Monday, January 26, 2015

All our bankers (including Jamie Dimon) betrayed us citizens by selling out to sovereigns and the AAArisktocracy.

Bank regulators, and because these borrowers are perceived as absolutely safe, allow banks to have much less equity when lending to sovereigns and the AAArisktocracy, than when lending to “risky” small businesses and entrepreneurs.

And that means that banks make much higher risk adjusted returns on equity when lending to the safe than when lending to the risky… and bonuses receiving bankers of course love it.

Some bankers, those who use very low equity requirements as hormone supplements, in order to grow into Too-Big-To-Fail-Banks, love it especially much.

And the bankers love it so much they do not care one iota about that this effectively blocks “The Risky” from gaining fair access to bank credit; or about that this pushes our economies more into the hands of the unholy alliance of governments, AAArisktocrats and some few TBTF-banks.

Yes, we citizens, we who need our banks to give small businesses, entrepreneurs and start-ups lots of access to bank credit, because that is how the future of our grandchildren is financed, we have been betrayed.

We are told that this is all in our best interest, because that is the way banks avoid taking the risks which would cause us tax-payers having to pay for supporting failed banks. Lies, lies, lies! 

What’s so good about low taxes when these stand in the way of our possibilities of high pre-tax earnings? 

And, on top of it all, the real risk for banks never really exist for that which is perceived as "risky", it always derives from that which is perceived as "absolutely safe"… like “infallible sovereigns” and splendid credit ratings.

Sunday, January 25, 2015

Unless they’re idiots, bank regulators, the Basel Committee, are total lunatics. You pick! To me they're both!

Regulators, like those of the Basel Committee and the Financial Stability Board, allow banks to hold much less equity when lending to a sovereign than when lending to a small businesses or an entrepreneur.

With that they are explicitly telling us they believe a government bureaucrat knows much more about how to deploy other peoples money efficiently for the society, than what the small business or the entrepreneurs know when they invest in their own projects… and, if so, I hold that to be sheer lunacy.

Of course, that is unless the regulators believe that the sovereigns are truly less risky for banks (and society) because sovereigns can always pay by collecting more in taxes, or having central banks print money… in which case it is pure idiocy.

Have your pick! Personally I think they have a lot of both!

Saturday, January 24, 2015

“The empires of the future are the empires of the mind”, said Winston Churchill, and sadly we’re losing ours.

A Western world that, without questioning, allows its regulators to require banks to hold more equity when lending to those perceived as risky, than when lending to those perceived as safe, is showing serious evidence of losing its mind.

Not only are those perceived as “risky” not really risky for the banking system; it is those perceived as "absolutely safe" which can be; but that also impedes our banks from allocation credit efficiently to the real economy.

It is only daring and reasoned audacity that can keep us moving forward, so as not to stall and fall. Have we become so risk-adverse so as to blind ourselves to the real risks of that?

What did we in the Western world do, to deserve getting saddled with so dumb bank regulations/regulators?

The pillar of current bank regulations issued by the Basel Committee for Banking Supervision is “the risk weighted capital requirements for banks”.

For those interested, a more accurate name would be “the portfolio invariant credit-risk-weighted equity requirements for banks

In essence it signifies that the more the ex ante the perceived credit risk is, the more equity banks need to hold.

That does not make any sense! It is never what the perceived credit risk is that constitutes any real risk for a bank and much less for a banking system. It is only how wrong banks could have perceived the risks to be, which represents the real risk.

If something is perceived as safe and turns out risky, everything is ok.

If something is perceived as risky but turns out to be less risky, then that is only good news.

If something perceived as risky turns out to be even more risky, then that is bad, but at least in that case one can suppose the balance sheet exposures to be lower, and that the bank has been receiving higher risk premiums that partly compensate.

But, if something perceived as safe turns out ex post to be risky, that is where the real dangers lie.

And so we can only conclude in that: the safer a bank asset may seem the more dangerous it becomes… and which is 180 degrees opposite of what current regulators think.

And that mistake also stops the banks from financing precisely those our society most need to be financed, in order to move forward, namely "the risky" small businesses and entrepreneurs.

What did we do to deserve that?

The difference between reasonable parents and the Basel Committee for Banking Supervision

Normal reasonable parents may advice their children “Please be careful when crossing the street”, because they know that children might be somewhat careless, especially when they do not perceive a special risk.


We would definitely find it curious if we heard parents waving goodbye to their children with the admonition of: “Children please don’t go bungee-jumping, cause that seems very risky”.


The Basel Committee for Banking Supervision though, does completely the opposite. It tells its bank-children, by forcing them to have more equity, not to take any risks on what is perceived as risky bungee-jumping bank lending, like lending to small businesses and entrepreneurs;


... while stimulating the carelessness of banks, by allowing them to have much less equity, when engaging in perceived safe street-crossing lending, like...






   





Please, can’t we send some normal reasonable parents to guide and mentor our loony bank regulators?
   

Friday, January 23, 2015

Scene 6 on the crazy reality lived while “Banking in times of the Basel Committee”

“But Sir, how can we put this 30 years, 11 percent, lousily awarded mortgage into a security that aspires an AAA rating?” 

“Easy, let me explain it to you Martin. To put a proper AAA quality mortgage, with a proper interest rate into that security, would be absolutely useless, as it would generate no profits for us. But, if we put that very bad mortgage you refer to in a security, and manage to get an AAA rating for it, then we can resell it as earning solely a six percent return… and that would mean an instant profit to be share among us all of $210.000. Irresistible eh?” 

“But Sir, would not the bankers find out how bad these AAA rated securities were?” 

“Dear Martin, when you are allowed, by your regulator, to leverage your equity more than 60 times, only because an AAA to AA rating is present, and which means that if you believe you can make a 1 percent margin means you expect a 60 percent return on your equity, you do not make a lot of questions. You see, if the ratings only go down to the range of A+ to A, then banks can only leverage those securities less than 25 times. Imagine from more than 60 to less than 25! 

In fact Martin, it is the European banks and our US investment banks who are demanding these AAA securities so much that frankly we have to cut corners… don’t forget that we are a service company… and we do what our clients wants us to do... hi-hi-hi!”

Scene 5 on the crazy reality lived while “Banking in times of the Basel Committee”

“Sir, I am not sure AIG deserves its AAA rating, and we keep somewhat important exposures to it. May I take a couple of our officers and assign them to do a little credit worthiness research on their own?”

“Have you gone raving mad? Do you know what that would cost? And who is going to pay us for that? The credit rating agencies have access to privileged information that AIG would never ever dream of giving to you, much less if they got hold of that you questioned their AAA rating.”


“So forget it! If the Base Committee and the Financial Stability Board considers that being able to get an AAA rating from a credit rating agencies merits us to being able to leverage our equity more than 60 times to 1, then those ratings must be good enough for us”

“But Sir?”

“No! No I do not want to hear more buts from you! Have you no idea what the low, almost non-existent equity requirements for anything related to a good credit rating, the AAArisktocracy, has to do with the extremely high returns on equity our shareholders obtain... or with the fairly decent bonuses we get?”

Scene 4 on the crazy reality lived while “Banking in times of the Basel Committee”

"Sir, do you not think that our exposure to Greece is way too big and risky? You know we only earn a .7 percent in margin on it and you know that country is so crazy it has an official retirement age of 50."

"Of course I do Martin. But since the Basel Committee allows us to leverage our equity with loans to Greece 60 times or more, tell me: how do you expect me to explain to our board we should withhold from a lending to Greece that produces us more than 42 percent in annual returns on equity?

And don't forget the bonuses we get while nothing happens to Greece!"

Scene 3 of the crazy reality lived while “Banking in times of the Basel Committee”

"Sir Bank President, do you not think that, no matter how safe it looks, this 100 million of exposure to Mr. Absolutely safe, must be a hundred times more risky for the bank, than all those half million exposures to the more risky, and from which we anyhow get much higher risk premiums?"

"Dear Junior Credit Officer, I know it sounds sort of crazy that the Basel Committee, in a portfolio invariant way, requires us to hold only a fraction of equity when lending to Mr. Absolutely safe, when compared to what we must have when lending to “The Risky”…. you might be right… but who are we to doubt those experts in the Basel Committee and the Financial Stability Board? 

Besides, as your mentor and friend, I strongly suggest you keep your concerns hushed up. As you surely must know much of the returns to our shareholders, and the size of our bonuses, depend on those ultralow equity requirements allowed when doing “ultra-safe” business."

Carney first stop supporting risk-weighted equity requirements for banks, those that discriminate against “the risky”.

“We have had to start reinvesting in social capital to rebuild trust in the system” holds Mark Carney… the Chairman of the Financial Stability Board.

Mr. Carney, before you have a right talk about social capital, you should stop supporting those antisocial distorting credit-risk-weighted equity requirements for banks, which so odiously discriminate against the fair access to bank credit of those perceived as “risky”… those whose small diversified bank borrowings anyhow never ever constitute a real risk to the banking system.

Thursday, January 22, 2015

Here’s another crazy real life scene from “Banking in times of the Basel Committee”

Colleagues, in order to obtain a higher risk adjusted return on our equity, it is more important to ascertain that the loans is perceived as safe, so that they require us to hold less equity against it, than to negotiate a higher interest rate with the borrower.

And so lets go out there and fight to find us those real low equity requirements that helps us maximizes our return to our shareholders (and our bonuses) because, if we don’t, you can be damn sure our competitors will.

Here’s a crazy real life scene from “Banking in times of the Basel Committee”

Jr. Credit Officer Martin: “But Sir, I believe that borrower to be riskier than what the credit rating agencies and we perceive” 

Bank President Wally: “That might be Martin, but that possible extra risk is more than compensated by the fact that having to hold less equity against it, produces us anyhow a higher risk adjusted return on equity than many of our other loans… and so you better keep that perception to yourself… don’t forget our bonuses”

Scene 2
Scene 3
Scene 4
Scene 5
Scene 6

Wednesday, January 21, 2015

You in Davos, anyone, tell us: How risky to the banking system can a borrower perceived as risky really be?

Regulators require banks to have much more equity against assets perceived as risky, than against assets perceived as safe.

I am totally opposed to that because banks, being able to leverage more, will make higher risk-adjusted returns on when lending to the safe than when lending to the risky. And that causes a dangerous distortion in the allocation of bank credit to the real economy.

But all that is obviously based on that regulators think that those perceived as risky, from a credit point of view, are much more risky to banks than those perceived as safe.

Why? How risky can a borrower perceived as risky really be? Is not the opposite true? That what really poses dangers to the banking system is what is ex ante perceived as absolutely safe, but that ex post might turn out to be very risky?

The risk of any asset to the banking system is a function of the length of the road it can travel from being safe to being risky... and that road is obviously much longer for what is perceived as absolutely safe than for what is perceived as risky.

In the same vein, the purpose of banks can be said to be a function of the length of the road a borrower has to travel from risky to absolute safe... and that road is obviously much longer for what is perceived as risky than for what is perceived as quite safe.

Friends, in Davos you might see some very famous bank regulators walking around. Please do not be intimidated by them. They do not know what they are doing... and if they do, so much the worse.

Tuesday, January 20, 2015

I have a very specific question for President Obama on his State of the Unions address.


“Will we accept an economy where only a few of us do spectacularly well? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?”

And which makes me ask: Are we supposed to keep bank regulations who so much favors the infallible sovereigns’ and the AAArisktocracy’ access to bank credit, when compared to that of the “risky” small businesses’ and entrepreneurs’?

To me it is amazing to see how much regulatory aversion against “the risky” exists in the home of the brave.

Thursday, January 15, 2015

Excuse me Mme. Lagarde, but you and the IMF, are so astonishingly wrong

Christine Lagarde, the Managing Director of the International Monetary Fund, in a speech titled Three “Rosetta Moments” for the Global Economy in 2015 delivered January 15, 2015 stated:

“If there is one lesson from the Great Recession, it is that you cannot have sustainable economic growth without a sustainable financial sector.”

Sincerely, excuse me Mme. Lagarde, but you are so astonishingly 180 degrees wrong.

Current difficulties derive directly from the fact that bank regulators, trying to bring stability, sustainability, to the banks, concocted portfolio invariant credit risk weighted equity requirements. And these allowed banks to earn much much higher risk adjusted returns on equity when lending to the “infallible sovereigns”, the housing sector and to members of the AAArisktocracy than when lending to “the risky”.

And so, as should have been expected, because it is always excessive exposures to what is perceived ex ante as absolutely safe that causes bank crises, we ended up with excessive banks exposures, against much too little bank equity, to AAA rated securities, to the real estate sector (Spain) and to sovereigns like Greece.

And so, as should also have been expected, because banks naturally search to maximize their risk-adjusted returns on equity, the banks abandoned those who are most in need of credit, those same our real economy most need to have access to bank credit, namely “the risky” small businesses and entrepreneurs.

And all this simply because regulators obnoxiously regulated our banks without defining a purpose for these any different from just being safe and convenient mattresses in which to stash away our money.

Mme Lagarde: If there is one lesson from the Great Recession, it is that you cannot have a sustainable financial sector without sustainable economic growth.

We hear all the time about the need to save taxpayer, but to save taxpayers by reducing even more their taxable earnings, sounds about as silly as can be.

Mme Lagarde states: “we must complete the agenda on financial sector reform”. Absolutely, but not by having the same regulators, taking us with their Basel III on even more shady and curvy roads, in the same dumb direction.

PS. Mme Lagarde, this is not the first time I comment on this to you... for example:

http://subprimeregulations.blogspot.com/2013/10/my-question-for-umpteenth-time-to-world.html

Tuesday, January 13, 2015

Bank regulation for dummies! Dedicated to those in the Basel Committee for Banking Supervision.

First, be aware that even though some individual banks could have troubles because a whole lot of issues, the banking system is never ever threatened by what is ex ante perceived as risky, but only by what ex ante is perceived as absolutely safe but that, ex post, surprises everyone by not being so.

So rule No.1: Make damn sure that banks have enough equity… especially against what is perceived as absolutely safe… which is, unfortunately, just the opposite of what is being required now.

Second, be aware that for the long term stability of banks, there is nothing as important as a sturdy economy. And that for a sturdy economy to exist, it is vital that the allocation of bank credit to the real economy is as efficient as can be.

So rule No.2: Make damn sure that banks allocate bank credit as efficiently as possible… and especially that those who most need access to credit, like small businesses and entrepreneurs get it… which is, unfortunately, just the opposite of what is happening now.

Saturday, January 10, 2015

Consumption will be postponed because of deflation? How much truth… how much nonsense?

We so often read of central banker’s being very scared of deflation because the expectation of lower prices would cause consumption to be postponed and therefore economic activity to be reduced. How much truth is there in this… and how much nonsense?

I guess no one in the upper 1% would postpone one iota of their demands because of this… nor is deflation much likely to affect the products and services they demand.

I guess that all who have unsatisfied needs, by far the largest proportion of the population, will just appreciate the possibility of satisfying more of these needs, and also not postpone one cent of their aggregate demand.

And I guess that of all those who could perhaps benefit from some purchase postponement, but who suffer the instant-gratification virus, will also not postpone satisfying any demands.

And so we come down to trying to estimate how much of the population have satisfied their current demands sufficiently; and who at the same time are sufficiently disciplined not give to in to instant gratification, and who therefore would save and net postpone some purchases.

And the savings resulting from those postponements, where would these go?

To sum up... I have no idea!

But I do know that inflation... is a tax that primarily hurts the poor... and so in a world full of Pikettys, it is sort of strange hearing central banker's wish for it... just as hearing central bankers who one normally think of in terms of being very thrifty fellows... wanting to rob value from their children's piggy banks. 


PS. Europe, should oil reach US$ 150 a barrel so as to allow ECB to celebrate having reached its inflation target?

Friday, January 2, 2015

At what moment does intuition turn into an overpowering prejudice that blocks all deliberate decision making?

Intuitively bank regulators think “risky is risky and safe is safe” and impose on banks credit-risk-weighted capital (meaning equity) requirements… more risk more capital – less risk less capital.

But then, in the hope of provoking a better and more deliberate decision, I sit down with them and explain:

First, that what has always turned out really risky for the bank system, has never ever been something perceived as risky, but always something that ex ante was perceived as absolutely safe but that, ex post, turned out to be very risky.

And second, that discriminating this way for risk already perceived by bankers, and already cleared for through interest rates, size of exposures and other terms, dramatically distorts the allocation of bank credit to the real economy.

And they say: “Yes, you are entirely correct Per”… but still insist on doing the same… How come?

At what moment does intuition turn into an overpowering prejudice that blocks all deliberate decision making?

Have anyone of you who participated writing in “Think-ing” edited by John Brockman any idea of how to break through intuitions when these are too powerful?

I appreciate all the help I can get… as these regulations have introduced a very faulty and extremely dangerous risk aversion that is really messing up all the economies of the Western World. These regulations are stopping our banks from financing the risky future by keeping them busy profitably re-financing the safer past

I also read the following on the site of Edge.org founded by John Brockman:

“To arrive at the edge of the world's knowledge, seek out the most complex and sophisticated minds, put them in a room together, and have them ask each other the questions they are asking themselves.”

And that makes me want to ask anyone of you about when complex and sophisticates minds, put together in a room, could turn into a dangerous mutual admiration club?

I say this because there are such monstrous errors in these bank regulations that could perhaps only be explained by the possibility that no one dared to ask the questions… as these had to reflect too badly on a member of the club 

How much are European taxpayers paying in reduced taxable income?

There is a photo that I cannot let go; that of four European leaders, sitting in a row boat, in a small lake, close to shore, surely surrounded by dozens of security officers and photographers… and they all carry life vests. The only objective reason I can think of for taking that security precaution, is that they might suspect that one of them harbors suicidal instincts and wants to take one of the others down with him… and, if so, perhaps life vests should be prohibited, so as to allow the good-riddance to operate.

And I react the same way when over and over again I hear about how important it is that tax payers should not have to pay for bank failures, without any consideration to whether those bank failures have helped to produce enormous taxable incomes or not.

A damn nannie mentality has taken over bank regulations and is destroying Europe (and others)… it does not even reflect the risk aversion of an average nannie but the risk aversion you get when adding up the risk aversion of two nannies. Absolutely insane!

As a result banks in Europe are now allowed to make much higher risk-adjusted returns on equity for exposures considered as safe from a credit perspective than on exposures considered as risky. And that completely ignores the fact that it is primarily the access to bank credit of the risky borrowers, the small businesses and the entrepreneurs, which will decide the sturdiness of tomorrow’s economy.

If I was a finance minister of any European country I would in fact want to allow the banks to leverage their equity the most, precisely when lending to small business and entrepreneurs… and not like now when they are allowed to do that lending to infallible sovereigns, to members of the AAAristocracy and to the housing sector.

How much less taxable income, how much less availability of jobs results from the regulatory risk aversion in banking is anyone’s guess… but I assure a lot more than any taxes that would temporarily be saved by forbidding banks to take those risks that bankers are anyhow also adverse to take.

Wednesday, December 31, 2014

This is my New Year wish for the Western World.

I wish for the Western World to fully comprehend that it is not by allowing its banks to earn higher risk adjusted returns on what from a credit-risk perspective is perceived as safe, than on what is perceived as risky, that it can move forward.

Because this is what currently happens when its bank regulators, those in the Basel Committee and the Financial Stability Board, allow banks to hold much less capital (meaning equity) against assets perceived as safe, than against assets perceived as risky.

And not that this would make the banks safer either. We all know that what is really risky for banks, is not really what is perceived as risky, even if risky, but what is ex ante perceived as absolutely safe, but that ex post could turn out to be very risky.

It is vital that we, the older members of the Western World, understand that we have no moral right to impose on the future generations a baby-boomers’ risk-adverseness agenda more suitable to retirees. 

The risk-taking of our forefathers was what brought us where we are, and it requires a lot of risk-taking to keep the Western World moving forward, in order not to stall and fall.

Western World, please listen up, “God make us daring!” is a prayer as valid as ever.