments, can always benefit from new tools that put some dampers on their possibilities to contract debt, usually only to benefit some few, and to be paid by future generations. Where would for instance the debt-squandered-away levels be for many countries where it not for holdouts?

And so, when discussing sovereign debt restructuring mechanism, we should begin with the beguine. 

For example any debt restructuring for a sovereign debtor who is in problems for causes mostly of his own making, should include clear mechanisms which at least shows an intention of that not happening again. By the way, that is most often an integral part of any private sector debt rescheduling, for instance maximum debt levels, minimum cash reserves and so on. 

A sovereign creditor who just plays out the card of “take your hit and leave me alone” might very well merit some bad vulture holdouts, I mean for the benefit of us tax paying citizens.

PS. Beside sovereign credit risk ratings, should we not also have sovereign governability and ethic ratings?

PS. And, in all these matters, let us never forget that what might appear as a benefit to some, might very well reappear somewhere down the line as a cost to another.

September 01, 2014

I challenge all in FT to, without fear, read The Document on Basel II risk-weights and then, without favour, explain it to us in layman terms

Sir, Stephany Flanders writes “Mr Draghi was quite explicit in Jackson Hole: the risk of doing too little in Europe are now greater than doing too much. “Draghi approaches his Abenomics moment”, September 1.

Indeed, but what is really sad is that neither ECB nor European governments say nothing, worse yet, seem to know nothing, about what is absolutely most urgent, namely getting rid of the risk-weighted capital requirements for banks. The credit-risk weighting effectively blocks credit from flowing freely and fairly to all “risky” capillary economic agents, like SMEs and entrepreneurs. Though these borrowers might individually represent risky credits, they are absolutely indispensable for the economy, they pay higher risk premiums and get smaller loans, and they do also not pose major dangers to bank stability, since bankers, like all of us, tend to avoid the risks they perceive.

In fact, I challenge anyone of you in FT to, without fear, read the explanations given by regulators on the risk-weights given in “The Basel Committee on Banking Supervision´s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005” and then, without favor, explain it to us in layman terms.

And please do not tell us that it is not your responsibility to read and understand such document, before reporting or opining on the pillar of current bank regulations. That bank regulators did not dare to question that document is what has gotten Europe and the world in its current bind. And I pray that is true, because to think regulators read it, understood it, and still went ahead and approved of it, is just too scary.

August 30, 2014

Bad bank regulations in the company of big egos, hidden agendas and lack of accountability have our economies stuck in the doldrums

Sir I refer to Joseph Stiglitz’ review of Martin Wolfs’ recent book “The Shifts and the Shocks” August 29.

Stiglitz writes: “The problem is not an excess of savings but a financial system that is more fixated on speculation than on fulfilling its societal role of intermediation between those with excess funds and those who need more money, in which scarce savings are allocated to the investments of highest social returns”

Of course that is the problem. A financial system, in which perhaps its biggest agent, the banks, are given immense incentives to lend and invest based on perceived credit risks, something which has absolutely nothing to do with social or economic returns, cannot fulfill its role of intermediation.

But, those immense faulty investments are given, not by any market, but by regulators who, for instance in Basel II, constrained a bank to leverage its equity 12.5 times to 1 when lending little to a small business or entrepreneur, while at the same time allowing banks to invest huge amounts in members of the AAAristocracy, leveraging a mindboggling 62.5 times to 1. 50 times more!

Unfortunately, in a world in which most of the big brass opinion makers carry their own agendas, and which in the case of Martin Wolf and Joseph Stiglitz neither one include the possibility of regulators regulating too much nor regulating too badly, it is difficult for this truth to surface. 

Add to that the fact that regulators themselves, quite naturally, hate their outright stupidity to be known, and stubbornly refuse to answer questions about the distortions their risk-weighted capital requirements produce in the allocation of bank credit, and you will get a better feeling for how stuck in the doldrums our economies are.

August 29, 2014

At a growth summit Matteo Renzi and Francois Hollande should just ask ECB’s Mario Draghi a simple question

Sir, I refer to Hugh Carnegy’s report “Hollande presses for growth summit” August 29, and I would strongly suggest Matteo Renzi and Francois Hollande, they ask Mario Draghi the following.

“Mr. Draghi. As you were for years the Chairman of the Financial Stability Board and therefore an expert on bank regulations we would like to ask a simple question.

Currently European banks are not lending to medium and small businesses, entrepreneurs and start-ups because that type of lending is considered to be risky by regulators, who therefore require banks to hold much more of that extremely scarce bank capital (equity) against that type of loans than against other supposedly safer loans. And that we would hold makes it impossible for our economies to grow in a sturdy way.

So can you please explain to us, in an easy way, why bank lending to medium and small businesses, entrepreneurs and start-ups is considered risky? We ask so because one could think that having banks not lending to these borrowers would be something way riskier for Europe and our economies.

Could it not in fact be so that the risk of your risk-weighted capital requirements creating distortion in the allocation of bank credit is far more dangerous than what the borrower’s credit risks represent to banks?

And while you’re at it Mario, please explain to us what is the reasoning behind the risk-weights? For instance are these to reflect the possibilities of a borrower not repaying the bank, or the possibilities of a bank going under because of a borrower does not repay? If the latter it would seem to us, humble laymen in these matters, that what is perceived to be safe and therefore is lent to much more by the banks represents more real danger… not the skimpy lending to those perceived as “risky”.

Bank fines, if not paid with new voting shares issued, seems societal masochism

Sir, I refer to Gillian Tett’s “Regulatory revenge risks scaring investors away” August 29. In it Tett indicates the possibility that the 10 largest western banks will end up 2014 paying £200bn in bank fines. Let me translate that for you.

In terms of the Basel III US leverage ratio of 5%, that signifies £4.000bn less in lending capacity or, with the European leverage ratio of 3%, £6.666bn less in lending capacity… and that is paid by the economy as a whole… in other words it seems pure societal masochism.

And that does not even consider that if any of these banks run into problems, and is undercapitalized, then tax payers might also end up paying the fines.

That is why I have for quite some time suggested that we should think having banks paying their fines in voting shares issued at their current market price… and government could then resell those shares in the market.

Are not bank regulators there to see to our banks are strong and well capitalized? Have we heard them protest these fines?

August 28, 2014

Central banks’ Friedman helicopter pilots have no idea about how to spread quantitative easing and low interest rates

Sir, Ralph Atkins report that "Central bankers face ‘confidence bubble’” August 28.

With respect to central bankers as bank regulators you know very well it’s been a long time since I have had any confidence in them. They are so lost in the labyrinth of their own making.

For instance they are now also supposed to base their monetary policy on the job rate, and so they pour liquidity and low interest rates on the economy while at the same time, with their risk-weighted capital requirements, they make sure that does not go as bank credit to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups… those who could create the next generation of jobs. How crazy is not that?

Really, how smart is it of the central bankers to believe ordinary lowly bankers to be so blind and so dumb so as to require them to hold 5 times as much capital when they lend to someone they know has a BB- rating than when they lend to someone they know has an AA rating?

Or, inversely, how smart is it of central bankers to believe ordinary lowly bankers when they argue they could hold only a fifth of capital when lending to someone who has an AA rating, than what they should hold when lending to someone with a BB- rating?

I can’t help to ask myself what Friedman would have to say about the ability of the current central bank’s helicopter pilots. I am sure he would be aghast at their stupidity.

August 27, 2014

What does stealing a show among adoring fan means? Draghi should dare to address a room full of unemployed young Europeans

Sir, Mario Draghi, as the former chairman of the Financial Stability Board, is one of the responsible for the risk-weighted capital requirements for banks, which, because regulators think that is too risky for the banks, stop banks in their tracks from lending to medium and small businesses, entrepreneurs and start-ups.

And so now, when Gavyn Davies reports that “Mario Draghi steals the show at Jackson Hole” August 27, I have to wonder how Draghi would be received by a crowd of well informed young unemployed Europeans? I really doubt he would there be able to steal a show, most likely he would have to retire running.

The inexplicable inconsistency of Martin Wolf

Sir, I refer to Martin Wolf´s “Opportunist shareholders must embrace commitment” August 27.

With respect to the corporations, those entities “largely responsible for organizing the production and distribution of goods and services across the globe”, Martin Wolf argues that “we have made a mess off them… with shareholder value maximization… which leads to misbehavior but may also militate against their true social aim, which is to generate greater prosperity”.

And though I agree with most of his concerns, I am left wondering if we would not run the risk of causing an even greater mess trying to correct it.

But, if Wolf is so concerned about how corporations allocate resources in the world, should he not be even more concerned about how bank regulators, with their risk weighted capital requirements, are providing a much worse and more concentrated distortion of something perhaps even more important like bank credit? Or is not the function of banks also to help generate greater prosperity?

Clearly Wolf should be concerned with it, but, for reasons that I do not comprehend, Wolf has never been able to understand that the risks with risk weighted capital requirements for banks are so much greater than the credit risks which are being weighted.

And Wolf ends admonishing “We should let 100 governance flowers bloom”. Yes indeed, but in these days when the reach of regulators is global and therefore more prone to causing systemic risks, should we also not look much closer into the governance of that sole regulating flower represented by the Basel Committee and the Financial Stability Board?

PS. And just in case, it is of course not my intention to single out Martin Wolf as someone who does not understand that risk-weighted capital requirements distort… he is in incredibly abundant and qualified company.

Sir, John Kay, while being entirely correct, makes you wonder where he has been the last decade

Sir, John Kay writes “Much of the complexity of modern finance is the result of regulatory arbitrage – avoiding or minimizing restrictions by engaging in transaction with more or less identical effect but more favourable regulatory treatment… Regulatory arbitrage is an inevitable outcome of the detailed prescriptive regulations of financial services” “Arbitrage wastes the talents of finance´s finest minds” August 27.

Of course, Kay is absolutely right, but it makes you wonder where he has been all these years.

Does Kay not know that Basel II, which allowed banks to leverage their equity in the range of 8 to infinite times, made regulatory arbitrage immensely more important for a bank´s return on equity, than being able to allocate credit to the real economy correctly? If, banks had to hold the same capital against all assets, say the Basel II basic 8%, then banks might still be arbitraging, for instance with insurance companies as Kay describes, but regulatory arbitrage would never ever have reached current endemic and monstrous proportions.

And Kay correctly holds that “The better response is to find simpler and more robust principles of regulations? Does he not know that Basel III goes into the opposite direction, increasing the complexity and perhaps even the number of tools in the arbitrage toolbox?

Well clearly Kay has not read the so many letters I have sent him about this issue over the last decade…I guess that happens when you do not belong to a financial columnists intimate network.

That said, I hope that Kay with this recent insight, then would dare start asking the regulators those nasty questions they need to be asked, if our economies are to stand a chance.

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 award or buy one single of these mortgages to the subprime sector. It also 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.

August 26, 2014

Let us hope the golf handicap system does not fall into the hands of something like the banks' Basel Committee.

Sir I refer to Anjum Hoda’s “The Bank of England´s fixation with price stability has cost us all” August 26.

Hoda puts squarely the blame for current problems, like weak wage growth and banking crisis, on “central bank’s decisions to price money incorrectly- a mistake that led to disjointed, mutually unsupportive outcomes in the capital and in the labour markets”.

I do not know sufficiently to hold an opinion on what role that played, but I do firmly believe that much more culpable were the risk-weighted capital requirements for banks, based on perceived risks already cleared for, which profoundly distorted the allocation of bank credit.

Since after soon a thousand letters to you trying to explain it I have not been able to do so, and though I do not know whether Anjum Hoda or you play golf, let me use its handicap system to illustrate what is going on.

The golf handicap system allows good and bad players to compete. Of course, now and again, the handicaps do not reflect the real golfing abilities of the players, just like credit ratings sometime misses the credit risk.

But what would happen if a Basel Committee for Golfing, because those with higher handicaps could be cheating themselves into some unjust winnings, decided to copycat their colleagues in the Basel Committee for Banking Supervision and instruct the following:

All those with handicap between 13 and 18 will have their handicap automatically reduced with 9 strokes, those between 7 and 12 with 6, and those between 1 and 6 with 3 strokes. 

Would that solve it? No, the unfortunate “unexpected consequence” of it would be that only scratch players were to be able to play golf competitively. Just like risky small businesses and entrepreneurs cannot currently compete in a fair way for access to bank credit, since that credit is now given primarily to the credit risk scratch players, namely the “infallible sovereigns”, the members of the AAAristocracy and house purchase financing.

PS. August 14 FT published a special report on Golf. In it Roger Blitz in “Sport stuck in a rut has to get a grip on its future” wrote “A single [governing] body would appear a logical outcome for an increasingly global game”. Let us golf lovers pray it does not fall in hands similar to the Basel Committee… since our breed would die out so much faster.

August 25, 2014

Does Martin Sandbu really not know who did the eurozone in?

Sir, in November 1998 in an Op-Ed titled “Burning the bridges in Europe” I believe I expressed as reasonable concerns as any about the Euro.

What I did not know at that time was that bank regulators would introduce a Basel II, by which banks were required to hold 8% in capital when for instance lending to SMEs but did not have to hold any capital when lending to “infallible sovereigns”. That of course dramatically reduced all possibilities the markets had of putting brakes on any macroeconomic imbalances.

And so now, when I read Martin Sandbu´s otherwise excellent “The euro is a scapegoat for the blunders of politicians”, August 25, I wonder more than ever about how come the absolute blunders of the Basel Committee are so brazenly ignored.

Does Martin Sandbu really not know who did the eurozone in? Or is it something else I am unaware of?

Sir FT, are you allergic to the idea that SMEs, entrepreneurs and start-ups lend our economies a helping hand?

Sir in “Central banks at the cross-roads” August 25, you describe the cross-roads in terms of whether central banks and governments are, with fiscal and monetary policies, to help or not to help. 

You do not include the crossroad that rids of the discrimination against “the risky” present in the risk-weighted capital requirements for banks. Doing so would allow banks to once again lend to medium and small businesses, entrepreneurs and start-ups. Are you allergic to the idea that they should have a chance to help out?

August 24, 2014

Bank regulators should stop profiling risk and use predictive statistics instead.

Sir, Gillian Tett brings up an extremely interesting question. What has predictive statistics on crime, which might indicate more crime possibilities in black areas, have to do with discrimination? “Mapping crime – or stirring hate” August 23. I would apply those notions to current banks regulations.

Regulators should apply risk-neutrality, meaning stop profiling bank assets using risk-weights based on perceived risk, which in essence is highly discriminatory and creates distortions in the allocation of credit; and instead use predictive statistics about when banks really get into troubles. Would they do so, they would soon discover that bank lending to “the risky” requires much less supervision than bank lending to what is perceived as safe and profitable. 

The predictive model could be based on quite simple algorithms… like what bank exposures are growing the fastest, in real time. At this time it would clearly indicate that, in Europe, regulators would have to urgently send out a squad to patrol the area of loans to infallible sovereigns.

August 23, 2014

Why is FT such an apologist of absolutely failed bank regulators?

Sir, referring to “a new post crisis world marked by tougher regulation and supervision”, you end with “If bankers are to regain public trust, they must learn the lessons of the past”. “Bankers brace for a brave new world” August 23. 

Excuse me… what lessons of the past? Those lessons regulators themselves have not understood yet and therefore, with their risk-weights, they keep on shepherding banks with little equity into corrals where the most dangerous “absolutely safe” wolfs stroll freely?

Brave world? What a laugh, with now also Basel III liquidity requirements, it sure looks just like the world with too many too frightened nannies of lately? 

PS. FT reporters... dare to ask The Question!

August 22, 2014

“More safe assets” might just quite dangerously signify too much safe assets.

Sir, I refer to Tim Harford’s “Low inflation targets becalmed our economies” August 22.

Harford writes “Low real rates suggest lots of people are trying to save, and particularly in safe assets, while few people are trying to borrow and invest” and that “regulators (understandably) insist that banks and pension funds hold more safe assets”.

Labeling it as “understandably”, Harford seems to miss the possibility that “more safe assets” could and does most likely signify too much safe assets. If our banks, those who have usually played the role of designated risk-takers, standing in for us much more risk adverse citizens, are by means of the risk-weighted capital requirements given incentives to also avoid risk, there is no way we can have anything but secular stagnation.

PS. FT reporters... dare to ask The Question!

The weaker their banks the lower the interest rates of their sovereigns; the sick result of risk-weighted capital requirements.

Sir, Claire Jones and Ralph Atkins report “EU borrowing costs hit new lows amid call for ECB intervention” August 22.

And they write for instance that “Portuguese yields fell to a near decade low – despite fears about weaknesses in its banking system”. Is it so hard to understand that precisely because of perceived weaknesses in the banking system sovereign yields must fall… because sovereign debt is precisely what weakened banks with no capital can hold without being required to have bank capital?

That is one of the very sick results of the very sick risk-weighted capital requirements for banks.

PS. FT reporters... dare to ask The Question!

What a waste of a good $17bn fine. Oh, if only it had been collected in voting shares of BofA.

Sir, Kara Scanell and Camilla Hall report that “BofA settles for record $17bn claim” August 22, and I cannot but reflect on what a waste of a good fine that is.

The fine is to be paid by BofA in cash and in consumer relief, all payments of course going against BofA’s capital account… in these days bank capital is already so scarce because bank regulators allowed it to become so scarce.

If we multiply be the 20 times leverage implied by the 5% leverage ratio US regulators have announced, those $17bn as capital could have supported $340bn in loans. Oh if only that fine had been collected in voting shares of BofA at current market valuations.

PS. FT reporters... dare to ask The Question!

August 21, 2014

Europe is about to throw away €489m to obtain fairly insignificant new information about its banks.

Sir, Claire Jones, Sam Fleming and Alice Ross report “Consultants to reap €490m from Europe’s banking audit” August 21.

First, we should not ignore that money, if bank capital, and if leveraged at the 3% leverage ratio allowed for banks in Europe, would permit bank credits to the tune of €16.3bn.

But we should also think about what that money can buy, and in that respect I believe it will buy regulators preciously little.

And I say that because we should not have to take a too close look at the balance sheets of banks to know that, because of the risk-weighted capital requirements they have:

Too little equity as a result of being allowed to have too little equity for much of those exposures that gort into real problems, like AAA-rated securities, sovereign like Greece, and real estate in general; and

Too much dangerously large exposures to what is perceived as absolutely safe, like the “infallible sovereigns, because those are the exposures that require the banks to have the least capital of that scarce capital; and

Perhaps even more dangerous because its implications too little exposures to what being perceived as risky requires banks to hold more capital, like loans to medium and small businesses, entrepreneurs and start ups.

What could the fees for that type of consultancy analysis be? Tops €1m? If so Europe will really be throwing away €489m in order to obtain information that on the margin seems to be quite insignificant.

And that does not even consider the fact that quite often, especially in the case of banks, the bliss of ignorance, is a quite valuable commodity.

Mario Draghi’s “Whatever it takes” should include Draghi going into early retirement.

The pillar of current bank regulations, those concocted in Basel II and surviving in Basel III, the risk-weighted capital requirements for banks, determine: less-risk-less-capital, more-risk-more-capital.

But what is perceived as “risky” is only risky, if it is more risky than what it is perceived to be. And what is perceived as “safe” is not safe, if it is less safe than what it is perceived to be.

And therefore the current capital requirements for banks based on perceived risk is utter nonsense since, if something like that could help our banks to be safer, it should at least be based not on the perceived credit risks, but on the risks of the perceived risks not being correctly perceived.

And, in such case, can someone really determine what is more risky than what it is perceived to be is, or what is less safe than what it is perceived to be is? I guess not.

But no! The Basel Committee regulators felt they had full authority to know best, and here we now have our banks being allowed to hold little capital against monstrously large exposures if these are only perceived as safe, like AAA rated securities, loans to infallible sovereigns like Greece, or real estate financing in Spain; while being required to hold much more capital against an immense number of small loans to SMEs, or entrepreneurs, only because these creditors, individually, are perceived as risky.

And that means that banks can leverage more their equity with “absolutely safe” assets than with “risky” assets; which results in banks being able to earn higher expected risk-adjusted returns on equity when lending to what is perceived as “absolutely safe”, than when lending to what is perceived as risky.

And that has of course completely distorted the allocation of bank credit to the economy… and therefore utterly diluting the significance for the economy of QEs, fiscal deficits, low interests, or any other similar stimulus.

And one of those most responsible for causing these distortions which are murdering any hopes of a sturdy economic growth in Europe, and the creation of jobs for our young, is of course the former chairman of the Financial Stability Board, Mr. Mario Draghi.

And therefore Sir, when Richard Portes now suggests that “Draghi has to do, as well as say, whatever it takes” August 21, I feel that “whatever it takes” should include Mario Draghi going into early retirement… and of course taking some other of his failed bank regulating colleagues with him.

And, if you consider that to be inappropriately harsh, then would you at least require him to publicly confront and answer this criticism of the risk-weighted capital requirements.

PS. It is a real tragedy hearing so many opining on current bank regulations, and being convinced we are now much better off with Basel III, without them having read, much less understood, what is said in that monument to mumbo jumbo document that is “The Basel Committee on Banking Supervision´s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005”. I am sure Draghi did not understand it… or at least I hope he did not… as otherwise that would be so much worse.

PS. If we do not at least learn to hold especially accountable those whose regulations have a global reach, then we are really setting us up for total disaster.

August 20, 2014

Most of the concern with derivatives derives only from the fact that “derivatives” sounds so deliciously sophisticated.

Sir, Tracy Alloway and Michael Mackenzie when reporting on the “Dangers to system from derivatives´ new boom", August 20, might not understand the most important differences between underlying markets and the derivatives traded based on these.

In a derivative, there is a buyer and a seller, and so whatever happens someone wins and someone loses and in essence it’s a wash out… of course as long as all can live up to their commitments.

But, in a real market loss, like that of a lower value of a stock, a lower value of a painting, or a lower value of a real estate, there is at that time only a loser… and no winner… that is unless you count he who might have way back earlier sold the stock.

And in this respect the trading in derivatives will depress much less the market than a depression of the values of the underlying vanilla assets.

The big fuss that is raised around the issue of trading of derivatives, again, besides the possibility of one side of the trade not living up to his commitments, has much more to do with the fact that “derivatives” sounds so deliciously sophisticated.

It is bank regulators who cuddle up to politicians and governments.

Sir, John Plender begins his “Eurozone debt problems in need of a fresh start” of August 20 with “Rarely can bond markets have taken politicians so comprehensively off the hook.”

What? Please? If there is anyone taken politicians so comprehensively off the hook – and delivering “the decline in government bond yields” which has “reduced the cost of servicing excessive public sector debt”, that is the bank regulators who decided banks had to hold much less capital (equity) when lending to governments than when lending to the “oh so risky” citizens.

And quite recently one of you in FT argued in an email to me, that it should be so since “the risk in lending to a government able to print its own money (like the UK) IS CLOSE TO ZERO” meaning with that we should trust the infallible politicians because the controlled the printing machine. Well no way Jose!

The squeeze between the leverage ratio, and the risk-weighted capital requirements for banks, intensifies the regulatory distortions.

Sir, Adam Posen opines that the Fed should “Keep rates low until the hidden jobless return to work” August 20.

I have not any strong opinions on where rates should be but, when Posen writes “After the global financial crisis, no one can dispute that central banks have to take financial stability into account when making policy”, then I must speak out again.

As I see it, it was precisely when trying to consider financial stability, and to that effect coming up with the risk-weighted capital requirements for banks, that regulators distorted the credit allocation of banks. And that made banks invest too much in safe assets, like for instance AAA rated securities, sovereigns like Greece, and real estate in Spain, causing a crisis; and way too little in lending to medium and small businesses, entrepreneurs and start-ups, causing joblessness.

And so for me more important than anything on the interest rate front, is eliminating the distortions that are impeding job creators to have fair access to bank credit.

And the saddest part of it all is that none of the regulators, in US and in Europe, seem to understand that while they are prudently imposing a minimum floor of capital by means of a leverage ratio, the constraints imposed by the risk-weighted minimal capital roof, become more severe and the distortions intensify… something which really kills the creation of jobs.

Do not reduce what is an economic crime against humanity to merely being a “petrol subsidy”

Sir, Daniel Lansberg Rodriguez, I presume my former colleague as columnist in El Universal, as I assume he has been censored too, writes about “slashing petrol subsidies” in Venezuela, “Latin America swaps its populists for apparatchiks” August 20.

Hold it there, “petrol subsidies” is not the correct way to describe selling gas at less than 1 US$ cent per gallon, at less than 1 € cent per 5 liters, less than 1 £ penny per 6 liters of petrol or gas.

To put it in its real current perspective it means that, more than US$ 2.500 are handed over to each one of the more than 5 million cars on the roads of Venezuela, representing a value that by far exceeds what the government pays out in all other social programs put together… if we now can count the gas/petrol give away as a social program.

The International Court of Justice should be able to also handle these economic crimes against humanity.

August 19, 2014

How long are individual countries to accept that risk-weighting capital requirements bullshit from the Basel Committee?

Sir, John Plender writes that “In the eurozone the banking system has become increasingly fragmented… [and that] The new parochialism is reflected in the way European governments have been encouraging banks to shrink their balance sheets while simultaneously demanding that they lend mote to domestic small business” “A threat to prosperity if the world cuts the ties that binds” August 19.

Not sure Plender has got the title right… because the global bank regulation, the “ties that bind”, that are coming out of the Basel Committee imply that the local banks are better off lending to any far away infallible sovereign, or any far away member of the AAA-ristocracy, than lending to their local medium and small businesses, entrepreneurs and start-ups… and, sincerely that does not sound right... for prosperity!

Philipp Hildebrand, unfortunately ECB’s Mario Draghi is too busy covering up for his own mistakes to have time for Europe.

Sir, Philipp Hildebrand writes “QE would merely enable governments to borrow even more cheaply, giving recalcitrant politicians an easy way out”, “The Fed´s regimen will not remedy Europe´s ill” August 19.

And you know that is completely in line with what I have been writing you letters about for about a decade now. And I say this because in my letter of November 18, 2004, one which you did publish, thanks for that, I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world…How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?

Hildebrand also writes “There will be no robust European growth without properly capitalized European banks…Swift action is essential to rectify any capital shortfalls that are discovered [after] comprehensive assessment of eurozone banks”. And he also mentions the “distortions will ultimately lead capital to flow into mispriced financial assets, instead of financing investment in new productive capacity.”

Hildebrand is right but, unfortunately, he ignores or forgets, first, that those comprehensive assessment do not include analyzing what should have been on eurozone balance sheets, like loans to SMEs, and second, that when he writes “Mario Draghi is right to prioritize fixing the banks”, the sad truth is that Draghi, as a former chairman of the Financial Stability Board, is too busy covering up his responsibilities in creating the current mess to have time for Europe.

PS. The day I write the book on how my arguments about how faulty and dangerous risk-weighted capital requirements for banks are were ignored by FT, and by many of its columnists and reporters, your prime line of defense will be exactly the same as the Basel Committee´s, namely people finding it hard to believe some “experts” can be as dumb as that. Am I impolite? Come on, I was extremely polite, outright nice, for years.

August 18, 2014

Do FT reporters really understand that capital, as in capital requirements for banks, refers not to general funds but to equity?

Sir, Christopher Thompson reports “Europe´s banks set for €250bn injection” August 18.

And that money, which according to Mario Draghi could eventually increase to €850bn, is to counter the fact that “Overall eurozone banks have decreased lending to the region´s businesses by €561bn since 2009 according to research by RBS, as they seek to raise capital and cut bloated balance sheets”

And I wonder if it is really understood that what the European banks need for renewing lending, to for instance SMEs, much more than that kind of cheap ECB funding, is the bank equity that regulators require them to hold especially much of when lending to those deemed “risky”, as compared to the equity banks need to hold when lending to those deemed “absolutely safe”.

Could the confusion result from that, for instance FT reporters, think of “capital” more in terms of general funds and not in terms of equity?

Could as it would seem Mario Draghi be equally confused about it, even though he was the chairman of the Financial Stability Board? Holy moly!

Europe, if you want to avoid death by attrition, you need to trust your bankers more than your bank regulators.

Of course it is tragic when banks collapse because of too much risk taking, usually on something they perceive as absolutely safe. Then, there is a big setback and lot of tears. But, in the long run, because your banks have also taken some constructive risks on those perceived as risky, like medium and small businesses, entrepreneurs and start-ups, net of this setback, you have at least moved forward.

But, when your current bank regulators concocted their capital requirements based on perceived credit risk, not only did they assure that banks will take even larger risky exposures on what was perceived as absolutely safe, but also that your banks would not be taking the sufficient constructive risks on the risky, something which therefore sets your economies on the road of attrition. And, so when the inevitable collapse occurs, when once again something perceived ex ante as absolutely safe turns out ex post to be very risky, not only will the pain be larger, but the setback will also be a net setback.

And Sir, set in this perspective, all usual discussions about what the ECB should or should not do which do not include getting rid of the current bank regulations, like that of for instance Wolfgang Münchau’s “Draghi is running out of legal ways to fix the euro” of August 18, are, forgive the expression, like pissing somewhat outside the pot… excuse me I mean outside the chamber pot.

I cry for you Europeans, if you can’t see where the Basel Committee’s and the Financial Stability Board’s obsessive risk aversion substituting for reasoned audacity is taking you.

Let me be absolutely clear, something else bad might have happened to your banks but absolutely not what happened to them, had there been no risk-weighted capital requirements which allowed banks to earn much higher risk-adjusted returns on their equity on assets like AAA rated securities, infallible sovereigns like Greece or real estate like in Spain.

Let me be absolutely clear, had there been no bank regulations the banks would never, at least knowingly, been allowed by the markets to leverage remotely as much as they were allowed to do by the regulators.

August 17, 2014

Friend-of-the-bank’s-owner ratings would be more useful than credit ratings when setting capital requirements for some banks.

Sir I refer to James Crabtree´s lunch with Raghuram Rajan, “Everyone expects you to be a prophet” August 16.

In his famous speech at Jackson Hole 2005 Raghuram Rajan said: “Something as intimate as credit risk is now being traded with strangers. In fact the same way as parent are asked ‘Do you know where your children are?’, bankers nowadays are asked ‘Do you know where your risks are held’”?

That was a somewhat incomplete observation because just as many parents would have answered “with their nannies”, bankers would then need to answer “in the hands of very few human fallible credit rating agencies”, because that was what Basel II approved in June 2004, instructed banks to do.

And of course, as was doomed to happen (see my letter in FT January 2003), soon thereafter some AAA ratings awarded to some securities guaranteed with mortgages to the subprime sector, became the nail in the coffer of those financial markets which even Rajan at that time called to be “in extremely healthy shape”.

And Rajan also concluded his speech admonishing regulators to allow “markets to signal the winners and losers” without reflecting that when it comes to the allocation of bank credit the risk-weighted capital requirements for banks are precisely distorting those market signals.

And I say all this because when now Rajan is quoted saying “Central bankers have had enormous responsibilities thrust on them to compensate, essentially for the failings of the political system”, he and we should not forget that central bankers, in their close nexus to bank regulations, also hold enormous responsibilities for the current failings of the banking system.

But I also say this because when I read Rajan complaining about “Many businesses groups treat public sector banks as their equity kitty”, and which of course is the same as the problem of private owners of banks also treating these as their equity kitty, it occurred to me that friends-of-the-bank’s-owner ratings could prove to be more useful than credit ratings when setting the banks´ capital requirements.

PS. Afterthought. Should not owner-controlled-banks and management-controlled-banks merit different regulations?