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Banks Are Setting Us Up Again, This Time The Fall Could Be $2.6 Trillion Or More
September 17, 2012September 17, 2012
By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning
Money Morning
Only this go-round the costs will be far higher and the damage much worse. This time the fall could be $2.6 trillion or more.
Let me explain.
It started back in the mid-2000s. Wall Street was busy packaging low-rated subprime loans into securitized offerings that were somehow worth more than the sum of their parts.
In reality, what they were doing was little more than laundering toxic debt while raking in obscene profits along the way.
You know the rest of the story as well as I do. Not long after, the stuff hit the proverbial fan and it was not evenly distributed.
Well here we go again…
Both JPMorgan and Bank of America are quietly marketing a new scheme designed to “transform” sub-par assets into quality holdings that will serve as treasury-quality collateral needed to meet the new capital requirements that come into effect in 2013 as part of the Dodd-Frank Act.
Wall Street Is Up to Its Old Tricks
This may sound complicated but it’s not. It works like this.
When you trade on margin like these mega-institutions do, you are required to post collateral to offset counterparty risk. That way, if the trade busts and you are unable to deliver on your side of the trade, there is recourse.
If you have a mortgage or a car loan, you know what I’m talking about. Your lender can seize both if you default or otherwise fail to meet your payment obligations.
Trading collateral works the same way. In years past, trading collateral has most commonly taken the form of U.S. treasuries (or other securities) that meet stringent requirements with regard to ratings, liquidity, value and pricing.
However, since the financial crisis began, treasuries are in increasingly short supply. Investors and traders who have preferred safety over return are hoarding them.
