Thursday, November 20, 2008

Does the First Amendment protect the right to freely express a lie?

The bank regulators of the world decided over the last decades to give some few credit rating agencies an immense role channeling the financial flows of the world and, as was doomed to happen, sooner or later, such an information oligopoly led us into a disaster, in this particular case the badly awarded mortgages to the subprime sector.

Currently, defending themselves, the credit rating agencies argue, apparently with great success, that all they do is opine and that their opinions are protected by the First Amendment to the US Constitution.

To anyone knowledgeable about these issues, may I ask a simple question?

Suppose the credit rating agencies were giving opinions that were not really their firm opinions, or in fact might even have been opinions contrary to their own real opinions, does the First Amendment equally cover the right to express non-opinions or outright lies?

Friday, November 14, 2008

Bank regulators, why, why, why?

If all bank crisis in history have resulted from excessive exposures to what was perceived as “absolutely safe”, or at least very safe, and none ever from excessive exposures to what was perceived as risky… what is the rationale behind capital requirements for banks which are much lower for what is perceived as absolutely safe, or at least very safe, than those for what is perceived as “risky”? 

Wednesday, November 12, 2008

The Joker on the Basel Committee

I can hear now the free market answering a confounded citizen by describing the bank regulators with the same words the Joker used in the movie The Dark Knight, 2008:

"You know, they're schemers. Schemers trying to control their worlds. I'm not a schemer. I try to show the schemers how pathetic their attempts to control things really are. So, when I say that … it was nothing personal, you know that I'm telling the truth. It's the schemers that put you where you are. I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few…" of some AAA rated collateralized debt obligations, and some of their 0% risk weighted sovereigns

When I think of a small group of bureaucratic finance nerd technocrats in Basel, thinking themselves capable of exorcizing risks out of banking, for ever, by just cooking up a formula of minimum capital requirements for banks, based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly empowering the credit rating agencies; and which all doomed, sooner or later, to take the world over a precipice of systemic risks; like what happened with the lousily awarded mortgages to the subprime sector, or to Greece when regulations assigned it only a 20% risk weight and doomed it to excessive public debt... I cannot but feel deep concern when I hear about giving even more advanced powers to the schemers.

PS. Years later I found out that even if Basel II would initially have risk weighted Greece 20%, European authorities assigned it a 0% risk weight, which meant European banks could lend to Greece's government without having to hold any capital against that exposure. Unbelievable! What champion schemers!

PS. Here is an updated aide-mémoire on some of the many mistakes with the risk weighted capital requirements for banks.