Tuesday, September 28, 2010

The bare-naked Basel Committee

The innocent child´s "But he isn't wearing anything at all!" in “The Emperor’s new clothes” tale by Hans Christian Andersen, would not have been written today, since modern emperors and their spin doctors are much too savvy to let an innocent voice get due attention.

As a sort of innocent child I have been clamoring for a long time that the Basel Committee on Banking Regulations, no matter their standing as the great global expert on these matters, is bare-naked and completely wrong… so wrong that they are in fact the primary cause of the current crisis… but the Basel Committee just ignores me.

In this respect I am searching for a voice stronger than mine who could pose some simple questions to the Basel Committee and have them answered. A Senator of the US concerned with that the banks in the land of the free and the home of the brave are not really free and are instructed to be coward, could be a perfect such voice.

Question 1: All major bank and financial crisis in the world have, without exceptions, resulted from excessive investments in what was ex-ante perceived as not risky but that ex-post turned out to be risky; and no crisis has never ever resulted from excessive investments in what was perceived as risky. In this respect, guys, what are your fundaments for creating regulations that give banks extra-incentives to lend or invest in what ex-ante is perceived as not risky; and thereby create extra disincentives for the banks to lend or invest in what is perceived as risky?

Question 2: In the whole set of bank regulations that has emanated from the Basel Committee over the last two decades, there is not one single word about the purpose of the banks. Guys, is not defining the purpose of the entity you are to regulate the basic required element for any successful regulation?

Question 3: Banks are allowed to lend to triple-A rated governments, like the US, with no capital at all, but are required to post 8 percent in capital when lending to any small business or entrepreneur. Guys, are you communist?

Question 4: Inducing the banks to follow too much the opinion of some few credit rating agencies must increase the risk that when these agents go wrong the banks will go dramatically and exponentially wrong. Guys why on earth would you do a dumb thing like this?

Question 5: Guys, when you have by the results been proven absolutely wrong are you not supposed to pause and perhaps even hit the reset button? Why then are you now forging ahead and perhaps digging us deeper in the hole we are in by now so arrogantly even trying to control for economic cycles?

Question 6: Guys, since even hedge funds rarely manage to leverage more than 15 to 1, would the banks without you explicitly allowing them to do so, even contemplate to leverage themselves 40 to 1?

Question 7: What was going on in your minds guys authorizing banks during the last five years to lend to a country like Greece or investing in triple-A rated securities, leveraging 62.5 to 1, and thereby converting for instance a .5 percent margins in an astonishing 31.25% return on equity… precisely that sort of returns that giant bonuses and too-big-to-fail banks are made of?

Question 8: It is evident that given the scarcity of bank capital, the small businesses and entrepreneurs, and who might be able to develop the next generation of jobs, are being crowded out from bank credits by your regulations are. Guys, why do you find that acceptable? Especially considering that these clients are supposed to be the banks´ most natural clients; and that they have nothing to do with creating a systemic crisis.

Question 9: Guys in the Basel Committee, who are you, how do you get appointed, who sets and pay your salaries?

There are of course many more questions, but for a starter these would do.

Is there any free and brave Senator fed up with being Razzle Dazzle Razzle Bazzled willing to make them? I sincerely hope so the whole world needs it… urgently!