Banking Community From Top Down Exposed
First, let me explain the background of the argument I’m about to make.
I get railed on now and then as I post at Seeking Alpha that off-balance sheet banking allowed at Basel II in 1998 resulted in the Ponzi housing bubble. One fellow who posts comments, Pier 0188, said while discussing Ellen Brown’s Foreclosuregate article:
However, that doesn’t get back to the truth. You know absolutely *NOTHING* about what you are blathering about online. You pretend to be erudite and literate, yet you are not a free thinker. You merely upchuck another cow’s cud, another lost, blind, and senseless cow.
Well, Pier, moo to you too. I have never claimed to be erudite. I have never claimed to be an expert on the ins and outs of complex banking. However, I understand the crucial financial manipulations at work here.
Now, here’s my argument.
I do believe that the banks had a plan, through the repeal of Glass-Steagall which tore down the barrier between banks who had mortgages and investment banks who securitized the loans. This allowed the packaging of individual mortgages into infamous private mortgage backed securities.
I believe that the banks had a plan to operate with less capital with Fannie and Freddie guaranteeing all manner of subprime loans. We know that they did not guarantee jumbos and many alt a loans, but subprime they did guarantee. So Fannie and Freddie were essential to kick-starting the scam. We have seen how their monstrous child, MERS, has attempted to run around state governments in corrupting the recording of proper documents and notes. So who were the main players in the scam?
1. the central banks like the Fed and the European Central Bank,
2. the mother bank of those central banks which is the Bank of International Settlements,
3. investment banks like Goldman Sachs, Merrill Lynch, Bear Sterns, Lehman Brothers,
4. commercial big banks, primarily JP Morgan, Citibank, Bank of America and Wells Fargo,
5. the GSE’s, Fannie Mae and Freddie Mac, however the private mortgage chart reveals their influence was not central to the private mortgage MBS debacle as they pulled back,
6. Highly leveraged European Banks.
In 2004, Chris Whalen offered an explanation of the scam, and this almost predicted what would subsequently happen in the mortgage markets. Well, Whalen says that the risk models were Enronesque:
“Second, Basel II is built around a suite of risk analysis tools that are, at best, a reflection of market sentiment rather than an accurate opinion on a company’s financial statement. In May 2004, the Bank for International Settlements issued a statement indicating that the Basel Committee had reached a consensus on the new risk framework for financial restitutions. The statement said in part: “Basel 11 represents a major revision of the international standard on bank capital adequacy that was introduced in 1988. It aligns the capital measurement framework with sound contemporary practices in banking, promotes improvements in risk management, and is intended to enhance financial stability.”
Translated into simple language, the New Basel Accord proposes to use precisely those measures of risk and credit quality that caused such fiascos as Enron, WorldCom, and Parmalat, to name the most familiar names. The largest banks will employ risk models that are based on derivative indicators and academic assumptions about the statistical distribution of such events (defaults and restatements, for example) that do not accurately describe the real world.
We know that Enron ended very badly. We are seeing Chris Whalen warning of a very bad ending here from that 1998 off balance sheet banking model that Basel 2 applies now in 2004. Basel 1 of 1988 that took down the Japanese bubble was abandoned. Mr Greenspan came out as a “good” central bank soldier to proclaim that adjustable mortgages could be a “better deal” for homeowners, in February, 2004. So much for ever trusting a Fed Chairman ever again.
So that we are not limited to one analyst, we have the Wall Street journal in 2007 saying essentially the same thing. Thomas Greco of Beyond Money tracks that article and here is author Quigley’s view:
If you don’t believe the pre-meditation involved please read the quote below from the Wall Street Journal, Nov. 27th. 2007:
“In 1998 the Basle Accord created the opportunity for regulatory arbitrage whereby banks could shift loans off their balance sheets. A new capital discipline that was designed to “improve” risk management led to a PARALLEL BANKING SYSTEM whose lack of transparency explains how the market started to seize up.
The “originate-to-distribute” model REDUCED THE INCENTIVE for banks to monitor the CREDIT QUALITY of the loans they pumped into collateralized-loan-obligations and other structured vehicles, the rules failed to highlight contingent credit risk””With Basle II, the question is just how the markets will evolve over the next 20 years”. as the new accord will require banks to hold LESS CAPITAL.”
The theme of the Wall Street Journal article is the same as Whalen’s views. Less capital is required because we have loan guarantees from the government, from Fannie and Freddie as well as, which we find out later, from a private MBS explosion based on phony ratings. And this gets worse, as Basel III apparently wants permanent guarantees for loans from Fannie and Freddie.