Home > Fande = Fact & Evidence, The Economy > IMPORTANT: Proper accounting rules for Wall Street banks

IMPORTANT: Proper accounting rules for Wall Street banks

* For a definition of “proper,” please see Guy Ritchie’s film, Snatch.

http://www.nytimes.com/2009/12/11/business/economy/11norris.html?adxnnl=1&ref=business&adxnnlx=1260547308-Y4O6EdgzrAFOiNRg5GuMVA

EXCERPT:

* Another name for subprime mortgage-backed securities is SIV, or Structured Investment Vehicle.

“The logic of the off-balance sheet treatment of such things as structured investment vehicles, or SIVs, which banks created in order to get assets off their books, was that the bank did not control them, and so did not have to show the SIV assets, and liabilities, on its own books.

That fiction evaporated early in the financial crisis. Some SIVs were among the first structures to fail, when they could not roll over loans to finance assets that had lost value. The banks chose to, or had to, rescue the SIVs. Maybe they did so to guard their reputations, or maybe they feared they would have been vulnerable to fraud allegations from those who lent to the leaking SIVs. In either case, it turned out there was a black hole that the regulatory rules had ignored in assessing how much capital the banks needed to hold.

There are other examples. Bank holding companies have been allowed to issue something called ‘trust preferred securities.’  The beauty of those securities was that they were really debt that the holding companies could call capital. Having that ‘capital’ meant the bank could take on more debt. A system that lets a bank borrow more money because it has already borrowed money — rather than because it has sold stock — is hardly a wise one.

All this was part of what financial engineers openly called ‘capital arbitrage,’ in which they created securities and structures whose purpose was to let banks slide around the capital rules. Regulators seem to have responded by assuming that everything would be fine.”

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