Thursday, 28 October 2010

The Next Financial Crisis Starts Here

I laughed out loud when reading yesterday's FT article on plans for an investment fund to enable banks to "unlock" capital that would otherwise be tied up under Basel III rules. Surely a spoof?
"The CRC Capital Release Fund will work by entering into “bilateral synthetic securitisations” with banks, whereby the fund will effectively buy a small amount of exposure to the riskiest portion of a segregated pool of bank assets, cushioning the bank with a “first loss” position.
The potential capital unlocked could be large, fund documents said.
In one example, the fund could reduce money required to be set aside by a bank against a €3bn ($4.1bn) pool of enterprise loans by up to 85 per cent.
The fund is expected to make between seven and 15 deals with four to six European banks.
It is targeting an average annual return of 20 per cent over its lifespan."
Wait, don't tell me. The six European banks will all "put" a share of their interests in pretty much the same underlying risky assets into the fund, which in turn will be rated AAA by one of a few major ratings agencies adopting the same old approach to due diligence and 'audited' by one or more of the Big Four accountancy firms (which will also provide the accounting advice on how to structure the fund and how one or more of the six European banks can reduce the capital they need to hold under the Basel rules). Then a bunch of other banks - and maybe the lucky six banks themselves - will invest in the fund, directly or indirectly, attracted by the 20% "return".

And pretty soon, the same structure will be replicated throughout the whole banking sector...

Image from Globlogisation.
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