Niall Ferguson aka the modern time Rudyard Kipling: >>>> For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets, so that (for example) the ratio of Citigroup’s tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year. <<<<
Although what my beloved Niall states in the above is standing up-side-down and needs to be turned the other way around, he is pointing out a very important issue: Basel I, Basel II and the national rules administered by the SEC failed miserably. When banks realized that they can weigh their assets by their "supposed riskiness," they started to play that usual game called regulatory arbitrage and the rating agencies cooperated: much of the "risky" assets (that is, "garbage" loans: read the NYT article Louis sent on an NYT economics reporter's personal credit crisis to see what I mean) were converted into AAA rated securities and kept on the balance sheets of the banks, because they could have hold much less for such "assets" in their reserves. I do not know who were the creditors of these banks that allowed them to built such huge leverages mentioned above when they were playing that regulatory arbitrage game, but I suspect that they lent that money to one another. I would not be too surprised if I learn that BofA is one of the major long-term debt holders of Citigroup and vice versa. Is there anyone here who knows who are the holders of long term debts of Citi, BofA and the like? Another puzzle: banks usually did not have long-term debt, especially when much of their debt were demand deposits. Why is it that the long-term debt of the current banks is so large by historical standards? Best, Sabri _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
