Comments on: EU Proposes Kicking Banks When They Are Down?

By: Yves Smith

Yves Smith — Wed, 01 Oct 2008 22:28:00 +0000

Ginger Yellow,

Thanks for the input. Informative as always.

By: Anonymous

Anonymous — Wed, 01 Oct 2008 21:10:00 +0000

Let us remember how Enron ended; when the banks that lent them money started to be insistent on getting it back, Enron went bankrupt as it didn’t have it.

Now the same story is happening to the US as a whole, and the current administration is desperately trying to cover up the massive fraud that took place.

By: schekker

schekker — Wed, 01 Oct 2008 20:24:00 +0000

Regarding the timing, I would say it is excellent. The right time to introduce new legislation is when the banks are down and everyone acknowledges these rules are necessary. It will take at least a year before anything comes actually into law, probably longer, and if the banks haven’t recovered by then it is soon enough to start thinking about some temporary relief.

By: Anonymous

Anonymous — Wed, 01 Oct 2008 20:16:00 +0000

Be trying for two days to contact Joe Pitt PA congressman to vote no and cannot make contact. Had no trouble before the congress voted but no it is not possible.

Nice move.

By: Anonymous

Anonymous — Wed, 01 Oct 2008 19:04:00 +0000

yes, and the phone number to the congress is jammed as well…also, you can’t bulk email anymore, need to go to each indiv. congresspersons site…the people have spoken and the reps don’t care…

By: kona

kona — Wed, 01 Oct 2008 18:36:00 +0000

Did Ya’all see this?

“The House is limiting e-mails from the public to prevent its websites from crashing due to the enormous amount of mail being submitted on the financial bailout bill. As a result, some constituents may get a ‘try back at a later time’ response if they use the House website to e-mail their lawmakers about the bill defeated in the House on Monday in a 205-228 vote.”

By: Anonymous

Anonymous — Wed, 01 Oct 2008 18:18:00 +0000

This is how things work or don’t work depending on your point of view.

http://www.financialsense.com/editorials/engdahl/2008/1001.html

By: bg

bg — Wed, 01 Oct 2008 17:03:00 +0000

capital requirements and mark-to-market are two sides of the same coin, right? We want consistent rules in good times and bad, so that we don’t have to tighten the rules at a time when the rules are already tight around the neck.

By: Ginger Yellow

Ginger Yellow — Wed, 01 Oct 2008 15:37:00 +0000

OK, some preliminary thoughts. The retained interest isn't actually the most novel thing about this. For a start, they've cut it from 10% in the second draft (and capital against 15% in the first) to just 5%, which is only a bit more than was typically retained anyway. Furthermore, a) they don't appear to be talking about the bottom 5% of the capital structure, but 5% of each tranche sold, and b) it only applies to "exposures incurred by the credit institution after 1 January 2011".

The most interesting things about this from my perspective are that:

a)It imposes for the first time a due diligence and surveillance requirement for securitisation, something I've argued for for a long time. The requirements are quite detailed and intensive, although they are certainly reasonable from a risk management perspective. They will almost certainly cause some investor banks to exit the market, although these are likely ones who were burned in the crisis and in the process of exiting anyway. In the long run it should greatly improve the quality of the investor base and improve the quality/risk sensiviity of ABS pricing.

b) It also mandates disclosure of asset performance and retained interest by originator/sponsor banks in order to obtain capital relief for the securitised portion. This is huge and should be of great benefit to the buy side.

c) It also requires originators to underwrite securitised loans with the same criteria as for balance sheet lending. While this was effectively the case already (at least in the UK, where the FSA forbids differential treatment of securtised and balance sheet assets), it may make enforcement easier and may have some impact on pricing - in the past loans intended for securitisation would often be priced with a lower coupon than those intended to be held on balance sheet. That may now be illegal, although the wording is somewhat ambiguous.

By: Anonymous

Anonymous — Wed, 01 Oct 2008 15:21:00 +0000

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