May 21, 2015

EY, when focusing on tax in developing economies, why ignore the most pernicious development tax, that on risk-taking?

Bank regulators, with their Basel Accord of 1988 decided, God knows why, that sovereigns were much safer than the citizens who make them up, and that therefore banks needed to hold much less equity when lending to sovereigns than when ending to citizens, like to SMEs and entrepreneurs.

And that, no matter how you want to bend it or hide it, means that banks, compared to a free market without these regulations, will lend more to sovereigns and less to citizens.

And that, no matter how you want to bend it or hide it, means a regulatory subsidy to sovereigns and a tax on citizens.

And this is an especially pernicious tax in a developing country that copycats those regulations, since risk-taking is the oxygen of any development.

And yet EY blatantly ignore this tax that directly taxes development. Why?

EY should perhaps talk with you Sir.

FT, you know I have sent you more than a thousand of letters on this issue, and though you have been ignoring these the last decade, in November 2004 you did publish a letter in which I wrote: “We also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”


Limit tax deductibility on what is paid to a CEO, to 10 times the average salary. That sends a discreet social message.

Sir, I refer to Michael Skapinker’s “It is time for a brave CEO to ask for lower simpler pay” May 21.

Skapinker is of course right in his wishes… also because I believe it is very useful for a company to attract CEOs that do not give the factor of financial remuneration an importance weighting of, let us say, more than 50 percent.

But why not also help “the brave CEOs” to make up their mind. For instance what about limiting the tax-deductibility for the company of all salaries and bonuses paid to the CEO to 10 times the amount of the average (or median) salary paid in the company? That should be a good place to start sending out a discreet social message to corporations and their shareholders alike.

As compensation above that limit would be made with after tax profits that would stimulate everyone to make really sure the CEO has really earned it.


May 20, 2015

Martin Wolf: Sovereigns = 0% risk weight; citizens = 100%. Are not regulations relevant to sovereign bond markets?

Sir, Martin Wolf discusses lengthily the history and possible future of the current low yields of sovereign bonds, “The wary retreat of the bond bulls”, May 20.

Surprisingly, or perhaps not so surprisingly, Wolf fails to even mention the absolutely extraordinary development that took place with the signing of the Basel Accord in 1988. In that accord, regulators, decided unilaterally and with no explanations given, that for purposes of the equity banks needed to hold, the sovereigns were assigned a risk weight of zero percent, while the citizens, those who really constitutes the backing of a sovereign, were risk-weighted with 100 percent.

That of course meant that those interest rates which were used as proxies for the risk-free rate, became subsidized risk-free rates and are not at all comparable to what existed before 1988.

That of course meant that banks would earn immensely higher risk-adjusted returns on equity when lending to the sovereign than when lending to the risky.

In November 2004 in a letter published in FT I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?” More than a decade later I still ask the same question and many still prefer to ignore that.


Though we cannot fine bank regulators, we should at least shame them, for the mother of all bank-credit markets riggings.

Sir, I refer to FT’s front-page report by Gina Chon, Caroline Binham and Laura Noonan “Six big banks fined $5.6bn over rigging of forex markets”, May 20.

Andrew McCabe, FBI’s assistant director is quoted saying “The activities undermined transparent market-based exchange rates that serve as a critical benchmark to the economy.”

Undoubtedly, the rigging of foreign exchange rates, and of the Libor rate, needs to be condemned in the strongest way… But, for that to really happen, it must be through mechanisms that does as a minimum not cause Lex describe these in terms of being “astonishingly opaque”… and commenting in “Bank fines: the wrong reaction” that “how the agencies decide what fines to impose is a mystery to everyone, the banks included”.

But, that said, in terms of the real consequences to the real economy, all that fraudulent market rigging is peanuts when compared to the mother of all market riggings, that which bank regulators, probably unwittingly, did to how bank credits were allocated.

I mean let’s look at Basel I, II and III. For the purpose of deciding how much equity a bank has to hold against a credit they establish: Sovereigns = 0% risk weight; Citizens = 100% risk weight. Really, is that not as big as market riggings come?

How much more bank credit at low rates did not governments, the regulators’ bosses, receive because of that? How much less bank credit did not all the SMEs, entrepreneurs and start-ups around the world, receive because of that.

Of course we cannot fine regulators (unless we can prove bad intentions… like ideological manipulation)… but should we not shame them at least?


CDS were bought more for their capacity to reduce equity requirements for banks, than as insurance against defaults.

Sir, I refer to Joe Rennison’s report “Wall St looks to revive niche CDS” May 20.

It states: “single-name credit default swaps, a derivative contract that tracks the risk of default by a company that sells bonds. Regulators sought to clamp down on the market after the crisis because it was widely blamed for helping to inflate the credit bubble”.

That is not telling it like it really was!

According to Basel II, if a bank wanted to hold a bond that for instance was rated BBB+, it needed to hold 8 percent in equity… meaning it could leverage about 12 to 1.

But, if it bought a CDS for that bond from an AAA rated company, like from AAA rated AIG, then it needed to hold only 1.6 percent in equity and could therefore leverage about 60 to 1.

And that is what really drove the incredible artificial demand for these CDS that helped to inflate the credit bubble.

If CDS are to work, as they should, they need to be traded on their own merits of how they provide insurance against defaults, and not because of regulatory distortions.

Do not let failed regulators get away with their own favorite version of history!


May 18, 2015

What about 15% of ad revenues to the content provider and the mobile operator, each one, and 70% to me?

Sir, Jonathan Ford seems to agree with “mobile operators… offering customers control over how they use their data allowance online” but is a bit suspicious of their intentions since operators also “want content providers to hand over more of their revenues from advertising”, “Mobile ad-blocking risks becoming a barrier to innovation” May 18.

There is no question that there is a lot of fighting about the value to access us consumers, and if we do not find efficient ways to block ads, we will drown in these, and de facto become incommunicado.

We users, we must fight back for our rights.

If I am going to use my limited attention span, and my data allowances, to look at ads that are directed to me only because my own preferences and lifestyle is known as a result of being on social media or otherwise surfing the web… then it is really I who should be paid.

And I would gladly pay the content providers, for providing advertisers the information they need about me, and the operators a commission for providing me a collection service. How about a generous 15 percent to each one of them? And 70 percent to me :-)​


May 17, 2015

ECB’s Mario Draghi’s QE is only going to increase the existent inequalities, for absolutely no purpose.

So Sir, let us analyze what you know.

You know that the activity of SMEs and entrepreneurs is vital for sustainable growth.

You know that banks need to hold more equity when lending to the risky than when lending to the safe.

You know, I hope, that means banks can earn less risk adjusted returns on equity lending to the risky than when lending to the safe.

You also know banks are tight on equity.

You must know SMEs and entrepreneurs are most usually classified as risky.

And so you should be able to deduct, I hope, that bank credit is not going to flow sufficiently to SMEs and entrepreneurs.

And so you should know that much of ECB’s/Draghi’s QE provided liquidity, is just going to be wasted on inflating the value of the existing assets that already has owners… increasing for absolutely no purpose the existing inequalities.

But yet, when reading your “Draghi perches nicely on both sides of the fence” of May 16, you apparently do not mind.

I am sorry. These last years are going to reflect very bad on the record of the Financial Times.


May 16, 2015

Political correctness is a society-wide groupthink that can be very dangerous.

Sir, In the Shrink and the Sage’s “Can we get used to anything?” of May 16, the Sage mentions “society-wide groupthink”. And the best example of current society-wide groupthink I can think of is “political correctness”.

I just came back from a week in Sweden. There I heard many expressing to me, in sotto voce, sort of ashamed, sort of “don’t tell anyone about this”, some very ordinary and human concerns about there being too many migrants and about the risk they felt that could dilute their meaning of being a Swede.

My immediate thought was that political correctness, if it blocks this way citizens from venting their concerns, then it must be a dangerous powerful growth hormone for extremism.

In other words, if you use a “That’s like Hitler” in response to too many of people concerns, then too many might end up thinking “That Hitler guy sound’s quite right for me”.

Let us never forget that the emotions involved in the not liking something for the wrong reasons, are just as strong as that of the not liking something for "the right reasons".

PS. My father suffered years of concentration camp because of Hitler. I don’t remember him saying, “That’s like Hitler” about anything or anyone… perhaps because he would never want to diminish Hitler’s evilness to something being sharable.


May 15, 2015

Gillian Tett would do better advising “the risky” on how to fend off bank regulators… pro-bono of course

Sir, Gillian Tett hands out her disinterested advice on “How savvy asset managers can fend off the regulators” May 15. Although most of them are grown up men who can take care of themselves, some of “Society’s lottery winners” might indeed appreciate her concerns about their wellbeing.

That said I believe that the small businesses and entrepreneurs would be much more appreciative of Ms. Tett’s efforts on how they can fend off the regulators. You see Sir, these borrowers have seen their access to bank credit drastically curtailed, as a result of regulators allowing banks to hold much less equity when lending to the infallible sovereign or to members of the AAArisktocracy than when lending to them.

Ms. Tett who has so much access to hotshots, could she perhaps put a word in for “the risky”, by reminding regulators that these borrowers, though they do suffer a lot from bank crises, they have never ever caused one? It could perhaps also be useful for Ms. Tett to remind regulators that the future health of the economy, that on which banks’ stability most depends on, is helped by “the risky” having fair access to bank credit.

Please Ms. Tett… look at is as a good pro-bono community service. 


Mario Draghi, for Europe’s and our young's sake, go home. And for your own, stop embarrassing yourself.

Sir I refer to Claire Jones’ “Draghi warns central banks against blind risk taking.” May 15.

Who understands it? “Mario Draghi has warned central banks to beware of the risk that aggressive monetary easing, including mass bond buying, [that which he has been promoting in the ECB] could lead to financial instability and worsen income inequality.

How shameless can you be? As the former Chairman of the Financial Stability Board he is as responsible as anyone else for bank regulations that have completely distorted the allocation of bank credit to the real economy.

He is quoted saying “After almost seven years of a debilitating sequence of crises, firms and households are very hesitant to take on economic risk”. Yes but the truth is that by means of the credit-risk-weighted equity requirements for banks he supports, he and his colleagues are de facto ordering the banks not to finance economic risks.

And he has the toupee of arguing that if ECB had refrained from its QE action, this “would have penalized young people”. No! There is nothing that penalizes young people as much as excessive sissyesque risk-aversion present in current bank regulations. Mr. Draghi, do you really know what is a real terrorist attack on our children’s future? I tell you, again: A risk weight of 0 percent for a sovereign and of 100 percent for SMEs or entrepreneurs.

And Draghi also has the toupee of warning that ECB’s policies could “exacerbate wealth disparities”. Amazing. He must by now be well aware of that current regulations impede bank credit going to where it is most needed, to finance the future and give those who have little opportunities; and directs credit to where it is “safe”, to refinance the past and keep up the value of the assets that exist and already have owners.

Mario Draghi, go home.


May 14, 2015

The most incapable and failed risk-manager in history, insists on helping banks to manage their risks.

Sir, Caroline Binham and Lindsay Fortado report that US regulators now include qualitative assessments of banks’ risk-management, “Banks still struggling with finance ethics” May 15.

What a laugh… how sad. If ever there have been incapable and failed risk managers, those are the current bank regulators. Here follows but some illustrations of it.

First, they set the equity requirements for banks based on the perceived risks of bank assets, more-risk-more-equity and less risk less equity, as if that has any real bearing on the risk of a bank. The risk of a bank depends on how banks manage the risk of their assets. And, if push comes to shove, since all major bank crises have been caused by excessive bank exposure to what was ex ante perceived as “safe”, the opposite requirement, less-risk-more-equity, would have been more appropriate.

Then they also entirely ignored the risk that their regulations would distort the allocation of bank credit in to the real economy, in such a way it would weaken it… and that nothing is as dangerous to banks as a weak economy.

Sir, frankly, had there been no regulators or bank regulations how many European banks do you think would have been allowed to leverage 20 to 50 times or more their equity? Does not zero sound like a good guess?

In 1999 in an Op-Ed I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of our banks”.

And we still allow these clearly failed bank regulators to play Gods. Well shame on us!


May 12, 2015

Here is what the Primary Bank’s game changing Manifesto could state.

Sir, I read with much interest Ben McLannahan’s “Rare US bank launch targets ‘It’s a Wonderful Life’ values” May12.

And it came to me that the following could be The Primary Bank’s vey important and game changing Manifesto.

We, in the Home of the Brave, we refuse to hold less equity against those perceived as safe than against those perceived as risky. That discriminates against the fair access to bank credit of those SMEs and start-ups that build the foundations of our economy.

If we are required to hold 8 percent against a loan to a citizen, that is what we will hold if lending to the government, because we, in the Land of the Free, refuse to think of the American citizens as more risky than their government.

That means we will hold more equity than we are required to, and so risk-adjusted returns on equity will be somewhat lower than what other banks can generate.

But, our shareholders, and us the management, we are certain our way will, sooner or later, lead to much higher returns for all.

Reasoned audacity and pure crazy risk-taking is what brought us here and so, no matter how much regulators wants us to become risk-adverse, we refuse to deny our children and grandchildren the risk-taking that is necessary for them to have a good future with plenty of jobs.

God make us daring!

PS. We remit to “The Parable of the Talents” Matthew 25:14-30


May 11, 2015

What if character analysis become character ratings, which are then sold to possible employers?

Sir, Lucy Kellaway in reference to the character describing Crystal app writes “great idea; must try harder”, “If we have to be stalked by apps they should at least be clever” May 11.

I am not sure… the cleverer it becomes, the more credibility it gets and the bigger is its systemic danger. What will they do with the results… could these be influenced… like could a good and valuable character strait be acquired by someone offering a good price for it. And if it morphs into a character rating, what is one to do if one gets a non-employable rating? No, this is indeed very dangerous territory. Perhaps Lucy Kellaway should think it over again.

I stop here… just in case Lucy wants it very brief (but still I throw in an emoticon, even if that risks negatively affect her character analysis of me) J


Nial Fergusson, do not blame Keynes, Keynesian economists do not give Keynesian policies a fair chance to work.

Sir, Niall Ferguson holds that Keynesians have lots of egg on their face after the elections in the UK where the conservatives won, by a lot “Labour should blame Keynes for their election defeat” May 11.

Indeed they should have, but the reason for it has little to do with what Ferguson thinks or wants to imply.

No Keynesian policy on earth, could deliver real positive and sustainable results, when bank regulations impede the liquidity their spending policies generate, to reach those who could make the most of it.

In 1988 with the Basel Accord, sort of when everyone was busy attacking the Washington Consensus for its private sector bias, the regulators (for ideological reasons), for purposes of defining the equity banks had to hold against assets, decided that the risk weight of the infallible sovereign was to be zero percent, while the risk weight for lending to the fallible citizen was to be 100%.

With that the regulators privileged government bureaucrats’ access to bank credit over the others in the markets.

Later, in 2006, with Basel II, they “half mended” it, by stating that some AAArisktocrats were good enough to have a risk weight of only 20%.

And so then everyone met happily in Davos, where of course no lowly “risky” SMEs are invited.

And here we are with for instance Paul Krugman preaching us about inequality, but keeping mum on the fact that the risk-weighted equity requirements for banks, by killing the opportunities of the risky to access bank credit in fair terms, is a great inequality driver.

The real problem might be that many of current Keynesians want much more statist governments than Keynes ever considered, and so the zero percent risk weighting of sovereigns, attracts them too much… and so they do not want to even give Keynesianism a fair chance to work.

Of course, the free-market defendants who failed to see how distorted the allocation of bank credit has become; or who do not want to cross banker friends who just adore the concept of being able to leverage immensely what is ex ante perceived as safe, and therefore keep silence on all this, will also end up having egg on their faces. (You too Niall Ferguson?) 

PS. How can you give a zero credit risk weight to a debtor who, right in your face, is pursuing financial repression, inflation (just another kind of haircut)?


May 09, 2015

Shrink and Sage, in these days of skepticism, why are bank regulators so trusted and so obvious questions not asked?

Sir, Psychotherapist Antonia Macaro (The Shrink) and philosopher Juan Baggini (The Sage) ask “Which great thinker is most relevant today?” May 9.

In it The Sage writes: “Ours is a skeptical age, where old certainties have collapsed and no new ones have taken their place. Fewer people in the west now look to religious leaders for guidance but, following various disasters with drugs, pesticides and nuclear power stations, there seems to be at least as much distrust of scientists.”

And “The Shrink & The Sage”, they end by requesting suggestion for questions. Boy, do I have one for them.

Regulators have decided banks need to hold much more equity against assets perceived as risky from a credit point of view than against assets perceived as safe. Though more-risk-more-equity and less-risk-less equity might intuitively make some sense, it absolutely does not. This because never ever have major bank crises resulted from excessive exposures to what was perceived ex ante as risky, but always from excessive bank exposures to what was ex ante perceived as “safe” but which ex post turned out to be very risky.

And by favoring so much the access to bank credit of those perceived as safe, it also introduces a seriously dangerous distortion in the allocation of bank credit to the real economy.

But the members of this “skeptical age”, like journalists who should be on the forefront of skepticism, they do not want to ask why and seemingly they blindly trust regulators to know what they are doing. How come?

For instance Martin Wolf in July 2012 wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

And yet Wolf is unable to take it from there and arrive at the only logical conclusion, which is that if equity requirements are to be based on the risk of assets then, for stability purposes, they should be 180 degrees the opposite… slightly higher for what is perceived as safe than from what is perceived as risky.

So Shrink and Sage… why in this “skeptical age” are questions not asked and scientifically failed bank regulators so trusted so as to keep on regulating banks even when they have failed?

In my blog you will find copy of all my hundreds of letters sent about this issue to FT and to their journalists and opinion makers for more than a decade. You can use it as evidence for what I am saying.


In finance the structurally discriminated are those perceived as “risky”, the SMEs and entrepreneurs

Sir, Gillian Tett refers to an almost all female conference on economic and finance to ask: “whether it is time to organize an all-black or all-Hispanic financial policy-making event of this sort?” “The power of role models” May 9.

And referencing Simon Kuper’s article “How to tackle structural racism” she reflects: “And, if that occurred, would it help to combat that structural discrimination”.

That is off target. In matters of banking, financial reforms and the future of global finance and economics, the truly structurally discriminated, the “all-black or all-Hispanics”, are those perceived as “risky”, like SMEs and entrepreneurs, while the structurally favored, the “all white males”, are “the safe”, like sovereigns and AAArisktocrats.

So we need more a conference with large representation of those perceives as risky. It would be so interesting if Senator Elizabeth Warren who has exposed “constant criticism of Wall Street and of America’s wealthy elite” were also present there. Can you imagine a small entrepreneur asking Senator Warren the following?

“From a credit point of view I am perceived as risky. I therefore face many difficulties to borrow that umbrella from bankers they only want to lend out when the sun shines. I accept that as a natural fact of life. But why must the regulators make it even harder for me to access bank credit, by allowing banks to have much less equity when lending to “the infallible” than when lending to me?

That results in that banks can leverage their equity, and the implicit or explicit support taxpayers give them, much more with the risk-adjusted net margin dollars paid by “the infallible” than when those same dollars are paid by me.

We the “risky” entrepreneurs and SMEs, we hear we are good for the economy, that we generate growth and jobs and, as far as I know, lending to us has never detonated a major bank crisis… so Senator Warren, can you explain to me why is there such an odious regulatory discrimination against us?

There exists an Equal Credit Opportunity Act (Regulation B) and so I must also ask: Senator Warren why does its benefits not extend to us?


May 06, 2015

The Basel Committee causes an inefficient allocation of bank credit, something which guarantees lower productivity.

Sir, Sam Fleming writes: “the efficient use of capital and labour is key to improving living standards, at a time when advanced economies face lower potential growth because of ageing populations”, “US productivity slowdown adds to concerns among policy makers” May 7.

Indeed, but current credit risk weighted equity requirements for banks impede bank credits to clear efficiently, by means of their credit risk adjusted net margins. That is because regulators allow banks to leverage their equity (and the support they receive from society) many times more when those margins are paid by those perceived as safe, than when the margins paid by those perceived as risky.

And that means, of course, that “the safe” will get too much bank credit at too low rates, while “the risky” will get too little at too high relative interest rates.

That inefficient allocation of bank credit caused by bank regulators, guarantees productivity will be negatively affected.

That regulators, academicians, financial experts and most financial journalists, including those in FT, stubbornly ignore this is truly mind-blowing. 

On May 6, in Berlin the Financial Stability Board (FSB) held a meeting of their Regional Consultative Group for Europe. The press release states: “The meeting was preceded by an informal seminar that considered how the financial reforms have changed bank business models and more specifically, capital strategies and capital structures.”

Sir, as you well know, there are no “changed bank business models” that do not imply some changes in the allocation of bank credit. Are regulators beginning to understand the mess they created? Lets hope so. It is more than a decade late.

PS. When the FSB or the Basel Committee refers to “capital” they basically signify “bank equity”.


What keeps the very competent Martin Wolf from commenting on the mother of all regulatory distortions?

Sir, I refer to Martin Wolf’s “Why neither main party is competent” May 7. He sure gives a depressing outlook for the UK. In it he writes about a “disturbingly weak and unbalanced recovery, not a strong, healthy one.”

But, as I have explained to him in hundreds of letters over the last decade, if regulators insist on discriminating against banks lending to those perceived as risky, favoring so much the lending to those perceived as safe, there simply cannot be a strong and balanced recovery. By allowing banks to earn higher risk-adjusted returns on equity on what is perceived as “safe” than on what is perceived as “risky”, that is precisely what their current credit-risk-weighted equity requirements for banks do.

That regulation distorts the allocation of bank credit to the real economy. It caused the crisis, and it stops us from getting out of it. Since risk-taking is the oxygen of all development, and since we got more than enough with our own natural risk aversion, we really cannot afford regulators from layering on theirs.

Wolf seems to begin to reflect on this the mother of all regulatory distortions, like when he states that neither Labour or Tory-led governments “showed healthy scepticism about financial services”; and opines “The time has surely come to shift the focus from the obsession with fiscal deficits and debt. These were neither the cause of the crisis nor the solution.”

But no! Wolf does not get there, and I do not think it is incompetence on his side. Sir, have you any clue of the reason for why your chief economic commentator keeps mum on it? Should you not also be slightly concerned about it?

May 05, 2015

The invisible hand was and is slapped by the not so visible hand of the Basel Committee.

Sir, Subitha Subramaniam’s writes: “the biggest distortion facing financial markets today comes from the repression of interest rates by the world’s central bankers. Under a laissez-faire approach, advanced economies with huge debt burdens that reduce long-term growth potential could be allowed to default as a self-correcting mechanism to restore growth.”, “The rise of the visible hand in economic policy” FTfm May 4.

That is indeed a source of distortion, and in a letter to FT in August 2006 “Long-term benefits of a hard landing”, I argued in favor of the self-correcting option. But the visible hand began acting and producing big distortions much earlier.

In 1988 the Basel Accord (Basel I) introduced risk-weighted equity requirements for banks. In 2004, with Basel II, these were, for example:

AAA to AA rated sovereigns 0 %; AAA to AA rated corporations 20 %; Unrated corporations 100 %; Below BB- rated corporations 150%

And for the Basel Committee’s basic 8 percent equity requirement, that translated into equity requirements that went from zero to 12 percent; which allowed for the leverage of bank equity, and of the support banks receive from the society, to range all the way from infinite down to 8 to 1; which of course allowed banks to earn much higher risk-adjusted returns on equity on what had a low equity requirement than on what had a high equity requirement.

This completely distorted the allocation of bank credit to the real economy; and this is what happens when you regulate banks without defining their purpose.

Understanding that source of distortion is essential in order to understand what has happened and what is happening. That was what dangerously overpopulated safe havens as AAA rated securities, sovereigns like Greece and real estate like in Spain. Currently one of the drivers of the ultralow interests on sovereign bonds is precisely that there the parking equity requirement tariffs are the lowest for the banks.


May 04, 2015

Brussels and US, when ruling on cyber space, never forget it is we, the undefended accessed, who most need assistance.

Sir, Carl Bildt holds that “Digital mercantilism — a misguided attempt to regulate away competition, or build up new boundaries to achieve some imaginary sovereignty in cyberspace — can only hurt Europe’s ability to innovate, compete and succeed in this new world.” “Brussels should resist the urge to rig the rules of cyber space” May 4.

Absolutely, but that does not mean all is fine and dandy.

Bildt writes: “Google, Facebook and Twitter have been extremely successful in establishing services that have a commanding lead in the markets in which they operate… not by exploiting the advantages of incumbency, but through groundbreaking innovations that have led users to flock to the services they provide.”

Indeed, but those companies did not create the internet Mr. Bildt; and all of us flocking to obtain their services are paying a price for it, by means of allowing these to access information about us, in order for them to resell advertising access to us. And that price could be reasonable or not.

If it constrains too much our ability to access information freely, the price would be way too high.

And it is in the area of unfair restrictions in the competition for information of all sort, that we, the undefended accessed, sure need some assistance from regulators, whether European or American, or from anywhere else on the globe where they might be hosted.

PS. Should I have a copyright over my own preferences, so that I could share in the ad-revenues from advertising directed to me, because of my preferences?


God help our grandchildren if our insurance sector, like our banks also fall into the hands of a Sissy Brigade.

Sir, You hold that “Global insurers should be supervised at scale”, May 4. One reason for why you think that should be, is “the pivotal role of American International Group in the 2008 financial crisis. AIG… was belatedly found to have an insolvent derivatives trading unit, heavily intertwined with large banks and investment banks.”

That’s correct, but the real cause for that excessive intertwinement was that since AIG was AAA rated, if it assumed the risk of a bank asset, then according to Basel II, banks could leverage their equity with that exposure more than 60 to 1. What a temptation! So in fact it was the regulators’ own dumb risk-aversion that caused AIGs problems.

I find it amazing that the world has allowed itself to fall into hands of a shortsighted bank regulator who thinks that banks can remain safe by avoiding to take the risks needed to adequately take care of the real economies’ financing needs.

With its credit-risk weighted equity requirements, those which allow banks to earn higher risk adjusted returns on equity when financing what is perceived as safe, than when financing what is perceived as risky, the Basel Committee (and the Financial Stability Board) has completely distorted the allocation of bank credit to the real economy.

And now another risk-aversion centered Sissy Brigade, the EU with its Solvency II, is also in pursuit of the insurance sector, which will make sure its investments will be completely distorted too. And FT, tough not explicitly in this editorial, even seems to be egging them on. God help us. God especially help our children and our grandchildren, those most in need of banks taking risks, with reasoned audacity.


May 02, 2015

Why does Martin Wolf keep mum about an important regulatory inequality driver he must know of by now?

Sir, when Martin Wolf, May 2, discusses two books on inequality in a “World of difference” and makes some suggestions of his own, there is one difference he does not refer to.

Regulators, with their different equity requirements based on perceived credit risks, allow banks to earn higher risk-adjusted returns on equity when financing those who already have something, and therefore can much easier be perceived as good credit risks, than when financing those who have nothing, and therefore can much easier be perceived as risky.

That clearly diminishes the opportunities of those who have nothing to get something, and thereby de-facto constitutes an important inequality driver.

It surprises me to see that someone like Martin Wolf keeps mum on that, even though he knows, or at least should know, that never ever has lending to those who have nothing, those who are perceived as risky, created a major bank crisis. Why such silence?

Perceived credit risks are all about expected losses. And bank equity is all about a buffer against unexpected losses. To use expected losses as a proxy for the unexpected, which is what regulators currently do, is simply stupid. Could it be that FT’s chief economic commentator has too many good friends among the regulatory elite?

PS. Martin Wolf writes: “Underlying these complex trends [of increased inequality], argue the authors, are complex economic forces... financial liberalization”. Let me ask: to distort immensely with regulations the allocation of bank credit to the real economy, is that “financial liberalization”?


May 01, 2015

Senator Richard Shelby. Ask Fed and FDIC, why Alabama’s borrowers are denied a fair access to bank credit.

Sir, I refer to Barney Jopson and Caroline Brinham’s “Republican resist global insurance role”, April 29.

Richard Shelby, chairman of the Senate banking committee is quoted with: “An international regulatory regime should not dictate how US regulators supervise American or US based companies”.

It is a quite relevant opinion, but Senator Shelby should start by asking the Fed and the FDIC the following:

Why on earth are Alabama’s state-chartered banks allowed to lend to well-rated corporations elsewhere, or to sovereign governments, holding less equity than when lending to their own local SMEs and entrepreneurs?

Does that not enable sovereign governments and members of the AAArisktocracy to generate higher risk adjusted returns on bank equity than what Alabama’s borrowers can do?

Does that not mean that Alabama’s borrowers are refused fair access to the credits of their Alabama banks?

Senator Richard Shelby faces a hugely important challenge. But he should know that challenge extends way beyond the insurance sector and the Financial Stability Board. He should start with banking, and with the Basel Committee, that committee that so much influences US bank regulations, but that is not even mentioned once in the over 800 pages of the Dodd-Frank Act.


What distortion causes Martin Wolf’s silence about the distortions produced by the different bank equity requirements?

Sir, Martin Wolf writes: “The rising price of housing… also distorts the financial system: 70 per cent of bank loans outstanding (after netting out lending within the financial sector) are to individuals secured on property. The financial system is now totally addicted to high house prices”, “Bribes and evasions on housing and the deficit” May 1.

Why does not Martin Wolf ask one of his many banker friends how much equity regulators require his bank to hold when financing secured with property as compared to when financing a SME?

And then Wolf should call one of his finance professors friends and ask what those different equity requirements do for the risk-adjusted returns on bank equity when lending for the purchase of a somebody’s home, as compared to with the lending for the creation of a job, so that someone could pay his mortgage and the utilities of his home.

Wolf keeps mentioning “distortions”, but no matter how much I remind him, he refuses to refer to that really monstrous distortion produced by different bank equity requirements based on perceived credit risks. What journalistic distortion causes his silence?

Again, for the umpteenth time, regulators have based their bank equity requirements, those that are to cover for unexpected losses, on the perceived possibilities of any expected losses… now how loony is not that?


April 29, 2015

Who is more risky, a Systemic Important Financial Institution, or a Systemic Important One and Only Regulator?

Sir, Richard Allan, Facebook’s vice-president of public institutions in EU, complains about “having to comply with 28 independent shifting national variants” of regulations, “European discord on the internet is bad for business."

It is not that I claim to know about European regulations that affect Facebook, but, if one is able to justifiably warn about a Systemic Important Financial Institution, a SIFI, then one also has the right to warn about a Systemic Important One and Only Regulator?

And I would leave it there, were it not for Allan writing: “The biggest victims [of national regulations] would be smaller European companies. The next big thing might never see the light of day. We know from experience that getting a company off the ground is hard enough already. And if regulation at the national level is adopted, it could stop start-ups before they even get started. At a time when Europe is looking to create jobs and grow its economies, the results could be disastrous.”

And that made me mad. No national bank regulator would have dared to come up with regulations like the current risk-weighted equity requirements for banks, and that so negatively affects the fair access to bank credit of the “risky”, like the start-ups. For instance the reason for which a Greek bank needs to hold much more equity when lending to a Greek start-up, than when lending to the government of Germany, is precisely the existence of a big monstrous non-transparent and not accountable concoction as is the Basel Committee for Banking Supervision.

In short, if I was a small start-up, I would like the regulator to be small like me, and not one of those biggies who mostly go to Davos and meet with SIFIs and the likes of Facebook.


Regulators believe those perceived as “safe”, will originate less unexpected losses for banks than the “risky”. Loony!

Sir, I refer to your Special Report “Risk Management – Property” April 27.

It mentions the risks of: climate change, cyber security breaches, terrorism, earthquakes… all those risks that are difficult to currently estimate but that can produce extraordinary unexpected losses… including for banks.

But those risks are not considered at all by regulators who, when setting their equity requirements for banks, use the expected losses derived from perceived credit risks as a proxy for the unexpected… more-credit-risk-more-capital and less credit-risk-less capital

It sort of translates in that regulators would seem to believe that risks, like those listed affect more the “risky” like the SMEs, than the sovereigns and the members of the AAArisktocracy. I can’t believe you believe that too.


April 28, 2015

Basing equity requirements for banks based on cuckoo-calls, could be better than using current risk weights

Sir, Satyajit Das writes “Where assets are not adjusted for relative risk, banks are encouraged to increase risk without having to hold additional capital”, “Rules to cut bank risk work in theory but not necessarily in practice”, April 28.

Wrong! Adjusted to relative risk has all to do with expected risks, with unexpected losses, those that bankers should be able to manage or have to fail, fast. Capital requirements should create a shield against the unexpected, something which definitely does not include the expected risks that banks are already clearing for.

For instance, if the probability of a cuckoo calling out more than x times during x month was 8 percent, then that percentage or required equity applied to all bank assets would make more sense that current risk-weights.

As is banks are not taking sufficient risk on what is perceived as risky, like lending to SMEs, but taking excessive risks on what is perceived as “safe”, like lending to the sovereigns or to the AAArisktocracy

The cuckoos in the forest would serve us better than the cuckoos in the Basel Committee.

The single currency is still a great gamble, but Europe don’t blame it for causing the current crisis.

Sir, in November 1998, in an Op-Ed titled “Burning the bridges in Europe”, I expressed serious reservations about the single currency. Among it, because “The Euro… seems to be aimed at creating unity and cohesion. It is not the result of these.”

But I do get upset when I read a letter like that of Sir James Pickthorn “Admit it, FT – the single currency has been the most awful mistake.”

Basel II regulations of June 2004, because of how Greece was rated A+ to A- between November 2004 and January 2009, would have allowed banks to lend to Greece leveraging their equity more than 60 to 1. The capital (equity) requirement was a meager 1.6 percent (the basic 8% times a 20% risk-weight).

And so of course the Greek government was doomed to take on too much public debt. What Greek politician/bureaucrat would have been able to resists the offers of loans? What couple of banks at least would not have resisted the temptation to offer these to Greece, in order to earn fabulous expected risk adjusted returns on their equity?

What would then have happened if there had been no Euro, and Greece had borrowed Dollars, Pounds or Deutsche Marks? The ensuing haircuts would be direct, or indirect by means of Drachma devaluations. Yes the crisis resolutions could perhaps been less traumatic, but the crisis would still have happened.

Get any European country to use its own currency, but keep current distortions of bank credit in place, and they are still all doomed! If someone needs to apologize to Europe, that is the Basel Committee for Banking Supervision. If something will really bring Europe to its knees, it is not the Euro but the risk-aversion implicit in current bank regulations. 


April 25, 2015

Under the rules of the Basel Committee for Banking Supervision, Cirque du Soleil would probably never have existed

Sir, with respect to the enormous success of Cirque du Soleil, Ludovic Hunter-Tileny writes that Mr. Laliberté ascribes his rise to a gambler´s boldness [and] Government grants and a substantial overdraft from a Quebec community bank” “Sun king of circus take the high wire” April 25.

That was in 1984… today after the Basel Committee started to regulate; and concocted equity requirements for banks that are higher for what is perceived as risky than for what is perceived ex ante as safe, meaning banks earn higher risk adjusted returns on equity financing what is "safe" than financing what is "risky", that bank credit would most probably not have been awarded. Please reflect on that.


US Congress, keep the US Export-Import-Bank open, you’ve got much more serious credit distortions to fight.

Sir, with respect to the US closing Exim Bank you write about “the economic equivalent of unilateral disarmament in a world bristling with nuclear weapons” as if the one disarming was doing what’s immoral, “The wobbly economic leadership from America” April 25.

You write “In the past two years, Chinese development banks have lent $670bn in subsidized credit in subsidized credit to help domestic companies win bids all over the world… more than all Exim guarantees since set up in the 30s” and still you argue that Exim-Bank could serve “as a check on crony capitalism practiced by China and others? 

And you write “No private sector bank will finance 15 year emerging market projects” Of course not, why should they when they are allowed to hold less equity when lending to already emerged markets perceived as safer?

Would I close Exim-Bank? No, I have been able to use it very satisfactorily during my life, so that would be something extremely ungrateful of me. But, that said, much more important than keeping it open, is to get rid of the credit-risk differentiated equity requirements for banks, those which distort immensely the allocation of bank credit all around the world. The Basel Committee, that’s what the US Congress should really be working to close down, or at least forbidding it to discriminate between borrowers.


Margrethe Vestdager, Europe’s competition commissioner, dare to confront your technocrat colleagues in Basel Committee

Sir, Mario Monti raves about the policies imposed by the European Competition Commissioner Margrethe Vestdager, “The bold Brussels ‘eurocrats’ who command the world’s respect” April 25.

Indeed, taking on Goggle and Gazprom, is unquestionably a sign of great daring. Still I wonder if Commissionaire Vestdager has what it takes to stop her colleagues, other technocrats/bureaucrats , from hindering competition.

Banks are currently required by the Basel Committee to hold more equity against those perceived as risky than against those perceived as safe. And in doing so they odiously discriminate directly against those who anyhow have less access to bank credit, and anyhow need to pay higher interests, precisely because they are perceived as risky.

In other words the regulators have given those perceived as “safe”, an unfair huge competitive advantage when it comes to accessing bank credit.


Risk of cyber-attack weighted equity requirements for banks make much more sense than the credit-risk weighted

Sir, I refer to Gillian Tett’s “Will cyber attacks mean the light go out?” April 25.

In it Tett describes the possibility of some huge unexpected losses that could happen to banks or to borrowers. And unexpected losses is precisely against which for instance banks, should be required to hold equity.

Instead our current regulators in the Basel Committee require banks to hold equity against the expected losses reflected in the perceived credit risks. As if the unexpected would be a function of the expected? Now how dumb is not that?

But perhaps there is a relation, though not the one the regulators see. The truth is that the safer something seems, the worse could be the consequences of something unexpected.

Natural sources of inequalities are more than enough for us to carelessly layer manmade ones on top

Sir, Tim Harford writes that “Anthony Atkinson is right to say that the evidence doesn’t conclusively rule out… that a 65 percent top rate of tax is likely to be counterproductive”, “The Truth about inequality” April 25. 

For anyone trapped one way or another in the UK, that might be valid. But anyone with a fair or unfair capacity to generate earnings and who is thinking about living in England, that certainly gives him reasons to think again. That some have to pay higher taxes than other could be reasonable, but it is not really about equality either.

I consider that in discussions about inequality it is always important to try to classify its origins as natural or manmade. For instance those perceived as risky from a credit point of view will always have less access to bank credit and will always have to pay higher interest rates. And that is natural, because it is natural that banks should give the loans to those who pay them the best margins after all costs, including credit risk premiums.

But regulators have decided that a bank should also be allowed to leverage its equity, and the support its receive from taxpayers, much more with margins paid by those perceived as safe than with margins paid by those perceived as risky. And that signifies a manmade source of inequality. Those perceived as risky, like SMEs and entrepreneurs, consequentially face even less access to bank credit and even higher relative interest costs. Any society that believes that’s the way to go has clearly gone bonkers.


April 24, 2015

Sometimes good bumper stickers are the best way to begin paving the road to a better world.

Sir, Philip Stephens writes: “the US lacks the resources and political will for ‘generational’ projects to transform the Middle East” “Republicans want a bumper sticker world” April 24.

The US Congress Iraq Study Group Report of May 2006 stated: “There are proposals to redistribute a portion of oil revenues directly to the population on a per capita basis. These proposals have the potential to give all Iraqi citizens a stake in the nation’s chief natural resource"

If that idea would have been implemented, you can bet the Middle East would have seen much good transformation… and not only there, other places, like Venezuela, would have benefitted immensely from such example.

Unfortunately the same Report then wrote: “Oil revenues have been incorporated into state budget projections for the next several years. There is no institution in Iraq at present that could properly implement such a distribution system. It would take substantial time to establish, and would have to be based on a well-developed state census and income tax system, which Iraq currently lacks.”

As if that was any real excuse. Any of the big credit card company could have set up a program that could have reached 50 percent of the Iraqis in 1 year, with the ambition of covering 100 percent in five years. What a missed opportunity for a real silver bullet.

But the US has other strengths… for instance with respect to oil revenue sharing why not ask Hollywood to make an inspirational movie.

It could for instance depict how a hypothetical country, one like Venezuela in which 97 percent of all that nations exports go directly into government coffers, becomes fundamentally transformed for the better, when some a “Hayek platoon” manages to allow the power of oil resources to flow directly to the citizens.

Recently Marco Rubio stated: “More government isn’t going to help you get ahead. It’s going to hold you back. More government isn’t going to create more opportunities. It’s going to limit them. And more government isn’t going to inspire new ideas, new businesses and new private sector jobs. It’s going to create uncertainty.”

And so that idea would seem to fit the political platform of any Republican who aspires the presidency, and, hopefully, also that of some democrats.

And a good bumper sticker: “Citizen’s should not need to live in somebody else’s business – End Natural Resource Curses” could perhaps be a way to begin it all.

And Sir, you know of course that if there is one bumper sticker I would also like to see in the next elections, that is “Stop bank regulators’ odious discrimination… against the ‘risky’ SMEs and entrepreneurs… that is un-American… that does not belong in the Land of the Free nor in the Home of the Brave”.


Jason Furman, things are not starting to go right. With the current distortion of bank credit, that’s impossible

Sir, Gillian Tett quotes Jason Furman, chairman of the US Council of Economic Advisors in that a “Greek exit would be taking a risk with the global economy just when things are starting to go right” “America fears a European sequel to Lehman”, April 24. 

Where does he get that “starting to go right” from? While regulators allow banks to earn higher risk adjusted returns on equity on what is perceived safe than on what is perceived as risky, things simply cannot go right. 

But of course there could be a sequel to Lehman. That, while banks are made to finance too much what is perceived as safe, is guaranteed. Excessive exposures to what is ex ante perceived as safe but that ex post turns out to be risky, is precisely the stuff major bank crises are made off. 

But, following this line of argument, Greece will not cause it. Greece has been perceived as risky, for a sufficient long time, so as to pose a major threat.

PS. I assume of course that the equity banks are required to hold when lending to Greece has been increased… and is no longer zero J


April 23, 2015

A world obsessed with Best Practices may calcify its structure and break with any small wind

In reference to Mr. Flash Crash’s supposedly malevolent disruption of the market in 2010, John Plender writes interestingly about globalization, regulations and fragility “Global financial regulation meets a cul-de-sac” April 23.

In this respect I would like to recall a written statement that I delivered as an Executive Director of the World Bank on April 2, 2003, while discussing its Stategic Framework 04-06. In it I wrote:

“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.

A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind. Who could really defend the value of diversity, if not The World Bank?"


April 22, 2015

Here are two recommendations to Raghuram Rajan on how to get India’s banks to become functional banks

Sir, I refer to David Keohane’s and James Crabtree’s “India’s central bank struggles to ensure lenders pass on interest rate cuts” April 22.

There are references to a “broken down process of monetary transmission through which the wishes of the central bank are transmitted to the real economy”, and to “a banking system frozen by high rates of bad loans”.

The following is what I would advice Raghuram Rajan to do, if he really wanted banks to become functional financing efficiently the real economy.

First, get rid of stupid Basel bank regulations that, with their different equity requirements based on credit risks, so distort the allocation of bank credit. These introduce a regulatory risk-aversion that has no place anywhere, but much less in a developing country, since risk-taking is the oxygen of any development. In its place put for instance an 8 percent equity requirement on all bank assets, and throw out forever, the portfolio invariant credit-risk equity requirements. Of course that could create a big need for fresh bank equity, and so…

Second, in order to take away the dead weight caused by the bad loans, and to help to fill any new bank equity needs, the central banks should proceed like Chile did during its financial crisis. Namely capitalizing all the banks by purchasing their non-performing loans, against the commitment by the banks to repurchase these assets from the central bank with their retained earnings, before any substantial dividend payments to their shareholders could be made.

You would then have well capitalized banks, ready to give credit on non distorted terms to for instance “risky” SMEs and entrepreneurs, and simultaneously been made so much safer that, presumably, they would have to pay less interest rates to depositors, and in the medium or long terms less dividends to shareholders. Not bad for a couple of hours work eh?