Monday, April 15, 2013


Awful day.  Everything got crushed; stocks, commodities, bonds all on the reports out of China that things were slowing down.  Europe remains as out of touch as ever and reports have it that The Leader and Jacob/Jack can't understand why no one Over There is listening to them.  Memo to POTUS and Jacob/Jack:  they don't think you know what you are talking about and hey, they don't trust you.

Having summed up the state of play in the world, I'd thought I'd turn to some fun stuff Over Here regarding the banks that has popped up recently.

The name of the game is still reduce risk thereby reducing the need for capital but one particular exercise seems to have resulted in politicians like Lizzy Warren and others getting their knickers in a twist over something that the banks are reportedly calling "Synthetic participations" which seem to be in some circles the new smell of the week.   Now I don't know exactly why Lizzy is bent out of shape (other than the fact that she is a wing-nut and may know a lot about consumer debt but nothing about running a bank) but sometimes it's hard to believe how these guys who make millions a year could be so beyond stupid in allowing ANYTHING to be labeled "synthetic" in this regulatory enviorment.  "Synthetic" to a politician is like "Cat" to a dog; it is to be attacked on principle.  Why not call it a "Risk Participation Agreement" like we used to 35 years ago and accomplish the same purpose or will that jeopardize your fancy construction and not allow people to think that only a genius could create one of these things?  You see, an RPA works like this.  You have a loan and wish to reduce your exposure.  Out there is a Greater Fool who wants a piece of the thing but suppose the borrower, for example, doesn't want to involve himself in a relationship with the Greater Fool either through a direct sale of the loan or an assignment which also transfers all legal rights under the agreement.  Enter the RPA through which the Greater Fool, in return for the interest stream, agrees for a period of time to assume all credit risk (save for a slight servicing fee).  Guess what gang, mission accomplished and the borrower doesn't even have to know.  Hell, we used to syndicate the damn things.  Now if the borrower goes toes up in the middle of one of these things nastiness can break out but you have the Greater Fool's money and unless he can prove fraud in the factum (look it up) it's pretty hard for a bank or hedge fund to prove it is similar to a widow or orphan which should keep Lizzy off your back.  If I'm missing something please tell me.

Meanwhile, the battle with the dreadful Dodd/Frank and Basel III goes on.  Citigroup reported a very good quarter today and was highly praised for its accomplishments.  But the inevitable question of where do profits come from in the future was properly asked by the talking heads.  "Greater participation in the mortgage business," sez one.  "Right," sez another, "but they can't service the mortgages they create (remember the "skin in the game" demand from the likes of Lizzy) because under Basel III they are penalized for the risk maturity profile mortgages create."  He was right of course which once again reminds me of Casey Stengel and the first year of the New York Mets:  "Can't anybody here play this game?"  One the one hand, legislation written in spite by two of the most politically spiteful men ever to serve in the Congress, demands actions to supposed strengthen the banking system which, two short years later is about to have the opposite effect through the adoption of international rules by the same Congress that will make it prohibitively expensive to follow the rules first written.  Anyway, congrats to Michael O'Neill and his team at Citi.  I'm happy to say I told you so.

No comments:

Post a Comment