The new plans

Alistair Darling, the Chancellor of the Exchequer, will deliver his long-awaited White Paper on financial regulation in Parliament at 12:30pm.

So, who thinks they\’ll be a complete cock up and who thinks they might just contain the odd thing of value?

For example, somewhere between the EU, the US and Darling himself (it\’s difficult to work out precisely where this started) there is the idea that all banks should continue to hold 5% of whatever securitisations they hold.

This is meant to make sure that they carefully consider the long term viability of that securitisation and thus don\’t create dogs like the toxic waste of the past few years.

That would be the toxic waste (the AAA tranches of those CDOs) which the banks did create and did hold because they thought they were safe. Those taxic wastes which are what bankrupted those who held them.

So the insistence is going to be that banks must do what has just busted the banks in order that the banks might not go bust.

It has to be said that there appears to be a slight error of logic in this idea.

For, if the banks had not held onto those AAA tranches, those tranches which they really did think were safe, if they had sold them on to insurance and pension fund, then the banking system would not have crashed. And if they had tried to but the investors were not buying them then the securitisation dance would have come to an end.

If you really wanted to make sure that the same mistakes were not made agai you would ban banks from holding any portion at all of their own securitisations. And what are the politicians recommending? The opposite.

Lucky for us, eh?

6 thoughts on “The new plans”

  1. You’ve got this slightly wrong, I think.

    There are two ways in which major mortgage-originating banks lost out in the crisis:

    * they couldn’t syndicate loans after wholesale markets dried up, so were left with an on-balance-sheet chunk of the worst crap (ie mortgages given in mid-2007…)

    * they were jealous of the profits that hedge funds were making on CDOs, and so tasked their debt trading units with buying lots of them from other people. Including the ones that people in the same banks’ mortgage and treasury units were delighted about successfully removing from their balance sheets.

    That’s important because it means that none of the people who were in charge of mortgage origination *thought* that the bank was carrying the risks on its books, even though it actually was.

    (whether this would actually have affected the banks’ behaviour is another question: after all, Bear Stearns was 50% employee-owned, but that didn’t moderate the risks they took…)

    Tim adds: And I’m pretty sure that originators were holding the AAA tranches of the syndications they originated….

  2. Hedge funds are in for a kicking, curbing “bonus culture” and penalties for banks with subsidiaries in tax havens.

  3. About 70% of each syndication was AAA-rated, so it’s pretty damn certain the banks weren’t holding onto the majority of the AAA tranche, at least…

  4. Yup, that’s a good piece. Note that the banks which are actually bust, rather than struggling, were buyers of others’ AAA tranches through their i-banking arms.

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