Saturday, January 5, 2013

The confession of a "monstrous" banker

George Banks (the first)
Dear Per

I thought it was a good thing for my bank to purchase AAA rated securities collateralized with mortgages to the subprime sector, and to lend to A+ rated Greece, since in both cases my regulator only required me to hold 1.6 percent in capital against these assets, and which meant that my bank could leverage its capital 62.5 times to 1. 

More so, was my bank not to engage in these operations, it might lose out to other banks who by doing so would earn much higher returns on equity… to such an extent that they might even end buying up my bank, and then I would find myself in the awkward position of having to work for a too-big-to fail bank. 

What should I have done? What would you have done? Did that turn me into a vile bankster? Per, help me some even want to put me in jail!

Your banker friend 

George Banks III

PS. My answer

Dear George

Don't feel bad. I have not held you responsible for any of this mess for even a second. 

As an Executive Director of the World Bank, in a formal written statement in October 2004 I warned: “I believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

And in January 2003 in a letter published by the Financial Times I had written: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

And yet I really doubt that, if in your shoes, I could have put a stop to the purchase of the highly rated securities, or convinced any bank colleagues that they should incur in the costs of a special check up to see if their credit ratings were correct or not.

That said I do condemn though the regulators, those who created the temptations of the 60 to 1 or more authorized bank leverages. I can guarantee you that, in the absence of these loony regulations, there would never ever have been such a demand for these so subprime securities which created this crisis, or to indulge in excessive bank lending like to Greece. The Basel bank regulators, hopefully unwittingly, let us at least pray for that, they were the real vile Lucifers in this disaster.

Your non-banker friend that with much fondness remembers your ancestor George Banks