I don't know if you as a reader here realize what a mind f*** this is. I mean the exact unregulated product that is out there covering some $60 trillion in debt and has been at the core of the financial collapse world wide is going to be used as a bench mark to price debt to an institution.
Forget official interest rates or Libor rates or any government issued or regulated market benchmark of the cost of borrowing money. Forget the business model or the validity of the business to make money or anything else. Base it on a derivative product that as we all know has the ability to value the likelihood of debt being paid at a rate of about ZERO.
This quote is from the article:
Banks are toughening terms for all borrowers following $919.1 billion in write downs and losses worldwide by tying loan rates to credit-default swaps rather than Libor to better reflect the risk they won't get repaid. Nestle SA, the biggest food producer, and Nokia Oyj, the largest mobile-phone maker, are among companies bowing to banks' demands to link loan rates to the derivatives contracts.
OK, so I have said many times since the genius Greenspan then Bernanke and Paulson all suggested banks somehow should manage their own risk profiles and not have capital requirements set by regulation entities or the Fed, that banks are horrible at determining risk for anything and have been in the middle of every boom and bust and have nearly bankrupt the government regulated insurance entities that are supposed to protect Joe the citizen's money more than once and have business models that are completely out of touch with reality.
Now they are admitting their business model is broken, they don't know how to price risk, they don't know how much to charge to lend to institutions and they are all completely in the dark about the exposure they have on their books to the shit they purchased and sold over the past 10 years because of this broken model. So they are going to price debt based on a unregulated product traded on a non-transparent platform that has a bunch of hedge funds and other profiteers manipulating the prices of the products for their benefit?
What the hell is going on here? I am beginning to think the idea in the Muslim world that interest is forbidden and all "lending" must be done with equity participation and repayment is a share of profits is one that the western banks need to seriously start to look at. Maybe then they will hire staff that have finance degrees and understand business and can make determinations on "lending" based on the business model and likely profitability of the entities they are "lending" to so they can get back to making loans that they have a stake in and making money the old fashioned way, earning it through smart decisions in lending.
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