Post by jeffolie on Aug 30, 2007 14:40:41 GMT -6
Sneaky Basel Accord Bombs exploding now
The epicenter of the crisis is in the US, but the reverberations are global - thanks to the universal implementation of the Basel Accords. In retrospect, the accords were a stealthy virus that contaminated the global financial system. Under the guise of improving financial regulation, supervision and stability, banks around the world were given a rating-based framework to manage their portfolios and risks better. Unfortunately, the pathway to hell is lined with good intentions.
Given the dearth of rated instruments in non-Group of Seven countries, financial institutions around the world reduced their credit staff and local assets - replacing them with rated instruments peddled by the investment-banking community. Sensing a unique opportunity, Wall Street distributed repackaged US consumer loans throughout the globe, creating a systemic time bomb that would eventually explode.
As a result, no one can move the paper off their books. Last week, a European financial institution sold a AAA tranche at a price of 78, forcing it to assume a huge writeoff. This means that lower-rated tranches will result in even larger discounts. With billions of US dollars in open derivative contracts, much of it in the form of collateralized obligations, the global financial system is bracing for massive writeoffs. It is for this reason that credit evaporated.
Banks are slashing lines of credit, paring back trading positions and refusing to roll over commercial-paper obligations because they must husband their cash. That is why a 50-basis-point cut or a 400-basis-point reduction in Fed Funds will not do anything to restore confidence. It is also the reason the markets will panic the day after the Fed's hand is forced on September 18, when they realize that financial institutions will still be unable to move the collateralized derivative structures off their books.
www.atimes.com/atimes/Global_Economy/IH29Dj01.html
The epicenter of the crisis is in the US, but the reverberations are global - thanks to the universal implementation of the Basel Accords. In retrospect, the accords were a stealthy virus that contaminated the global financial system. Under the guise of improving financial regulation, supervision and stability, banks around the world were given a rating-based framework to manage their portfolios and risks better. Unfortunately, the pathway to hell is lined with good intentions.
Given the dearth of rated instruments in non-Group of Seven countries, financial institutions around the world reduced their credit staff and local assets - replacing them with rated instruments peddled by the investment-banking community. Sensing a unique opportunity, Wall Street distributed repackaged US consumer loans throughout the globe, creating a systemic time bomb that would eventually explode.
As a result, no one can move the paper off their books. Last week, a European financial institution sold a AAA tranche at a price of 78, forcing it to assume a huge writeoff. This means that lower-rated tranches will result in even larger discounts. With billions of US dollars in open derivative contracts, much of it in the form of collateralized obligations, the global financial system is bracing for massive writeoffs. It is for this reason that credit evaporated.
Banks are slashing lines of credit, paring back trading positions and refusing to roll over commercial-paper obligations because they must husband their cash. That is why a 50-basis-point cut or a 400-basis-point reduction in Fed Funds will not do anything to restore confidence. It is also the reason the markets will panic the day after the Fed's hand is forced on September 18, when they realize that financial institutions will still be unable to move the collateralized derivative structures off their books.
www.atimes.com/atimes/Global_Economy/IH29Dj01.html