Banks Offloading Risk to Who?

Here is another rant inspired by a Bloomberg article I read a couple weeks ago.  Those folks at Bloomberg do some very informative reporting.

Everything in the article is fascinating.  To imagine for an instant, after the absolute crash we had in credit markets such a short time ago and the reality that technically, as I write this post, dozens of very large banks around the globe are insolvent if they were required to be honest about the current market value of the "assets" on their balance sheets, that the monetary "authorities" around the world would even entertain the idea that banks could "buy" credit protection against default of loans on their books is ludicrous, insane, archaic, incomprehensible and absolute madness, yet it is happening!!!

The only question one has to ask is, "Who are these people providing "insurance" on these portfolios of loans banks are buying and what capital do they employ to show that in a crises they could actually provide the "protection" they are offering?"  We are just living Credit Crises 2.0 in the making.  There are still tens of trillions of dollars of "credit protection" out there being bought, sold, securitized, traded, passed off, derivativeized etc. by a completely unregulated global financial "industry" for crying out loud, with no rational capital requirements or other oversight by anyone and being backstopped by governments, who are already ill equipped to do anything to prevent another disaster!!

The fact that institutions still functioning as "banks" with the backing of their activities by "taxpayers" through "insurance" still go about gambling on a global scale is insane to say the least and downright financially apoplectic to put it in real terms.

Now we have the largest "money manager" in the US, Blackstone, orchestrating "insurance" against losses on pools of loans on the books of international financial institutions.  Since when is Blackstone an insurance company?  And what assurances do we have that those who have provided the "insurance" actually have the capability of delivering on this insurance? Are we really going to let a government insured global institution hold less capital against their loan book because they have purchased "insurance" from an unregulated industry?

From what I see of this deal between Blackstone and Citigroup it looks like the same financial engineering that Greece used to hide liabilities and underreport the amount of debt they had on their books when lying to the ECB and European Governments.  It may be a different way going about it, but the effect is the same, and where did it get Greece?

From the article:

“It’s a form of financial engineering,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.

According to the article, Blackstone was able to do this because of how "regulators are viewing loan exposures".  Hmmm, so regulators are now thinking banks can financially engineer their balance sheets to offload exposure to loans on their books. 

I will never forget when back in 2006 when Bernanke actually said that banks had become sophisticated enough to manage risk and that implied regulation and oversight was not as needed in the past.  This mind think from the Fed, Treasury and our congress (who passed the deregulation at the encouragement of Wall Street firms and the Fed) was the most ignorant and destructive thinking that ever perpetuated our collective attitude towards the financial industry.  These people were all seduced by the same greed that drives the industry and to think for a minute the financial industry in a capitalist system has ANY objective but to create ways to scrape as much cash from the national (now global) till as humanly possible until there simply is no more, is to have a lobotomy!

Without strong and active regulation in a capitalist system is to turn all humanity into slaves.  You might as well just put everyone in a meat grinder and feed them to those who know how to best exploit the system.

Back to the article.  This is a notable quote:

The Blackstone deal is one of the first examples involving a private-equity firm, which traditionally look to take a more active role in managing assets. It demonstrates the extent to which banks are prepared to pay up for capital when other sources, such as issuing shares or unsecured bonds, are closed.

What does this say?  1) Private equity, traditionally having a history of actually managing the firms (assets) they take an interest in (though mostly they find cash rich companies, rape them, load them with debt, then float them again), now are interested in filling a role of "financial engineering" to the banking industry because no real investor will buy the bank's "shares, unsecured bonds" or whatever other shit they can come up with to raise money, cause any real investor knows they are INSOLVENT!!  But it does seem that a bunch of investors in the world of "unregulated finance" are more than willing to take millions of dollars of the bank's money to help the banks further understate their liabilities.  Why not?  There is absolutely NO RISK in doing so because the next time the "shit hits the fan" the unregulated pigs can just go out of business.  They have already banked their millions in fees providing this "service" to the industry and as we all know, NOBODY anywhere in the world was held accountable for anything that happened in 2008-09, NOBODY. So why the hell not take the banks money while they have it.

Thinking this quote though will almost make you laugh:

Private-equity firms have struggled to achieve returns exceeding 10 percent after banks cut off credit in the aftermath of the financial crisis, starving the industry of the leverage required to match previous returns. 

So poor private equity has been cut off from loose credit because the banks are insolvent.  So what to do.  Hmmm, why don't we find a way to make the banks look solvent. Then they can go back to reckless lending to us again.  Genius!

So what is the debt?  Part of a $500 billion book of loans out the "shipping industry", an industry that if you read anything now, is floating on borrowed time.   Commerzbank, an institution everyone knows is technically insolvent, made some risk adjustments to their books and wallah, lowered their reserve requirements by over $9 billion. This is significant. Citi is trying to offload it's reserve requirements to the same industry.  We all know where this is going.

I like this quote to:

Blackstone spent five months to develop a structure that the Financial Services Authority, the U.K.’s financial regulator, would accept, one of the people said.

You know, if it took five months to "develop a structure" that there was another year prior to that with a bunch of computer programs and mathematicians creating "models" and other "engineered" outcomes to ultimately approach regulators with the proposal.  And we all know, the smart people are NOT the regulators.

And how does the article end?

“The government is jumping up and down asking banks to lend more to small and medium-sized businesses at the same time as stricter capital rules come in,” Walsh said. “The banks can either say: ’I’m sorry, we’ll have to wait until people pay off their loans,’ or the regulators could look at sensible ways of releasing those assets from their banks’ balance sheets so as to free-up capital to allow them to lend to more businesses.” 

"The government", yea the same government that deregulated the financial industry while allowing taxpayers to stay on the hook to their activities, and has, in the case of the US, failed to even pass it's own budget for three years; the same government that bought into the idea that they did not need to be involved in the rapidly globalizing financial industry that has become way to large and unwieldy for ANY central bank to bail out; the same government that does not even understand how to manage a balance sheet; that government is now looking for ways to allow their insolvent banking industry to "lend more".  Go figure. 

Real Terrorism vs. Financial Terrorism

Within days of some terrorists flying some airplanes into buildings our government leapt into action passing legislation to restrict American freedoms so fast it is obvious that all of this legislation was sitting on the shelf waiting for the opportunity to be implemented. The Patriot Act was obviously a pre-conceived piece of legislation that had broad backing of industry and right wing elements of the US government for some time. It passes with flying colors, even overwhelmingly by the more liberal members of the government who bent over and allowed themselves to be bullied into passing the legislation less they be deemed “un-patriotic or un-American” during this knee-jerk time of American history.

Yet TWO YEARS after the first major financial firm’s collapse (Bear Sterns) and 18 months after the rest of the market’s collapse as a result of what could be called “financial terrorism”, the domination of the market by unregulated risky and toxic financial derivatives traded, financed and created by unregulated and regulated financial institutions alike, with abandon and with no sense of respect or responsibility to the financial system or lives of people who would be affected by their reckless actions, we have yet to have ONE IOTA of regulation passed to address this run-amok unregulated toxic industry.

In fact, this very industry is betting Billions of Dollars with financial derivatives designed to “pay out” if the finances of the nation of Greece collapses. Yet no-one is asking, “Who is going to pay out on these derivatives if Greece truly collapses and will the actions of these gamblers in Greece’s debt create winners and losers and another market tsunami that will inevitably result in Greece becoming the first domino in a cascade of nations which will ultimately have their finances also collapse under the pressure of these financial speculators?”

It seems clear to me who “owns” Washington and it is not the citizens of the United States, but the “corporate super citizens” who have our government in their pockets and have just been give the green light to spend an unlimited amount of money buying and selling the individual legislators who make the rules in this nation.

I don’t give a damn about the finances of Greece. I do give a damn about the lack of governance in the US and the rising fascist, corporate domination of the structure with which Americans now live and will be increasingly living under in the future.

I also have a desire to completely do away with “unregulated markets” of all kinds and “unregulated financial derivatives” of all kinds. In a world with over 6 Billion people, highly interconnected and mutually destined to live the same fate, there no longer exist any positive human element to Trillions of Dollars swathing around betting for or against any asset class or created asset class with the sole objective of raking as much money out of the global financial system as possible irrespective of the consequences of their actions on the lives, destinies or wellbeing of the human beings their actions touch.

These unregulated institutions function outside of the regulatory structures of any nation, global governing body, or regulated institutions, answer to no person or persons in any jurisdiction with which they operate and seek to make money irrespective of their impact on the human beings they may have positively or negatively. They need to be eliminated or regulated. They need all funding by regulated financial institutions to be terminated. Their products need to be liquidated. We need them no more.

No Insider Trading Rules?

I found the information in this article useful.

It appears there are no "insider trading" restrictions within the CFTC regulations except with respect to employees. Is there any wonder why all of the products "created" over the past few years have been products NOT traded on any open exchange?

From the article bit below...

Participants also debated concerns about harmonization when it came to insider-trading prohibitions.
Annette Nazareth, a former Democratic SEC commissioner, said she wants to see such prohibitions when it comes to commodities futures, modeled after how such restrictions exist in the securities market.
"The Commodity Exchange Act generally contains no such ban, other than for CFTC and market employees, largely because one of the historical functions of the futures markets was to permit hedgers to protect themselves against risks to the commodity positions based on their own knowledge of those positions," Nazareth said.
However, the CFTC's Chilton said he "wasn't so sure" about bringing the insider-trading ban to the commodity futures regulator.
CBOE's Brodsky said both agencies could impose insider-trading restrictions so long as a particular rule on insider trading applies only to a particular product and not broadly across all sectors.
Some officials testifying expressed concern about whether insider-trading prohibitions should apply to broad-based indexed products as opposed to individual products.
With lots of derivatives, Brodsky said, there is no transparency or reporting requirements, giving many investors the opportunity to do a wide variety of insider trading.
CFTC's Gensler pointed out that the agencies as well as the White House and Congress are working on legislation that would bring these products, both over-the-counter and exchange-traded, under regulation. "We are working on record keeping, reporting and other regulations for derivatives," he said.
Clearinghouses
Clearinghouses, which are intermediaries between buyers and sellers, should have agreements among themselves, based on a common set of principles agreed to by the agencies, so that no problematic products slip through the cracks, said Anthony Leitner, director at A.J. Leitner & Associates.

I especially like the remark by Anthony Leitner. It reminds me of the remarks by Bernanke and Paulson when they started in their new jobs while still having their feet in their prior ones where they suggested point blank that the banking industry was sophisticated enough to gauge its own risk profiles and thus could create it's own guidelines and needed little "meddling" from the Fed or government as to how to manage risk capital ratios. These words were being spoken as the entire financial system was stretched over 30-1 and beginning to implode in 2006.