Thursday, October 25, 2012

Guest Post: Italy's earthquake vs financial earthquake - outrageous punishment vs outrageous forgiveness

I think that regular readers will enjoy the following guest post from Per Kurowski, a former Executive Director at the World Bank.  Mr. Kurowski likes to ask those wonderfully simple questions that get you to stop and think.  For example:
What exactly are the qualifications for being a member of the Basel Committee on Bank Supervision? 
Why should banks have to hold more capital against loans to small businesses than they do for government bonds since the interest they charge the small business takes into account credit risk? 
What part of high leverage combined with low perceived risk equals high systemic risk don't regulators understand?
Is there such a place as never-risk-land for banks? 

Italy’s earthquake vs. financial earthquake - outrageous punishment vs. outrageous forgiveness

I refer to the recent sentencing to jail in Italy of six seismographers and one civil protection officer, for not having warned about the earthquake that devastated L’Aquila

If we transport what happened in Italy to the financial sector, we can observe that: the credit rating agencies correspond to the seismologist, the regulators who gave the credit rating agencies so much importance and credibility to those regulators in Italy that flouted building regulations and, all those who trusted the advice and assured the world all was fine and dandy to the governments.

As that major financial earthquake which was for some of us, perhaps not scientist but ordinary laymen, absolutely doomed to happen, “just follow the AAAs”, and that quake has produced immensely more widespread damages than those tragically produced in L’Aquila, the question which remains is:

What is worse, outrageous punishment or outrageous forgiveness?

The credit rating agencies made mistakes which one way or another should have had some type of consequence. The bank regulators should have been ashamed and not simply authorized to keep on regulating, using the same silly paradigms, as if nothing had happened. And, if those in the governments of this world, do not understand they need new advisors, they should just be sent home, for being too dumb.

PS. In October 2004 in a formal written statement delivered at the Executive Board of the World Bank I warned:

“We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions”. 

And if little me sort of knew it, should regulators and credit rating agencies have known it?

I dare you to read that statement in full as it contains other relevant comments.

Per Kurowski
A former Executive Director at the World Bank (2002-2004)

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