During the years leading up to the financial meltdown, banks primarily took mortgages and other loans and bundled them together. Rating agencies were called in to bless them -- we now know those ratings were bogus. No one bothered to ask what was in the packages and no one cared as long as the value kept rising. Then when the crash came, it was too late. Not knowing what was in the packages, investors could not sell because no one on the other side of the trade wanted to buy. The markets froze and the meltdown was on.
Now U.S. Treasury Geithner wants to change the rules and force lenders to retain at least 5% of the loans they generate. In a way, this is akin to a margin requirement for these securities. Obviously the banks oppose such a measure because it would tie up a portion of their capital.
Geithner knows that loads of securitized securities are still hanging "off the books" somewhere hidden in the banks. This move would mitigate banks from having to sell the securities at a loss. Instead they would put up 5% and unwind them more slowly.
Here's another whopper. U.S. authorities plan to stop credit rating agencies from using the same standards for rating securitized securities as they do for corporate and sovereign bonds.
Banks are not happy about this move either. Nor are the credit rating agencies. Actually they should be thankful that derivatives are not banned altogether and that credit rating agencies are not shut down permanently.
Should all derivatives be banned?
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Reader Comments (Page 1 of 1)
6-25-2009 @ 6:15PM
katgod said...
Seems like a great idea except that I would make the number higher i.e. 10-15%, 5% of your own cooking still allows a lot of poison. Yes it would cut back on their capital which is like everyone else, i.e. you have limited capital use it wisely.