Michael
Sep 29th 2009, 12:35 PM
It would seem that the centerpiece of the Obama Administration reform of banking/financial regulation is going to be some new rules about capital requirements.
The gist of it is that banks who want to engage in risky behavior (trading derivatives or investing in stocks) need to physically retain more capital as a security cushion against losses. Banks that don't engage in those types of risky behavior can have lower capital requirements. Seems simple enough?
The key here is that the banks want capital requirements to be as low as possible to enable the most capital to be used for profit making activities.
It all sounds very good on the surface, but unfortunately, this type of regulation wouldn't have made any difference to the recent financial crisis since the problem there was that so much of the capital being held as security by the banks were AAA-rated securitized junk-mortgage bonds filled with sub-prime crap that evaporated in value the minute trouble popped up, making all the banks technically insolvent (insufficient capital reserves).
I don't see how holding ever-larger piles of AAA-rated junk bonds is going to change anything. Indeed, I see that as one of the primary causes of the debacle and it looks like the Obama Administration and Wall Street want to 'double-down' on the same banking strategies that lead to the financial crash.
And who is surprised by this?
Bottom line is that the 'genie is out of the bottle' now - or 'pandora's box has been opened'. One cannot put genie back in bottle any more than one can close the lid on pandora's box. Banks and financial institutions are addicted to 20% profit margins and million-dollar bonus paychecks and they are going to stop at NOTHING to return to that game.
AAA-rated junk fooled everybody once, no reason it can't work again! If it doesn't work, don't worry - the US taxpayer will just bail out any substantial losses. :erm:
The gist of it is that banks who want to engage in risky behavior (trading derivatives or investing in stocks) need to physically retain more capital as a security cushion against losses. Banks that don't engage in those types of risky behavior can have lower capital requirements. Seems simple enough?
The key here is that the banks want capital requirements to be as low as possible to enable the most capital to be used for profit making activities.
It all sounds very good on the surface, but unfortunately, this type of regulation wouldn't have made any difference to the recent financial crisis since the problem there was that so much of the capital being held as security by the banks were AAA-rated securitized junk-mortgage bonds filled with sub-prime crap that evaporated in value the minute trouble popped up, making all the banks technically insolvent (insufficient capital reserves).
I don't see how holding ever-larger piles of AAA-rated junk bonds is going to change anything. Indeed, I see that as one of the primary causes of the debacle and it looks like the Obama Administration and Wall Street want to 'double-down' on the same banking strategies that lead to the financial crash.
And who is surprised by this?
Bottom line is that the 'genie is out of the bottle' now - or 'pandora's box has been opened'. One cannot put genie back in bottle any more than one can close the lid on pandora's box. Banks and financial institutions are addicted to 20% profit margins and million-dollar bonus paychecks and they are going to stop at NOTHING to return to that game.
AAA-rated junk fooled everybody once, no reason it can't work again! If it doesn't work, don't worry - the US taxpayer will just bail out any substantial losses. :erm: