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They’re At It Again – Securitization
Courtesy of Karl Denninger at The Market Ticker
It’s not enough to rig leverage limits as Henry Paulson asked for and was granted when he ran Goldman Sachs.
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!
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" in prison.
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, 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.”
Disappears eh?
Sounds like a scam to me.
Get the handcuffs Danno.
Top Photo: Explosions – 2004-10-16, some of the ground display from the Miramar Airshow, by Jon Sullivan, at Wikipedia.
Second Photo: a cell block in the Wisconsin State Prison, at Wikipedia.
