naked capitalism

This item came from reader Chris, who passed along a tidbit from Wolfgang Munchau’s Eurointelligence daily newsletter. I can’t provide a link to the story itself; checking around the Eurointelligence site, it seems to be an e-mail only product, and the piece in question is based on a German news story.

The proposal is odd. It would restrict EU banks from selling securitized products unless the seller retains a stake of 10% or more. Given that the banks have quite a lot of US paper, constraints on purchases would seem more sensible (assuming that the intent is the obvious, which would be to restrict this activity).

Perhaps the logic is that the EU will use this move as a basis for demanding that the US institute reforms of its securitized debt market, or it will impose similar restrictions on buyers. I’d be interested in hearing of any other theories.

Chris also believes “cracking news story” = “breaking news story”.

From Eurointelligence:

FT Deutschlands leads today with a cracking news story according to which the European Commission is planning to put severe restriction on the ability by banks to participate in the global credit market. The most important of these restrictions concerns a rule that it will only be legal to sell securitised debt instruments, such as asset backed paper or the more compilcated collateralized debt obligations if the issuer retains a stake of at least 10 per cent. (We find this is a very sensible attempt of a regulation, and perfectly compatible with the original intention of the securitisation business. The fact the banks were able to see credit products without retaining a stake was clearly one of the factors that help create the credit bubble.)

The European Commission also wants banks to restrict the amount they lend to other banks to no more than a quarter of their tier one capital.

It is no surprise that the European banking lobby is howling with protest, saying that more transparency will do the job.

Update 10:50 PM: Per an anonymous reader, it appears the Eurointelligence piece had an important translation error:

There seems to be a translation error in the Eurointelligence snippet. They write of a proposed restriction on what European Banks can sell. In actuality, the FTD article is about a proposed restriction on what European Banks can buy (’kaufen’); i.e. only securitizations in which the seller keeps 10%.

This makes it an effective rule regardless of what non-European governments decide to do about the securitization market, even if they decide not to act. The result would be that European Banks could no longer buy nonconforming securities from anywhere in the world, leading to some protection of European Banks from such toxic waste as repackaged US subprime debt or whatever the future will bring.

In fact, the article emphasizes the bailout of banks like IKB at (German) taxpayers’ expense because of their extensive investments in US subprime debt.