Tuesday, June 30, 2009

Madoff got 54.900 days of jail, that’s ok, but should not regulators get at least 1 day in the slammer?

Madoff got a sentence of 54.900 days it serves him right but having said that the regulators should also spend at least one day in the slammer for the sake of justice, just to help us restore some minimum accountability. Are they not 1/54.900 part responsible for this crisis? Of course they are. Not only those who were paid to keep an eye on Madoff but even more so those in Basel who are responsible for setting up a system that stimulated the financial sector to depend so much on the opinions of the credit rating agencies and the race for the triple-As.

Sunday, June 21, 2009

They’ve left the rotten apple in the Financial Regulatory Reform barrel!

Though the proposed financial regulatory reform often speaks about more stringent capital requirements it still conserves the principle of “risk-based regulatory capital requirements” and by doing so the “new foundation” builds upon the most fundamental flaw of the current regulatory system.

Regulators have no business in trying to discriminate risks since by doing so they alter the risks and make it more difficult for the normal risk allocation mechanism in the markets to function.

Financial risk cannot only be managed by looking at the recipients of funds as lenders or investors are also an integral part of the risk. High risks could be negligible risks when managed by the appropriate agents while perceived low risks could be the most dangerous ones if the fall in the wrong hands.

The recent crisis detonated because some very simple and straight-forward awfully badly awarded mortgages to the subprime sector, managed to camouflage themselves in some shady securities and thereby hustle up an AAA rating. This crisis did not grew out of risky and speculative railroads in Argentina this crisis had its origins in financing the safest assets, houses, in supposedly the safest country, the US.

Are you aware of that for a loan to a borrower that has been able to hustle up an AAA the regulators require the banks to have only 1.6 percent in equity, authorizing the banks to leverage their equity 62.5 to 1?

Saturday, June 20, 2009

The credit rating agencies and the GPS

Not so long ago I asked my daughter to key in an address in the GPS and then even while I continuously heard a little voice inside me telling me I was heading in the wrong direction I ended up where I did not want to go. That is exactly what the credit ratings did to the financial markets, especially when the regulators created so many incentives to follow them.

“Too large to fail” are yet in some ways small fry

“Too large to fail banks” are regulatory peccata minutiae when compared to that of having created the credit rating agency’s oligopoly. The opinions of the credit rating agencies, that the regulators induced, brought on much worse systemic concentration of risks than the “too large to fail” banks.

And don’t get me wrong I was one of the few ones who spoke out against the “too large to fail” while they were still considered to be too large to fail and people kept mum about them. While an Executive Director at the World Bank in May 2003 I told a workshop of some hundred regulators for all over the world “Knowing that the larger they are, the harder they fall, if I were regulator, I would be thinking about a progressive tax on size”.