Get the handcuffs
They're At It Again - Securitization
Jul 7, 2009
It's not enough to rig leverage
limits as Henry Paulson asked for and was granted when he ran
It's not enough to watch both
Bear and Lehman blow up as a consequence of that excessive leverage.
No, now we have to find new
and innovative ways to cheat capital requirements!
reinvented to cut costs -Financial Times
Investment banks, including
Goldman Sachs and Barclays Capital, are inventing schemes
to reduce the capital cost of risky assets on banks' balance
sheets, in the latest sign that financial market innovation is
far from dead.
The schemes, which Goldman
insiders refer to as "insurance" and BarCap calls "smart
securitisation", use different mechanisms to achieve the
same goal: cutting capital costs by up to half in some cases,
at the same time as regulators are threatening to force banks
to increase their capital requirements.
This sort of garbage needs
to be treated as conspiracy to defraud and land the "inventors"
How many times do we have to
see the same horror show?
The purpose of capital requirements
is to insure that a bank's unsecured lending, that is, the
loan value outstanding in excess of the collateral's value in
a sale at the market, never exceeds the bank's excess capital.
So long as this holds true
there while the bank may become insolvent and need to be seized
there will never be an insured depositor loss.
The entire purpose of SIVs
and other off-balance-sheet games, along with this sort of nonsense
being "worked on" here, is to hide capital requirements
from regulators and governments so as to increase leverage ratios,
thereby increasing the amount of profit that can be earned from
a given amount of capital.
The problem is that there
is no such thing as a free lunch and for every potential profit
from such a scheme the amount of potential loss increases by
the same amount.
However, some regulators may
be wary of the invention of new pooled asset derivatives, especially
if they are perceived as a way to avoid regulatory capital requirements.
Some rival bankers also view
the schemes with scepticism. "This is a system of capital
arbitrage," said one senior banker at another investment
bank. "The need for capital just miraculously disappears."
Sounds like a scam to me.
Get the handcuffs Danno
Jul 6, 2009
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