Via Kevin Drum, the news that Wall Street has learned nothing and forgotten nothing from the financial crisis. The whole thing was caused by banks selling mortgages to people that couldn't afford them, then bundling them up to stick a triple-A credit rating on them. When the bad loans were revealed, the credit ratings were downgraded, meaning the banks needed a lot more money to compensate for the bogus "asset". Having taken that money from the taxpayer, they've gone straight back to their old tricks, rebundling those bad loans and getting the same rating agencies who said they were good in the first place to say they're good again:
The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.Et voila! Instant recapitalisation through accounting trickery!....A hypothetical example cited in research by Barclays Capital said that a $100 million asset that required $2 million in capital at a triple-A rating may require $35 million if downgraded to double-B-minus. At triple-C, the capital requirement might rise to 100%, or $100 million.
In a re-remic, three-fourths of the same asset may regain a triple-A rating, requiring just $1.5 million in capital, Barclays said. The remaining one-quarter may require 100% capital, but the total capital requirement would fall to $26.5 million.
...."There is $350 billion to $400 billion in market value of securities with no natural buyer due to their rating," Barclays said in a June report. "The re-remic market provides a way out of this gridlock by creating new AAA securities, which are likely to be viewed as attractively priced."
This is simply inviting the same problem on us again. But the people doing it will get a fat bonus for making the books look good next quarter, and that is apparently all that matters. Besides, if it all falls over again, they can always go stand over the taxpayer again and hold a gun to the economy's head by saying they're "too big to fail".
When are we going to learn? "Too big to fail" means "too important to be left to the market". Either these companies need to be regulated to within an inch of their lives to prevent them from pulling these scams - or they need to be taken over lock, stock and barrel by the government and run publicly so that they can't. Otherwise, we are simply exposing ourselves to recurring cycles of speculation-driven financial collapse, with real people thrown out of work and real industries folding because the back-room boys keep using tricks like this to juke their stats.
