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LQD: Securitisation Redux

by Melanchthon Mon Jul 6th, 2009 at 11:17:56 AM EST

Well, it looks like they are at it again:

FT.com / Companies / Banks - Securitisation reinvented to cut costs

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.

...

These new mechanisms are in some respects similar to the discredited structured products, which were widely blamed for fuelling the financial crisis.

...

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."

Update [2009-7-6 11:20:46 by Colman]: From the comments: "I remember when "financial engineering" was a term of abuse"


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See Also: FBI Arrest Opens Goldman-Sachs' Pandora's Box

The whole diary is worth reading.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Mon Jul 6th, 2009 at 06:45:23 AM EST
FT.com / Lex / Macroeconomics & markets - "Smart" securitisation
On one level, such initiatives might be welcomed as industry practitioners try to find a market solution to their own problems, reducing the need for taxpayer-funded bail-outs. But there are dangers here. As studies of the origins of the financial crisis such as the UK's Turner Review have concluded, one of the keys to creating a sounder banking system is increasing the quantity and quality of bank capital - which also, of course, means lower returns. Since the new schemes being developed are designed to cut the capital cost of risky assets, they potentially go against the spirit of such proposals. (bold mine)

How surprising!

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Mon Jul 6th, 2009 at 07:27:40 AM EST
FT.com / Companies / Banks - Securitisation reinvented to cut costs
they involve the securitisation of banks' existing assets, rather than of new lending. Second, bankers argue that the new products do not disguise the transfer of risk.

That might depend on what the existing assets are, and how possible it is to accurately assess risk on them?

FT.com / Companies / Banks - Securitisation reinvented to cut costs

Under Goldman's idea, it would sell an insurance product to a bank with a toxic portfolio, effectively shifting the risk of the underlying assets off the balance sheet. The insurance would require far less capital to be carried against it than the original assets.

Transparent and adequately-funded risk?

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Jul 6th, 2009 at 08:58:55 AM EST
European Tribune - LQD: Securitisation Redux
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 innovationregulatory arbitrage is far from dead.
There, fixed it.

Also known as "creative accounting".

I remember when "financial engineering" was a term of abuse (Spain in the early 1990's).

I mean, I have a technical book by a leading expert which plainly states that one of the main motivations for securitisation is to sidestep regulation. As I quoted in another thread:

There are four principal reasons why a corporation may elect to raise funds via a securitization rather than a corporate bond. They are:
  1. The potential for reducing funding costs
  2. To diversify funding sources
  3. To accelerate earnings for financial reporting purposes
  4. For regulated entities, potential relief from capital requirements


A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous
by Migeru (migeru at eurotrib dot com) on Mon Jul 6th, 2009 at 09:23:01 AM EST
You missed a bit
"This is the world of smart securitisation," said Geoff Smailes, managing director of global credit solutions at BarCap. "It's not securitisation for leverage and arbitrage purposes any more. This is all about restructuring portfolios of assets to achieve risk, capital and funding efficiency in a transparent and less complex way."
right before
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."

which makes the sleight of hand being played all the more obvious. (My emphasis throughout)

A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous
by Migeru (migeru at eurotrib dot com) on Mon Jul 6th, 2009 at 09:26:29 AM EST
Debt is debt. It doesn't matter how you wrap it.

The only lasting solution will come from a debt/equity swap. Just not equity as we know it, Jim.....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 6th, 2009 at 11:52:35 AM EST
[ Parent ]
I can readily see why the financial institutions would be eager to sell these things.

What I don't see is why anyone would be dumb enough to buy and hold these things.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Jul 6th, 2009 at 11:13:42 AM EST
um, because there's a greedy, overcapitalised fool born every minute?

:)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Jul 7th, 2009 at 04:48:58 AM EST
[ Parent ]


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