I am at such a loss right now - this is absolutely incredible. I am posting it here to ensure that everyone takes a moment, perhaps another moment, to let it sink in. This is from Choudry's Securitization Chapter.
Securitization Post Credit Crunch
- Thread starter brian.field
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Thanks for sharing Brian. Very interesting indeed.
Is this a new Author? I don't think we had Choudhry for Securitization pre 2016?
Anyway, this is nothing but a book adjustment and artificial stimulation of securitization, selling one asset and bringing them back as another doesn't smell good
Were there artificial book profits made as well? And all our central bankers are repositories of Junk assets?
My God, no wonder they are removing Andrew Jackson from the bills, his blood would boil for murder wherever he is right now
( Trivia: Andrew Jackson, aka General Jackson was a US President thoroughly opposed to the idea of Central Banks like the Federal Reserve )
Anyway, this is nothing but a book adjustment and artificial stimulation of securitization, selling one asset and bringing them back as another doesn't smell good
Were there artificial book profits made as well? And all our central bankers are repositories of Junk assets?
My God, no wonder they are removing Andrew Jackson from the bills, his blood would boil for murder wherever he is right now
( Trivia: Andrew Jackson, aka General Jackson was a US President thoroughly opposed to the idea of Central Banks like the Federal Reserve )
Now that I have introduced Andrew Jackson over here, I think those interested in US Financial history should read about the Founding Father Alexander Hamilton and his deft management of finances of a new nation, arguments for and against a paper currency, bond, gold standard, Central Bank with Thomas Jefferson. The longer the things change, the longer they remain the same. ( Hamilton by Ron Chernow )
Great references @QuantMan2318!
Regarding my initial post, I thought I would be more specific for the folks newly exposed to the arena of risk management.
Many blame the credit crisis on bank greed. Historically, I have been a staunch defender of banks, especially during the crisis. As I've mentioned elsewhere, banks were legally required to lend to subprime borrowers, in many instances, regardless of credit worthiness, so it is unfair to simply blame them for subsequent losses.
That being said, we see that the Federal Reserve and European Central Bank executed extraordinary measures to save banks in the midst of the crisis. As you know, many banks held significant amounts of securitization paper on their balances sheets. The fact that the ECB allowed banks to post securitization paper as collateral rather than treasurys (or comparably safe assets) was truly remarkable, and equally extraordinary.
So, rather than use this new option to increase liquidity by posting the securitization collateral that they already owned, the banks "adversely selected" the ECB by creating new securitizations, which were backed by the worse collateral held on their books at that time. The banks's risk profiles didn't change, per se; they owned the assets initially, and then simply repackaged them and repurchased them, thus creating more, and worse securitization paper, to trade for cash or liquidity with the ECB. Isn't this incredible? This is a greed that I cannot defend.
Let's say a bank has $100 in assets, $25 of which is securitization paper, $25 of which is corporate debt, $10 of which is equity, and $40 of which is CCC rated junk.
The ECB option was meant to allow the bank to post the $25 in securitization paper as collateral and receive close to that amount in cash or liquid funding. Instead, the banks took their $40 of junk, re-securitized it and created new debt off of it, which they purchased, and then posted the new securitization paper as collateral for additional funds. Now the bank held $25 + $40 in securitization paper!
And so, the bank could post $25 + $40 as collateral and receive $65 in new funding. (These balances are ignoring haircuts and Aaa requirements, i.e., the entire balance would not be able to be used.)
The point is that the banks took advantage of the hand that fed them, even though that hand was only offered in hopes of saving the banks to begin with, and to the detriment of the tax payers!
Incredible!
Regarding my initial post, I thought I would be more specific for the folks newly exposed to the arena of risk management.
Many blame the credit crisis on bank greed. Historically, I have been a staunch defender of banks, especially during the crisis. As I've mentioned elsewhere, banks were legally required to lend to subprime borrowers, in many instances, regardless of credit worthiness, so it is unfair to simply blame them for subsequent losses.
That being said, we see that the Federal Reserve and European Central Bank executed extraordinary measures to save banks in the midst of the crisis. As you know, many banks held significant amounts of securitization paper on their balances sheets. The fact that the ECB allowed banks to post securitization paper as collateral rather than treasurys (or comparably safe assets) was truly remarkable, and equally extraordinary.
So, rather than use this new option to increase liquidity by posting the securitization collateral that they already owned, the banks "adversely selected" the ECB by creating new securitizations, which were backed by the worse collateral held on their books at that time. The banks's risk profiles didn't change, per se; they owned the assets initially, and then simply repackaged them and repurchased them, thus creating more, and worse securitization paper, to trade for cash or liquidity with the ECB. Isn't this incredible? This is a greed that I cannot defend.
Let's say a bank has $100 in assets, $25 of which is securitization paper, $25 of which is corporate debt, $10 of which is equity, and $40 of which is CCC rated junk.
The ECB option was meant to allow the bank to post the $25 in securitization paper as collateral and receive close to that amount in cash or liquid funding. Instead, the banks took their $40 of junk, re-securitized it and created new debt off of it, which they purchased, and then posted the new securitization paper as collateral for additional funds. Now the bank held $25 + $40 in securitization paper!
And so, the bank could post $25 + $40 as collateral and receive $65 in new funding. (These balances are ignoring haircuts and Aaa requirements, i.e., the entire balance would not be able to be used.)
The point is that the banks took advantage of the hand that fed them, even though that hand was only offered in hopes of saving the banks to begin with, and to the detriment of the tax payers!
Incredible!
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Yes Brian, this is a more complex topic, however, I will try to explain as much as possible, what I meant, in a short para. You see, I gave those references because the US Financial history at its various points seems to be a clash of two competing factions, two ideologies/pedagogies. I wanted to tell this when you had earlier referenced the role of the CRA in the sub prime meltdown - ( You are not alone, Bethany Mc Lean in "All the devils are here" seems to concur that this mess started with that compounded by Greed )
You see, our Govts bring in regulation seeing the best interests of all concerned, however it does have unintended consequences; The history of Wall Street Crises is one of adverse selection, one that is of great interest to a Risk Manager - you learn more from crises than anything else. Look at the rise of HFTs and the Flash crash, what was it caused by? Deregulation of the Stock Exchanges, Michael Lewis states that this is the latest in a long line of Elephants (Crises) hooked Tail to Trunk caused by some regulation to stop something preceding it
Lets go the primordial era where there was absolutely no regulation, the antebellum and the Gilded Age, look at them, they were marked by Go(u)ld and Greed and massive Panics and Pain, yet we had the rise of Industry, Innovation, Invention and Tycoons like Carnegie, Rockefeller, Vanderbilt who practically laid the foundations of the Industrial Powerhouse that the US would later become. This was what separated Hamilton from Jefferson and Jackson, Hamilton was for a Central Bank - to provide some order to the Market, the others were against it, Jefferson was for Open Markets without regulation while Jackson didn't want Wall Street ( Banks and Traders ) at all - so who's correct? Each had their own points that we saw in the past and we still see today.
Interestingly, completely in line with the spirit of the country, none was for Socialism or Communism despite all the pains and crashes. Later we had the age of Titans starting with Woodrow Wilson and the First Roosevelt, they provided some guidance (like Sherman Anti Trust) to the Market and the Market acted responsibly to the Power, lost, when the Fed worsened the already severe Great Depression (Jackson must have smiled). The First major Govt, guidance ( can't call it Socialism yet ) was from the second Roosevelt and it worked to a large extent. However, when the second wave of deregulation came with Reagan, the Responsibility associated with Power was lost causing a wide variety of problems in Industry (off shoring) and Finance (excess greed) and your country, remarkably, is moving in a Socialistic direction.
So, your dynamic economy is as it should be, a clash of differing philosophies all within the bounds of Capitalism with limited Govt. interference. Again, Risk Management's job has another dimension - to add some semblance of Moral Responsibility to everything else. Finally, let me conclude that there can never be a 'stable' Capitalistic economy, and this current Socialistic trend, in my opinion, is an anathema to the values and ethos of your country. I don't know for sure how it will play out. ( Look at us, we lost because of some of our Socialistic policies and we started growing only after a limited adoption of Capitalism )
You see, our Govts bring in regulation seeing the best interests of all concerned, however it does have unintended consequences; The history of Wall Street Crises is one of adverse selection, one that is of great interest to a Risk Manager - you learn more from crises than anything else. Look at the rise of HFTs and the Flash crash, what was it caused by? Deregulation of the Stock Exchanges, Michael Lewis states that this is the latest in a long line of Elephants (Crises) hooked Tail to Trunk caused by some regulation to stop something preceding it
Lets go the primordial era where there was absolutely no regulation, the antebellum and the Gilded Age, look at them, they were marked by Go(u)ld and Greed and massive Panics and Pain, yet we had the rise of Industry, Innovation, Invention and Tycoons like Carnegie, Rockefeller, Vanderbilt who practically laid the foundations of the Industrial Powerhouse that the US would later become. This was what separated Hamilton from Jefferson and Jackson, Hamilton was for a Central Bank - to provide some order to the Market, the others were against it, Jefferson was for Open Markets without regulation while Jackson didn't want Wall Street ( Banks and Traders ) at all - so who's correct? Each had their own points that we saw in the past and we still see today.
Interestingly, completely in line with the spirit of the country, none was for Socialism or Communism despite all the pains and crashes. Later we had the age of Titans starting with Woodrow Wilson and the First Roosevelt, they provided some guidance (like Sherman Anti Trust) to the Market and the Market acted responsibly to the Power, lost, when the Fed worsened the already severe Great Depression (Jackson must have smiled). The First major Govt, guidance ( can't call it Socialism yet ) was from the second Roosevelt and it worked to a large extent. However, when the second wave of deregulation came with Reagan, the Responsibility associated with Power was lost causing a wide variety of problems in Industry (off shoring) and Finance (excess greed) and your country, remarkably, is moving in a Socialistic direction.
So, your dynamic economy is as it should be, a clash of differing philosophies all within the bounds of Capitalism with limited Govt. interference. Again, Risk Management's job has another dimension - to add some semblance of Moral Responsibility to everything else. Finally, let me conclude that there can never be a 'stable' Capitalistic economy, and this current Socialistic trend, in my opinion, is an anathema to the values and ethos of your country. I don't know for sure how it will play out. ( Look at us, we lost because of some of our Socialistic policies and we started growing only after a limited adoption of Capitalism )
Hope, the above serves as a worm's eye view of the Financial History of the United States
as well as my introspection.
Sorry for my lengthy introspection, in simple words, this is a tug of war between the Market, if left alone can create value or destroy as well as the Govt. regulation in quantities that can be more or less which can again create or destroy - which in turn again leads the Market to create or destroy - A vicious Circle isn't it?
as well as my introspection.Sorry for my lengthy introspection, in simple words, this is a tug of war between the Market, if left alone can create value or destroy as well as the Govt. regulation in quantities that can be more or less which can again create or destroy - which in turn again leads the Market to create or destroy - A vicious Circle isn't it?
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Don't get me started on politics @QuantMan2318!
Sorry about that @brian.field, I didn't intend it to be on politics, rather on Financial History as well as my own introspection, I have slightly modified it to reflect more, the Historical aspects of the Financial ideas as well as some Macro Economics behind some ideas, not politics!
I once again apologize, if my post had unintended consequences
I once again apologize, if my post had unintended consequences
No need to apologize @QuantMan2318! I was stating that more in a "tongue-in-cheek" manner. Your thoughts are enlightening and informative! Keep 'em coming my friend!!!
Interestingly, Let me also add that Adam Smith wrote the "Theory of Moral Sentiments" before "The Wealth of Nations" and he considered the first book to be his magnum opus seeming to imply that Capitalism should have Moral sentiments in order to succeed completely, which is related to your example of how Banks are biting the hand that feeds above. Let me also get back to FRM before David dismisses these as a rant (just kidding, he won't of course)
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