Monday, August 17, 2009

The shape of risk

(When your risk model hits you upside of the head and you're lying on the ground I suppose that sideways the boomerang does look like a normal distribution curve. -AM) via FT Alphaville

U.S. government officials are aiming for September to decide once and for all (Rocky this time for sure. -AM) how banks’ capital reserves should reflect a tidal wave of securitized assets that are headed for their balance sheets. (The tidal wave will be buffered by the breaker of 'loose' valuation rules today with the pablum narrative of 'tightened' rules circa 2012 which surprise, surprise, surprise, will result in write-ups. Sweep that nasty down cycle under the rug and grab some booty in the new cyclically turbo-charged 'transparent' future. -AM)

The landmark ruling, from the FDIC, Federal Reserve, Office of the Comptroller of the Currency and Office of Thrift Supervision, would mark one of the final steps in determining the impact of the Financial Accounting Standards Board’s FAS 167. At issue are the costs issuers incur in tending to huge volumes of already-securitized assets, and when, or if, securitization might re-emerge as a popular funding source.(We're not as think as you broke we are, hic ... bartender more leverage please -AM)

The fact that the government is even weighing in on the matter is giving market players hope of some sort of reprieve. (Nancy Capitalists versus the Squints. -AM) Indeed, the efforts appear geared toward lessening the immediate impact of FAS 167 from a capital-adequacy standpoint, as many banks have already struggled to keep their capital reserves at appropriate levels amid the global financial crisis. The government has also sought to ensure that financial institutions can continue to fund themselves through securitization.(Present day Crappy Paper {Junk rated securities with AAA lipstick} to the government for Future day Crappy Paper {Cash or equivalent} to fund Present day Crappy Paper {same as what was blingfenced, junk rated securities with AAA lipstick}... the Federales version of waste processing. -AM)

However, nobody is suggesting that banks be completely spared from setting aside additional capital as a result of FAS 167. A more likely scenario would be a gradual phase-in of full capital-adequacy requirements, giving the institutions more time to raise the necessary money.(Will the last bagholder please screw in the light? -AM) That said, the government’s plans are murky. Members of the American Securitization Forum met with Fed officials last week to discuss the matter, but walked away without much insight on the central bank’s stance. (No auditing the FED and no breakdown in banks' FICC effects ones' vision. Lots of folks walked away from that shining trading floor at Enron without much insight also. -AM)

In testimony to the U.S. Senate Finance Committee last week, FDIC Chairman Sheila Bair said banks would ultimately have to hold capital against the newly on-balance-sheet receivables. (Once that capital has been sufficiently lubricated of course with an inflating elixir. -AM) She also expressed fears about what such a shift would do to the still-vulnerable market. “If more assets are coming on-balance-sheet, capital levels are going to be impacted accordingly,” she said in response to a question from Sen. David Vitter (R-La.).

“We support the general direction of bringing all this back on-balance-sheet.” she added, noting that the timeline for implementing FAS 167 “still gives me some heartburn.” (Know some of these folks have a heart now if only the Wizard would give them brains. Failure to liquidate the insolvent banksters has liquidated a large part of the productive economy.-AM)

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