A short piece in Alphaville that I just came across caught my eye today:
“[Beware] the rise of the collateral swap. Also known as a long-dated repo.
The premise was simple. Prudent institutions flush with top quality government bonds (or even cash) wanted to secure a better rate of return — on a still relatively low-risk basis. We’re talking insurance firms, pension funds and other low-risk asset managers.”
The astute among you will remember that the notorious “repo 105” was at the heart of Lehman Brother’s financial gerrymandering at the onset of the 2008 financial crisis.
What this Alphaville piece is now suggesting is that normally prudent financial institutions with substantial low risk assets are swapping these (on a temporary – but potentially revolving / perpetual basis) with the casino banking community.
Does this seem healthy to all of you out there with your precious pensions? What if you had specifically nominated in your pension fund that your savings should be invested in low risk assets? Have you all been notified that you are now indirectly (and covertly!) investing in higher risk assets and potentially falliable institutions (i.e. investment banks and hedge funds)?
“given the identity of the counterparties, collateral swaps seem destined to strengthen the interconnections between (1) banking markets and (2) insurance and pension markets”
Does this sound like the prudent entrustment you were explicitly sold on?
No. And especially not if the casino banks are subject to a bad run with their questionable assets and consequently can’t pay up to the pension funds.
No prizes for guessing who will be left holding the bag (of sh!t) next time.
Therefore, be on the lookout for cries that “we must underwrite your pensions and the insurance industry, as without this there will be anarchy!”
P.S. If there is anyone out there with more technical competence and clout to try and head off this worrying trend of “pass the (toxic) parcel”, then the FSA is seeking policy consultation on “Liquidity Swaps”:
(Although the cynics among you will notice that this appears to relate to “guidance” for financial institutions rather than concrete restrictions!)
In your opinion, are the capital market players with the questionable assets using collateral swaps to dress up their books for regulators and investors? The reason I ask is that there has been a plethora of research about, for instance, the French banks claiming that there is no need to worry about dollar liquidity since they have so many dollar assets on hand with the Fed (in contrast to 2008). But if those assets are coming from collateral swaps which themselves are subject to investor fickleness, then they might not be as secure in the short-term as many believe.
ReplyDeleteOff-topic, but definitely worth noting:
ReplyDeletehttp://govinthelab.com/25-major-companies-paid-more-to-ceos-than-they-did-in-taxes/.
@ryan
ReplyDelete"In your opinion, are the capital market players with the questionable assets using collateral swaps to dress up their books for regulators and investors?"
Excellent point! The piece by Awrey is as close to a confirmation of that as you will get:
"collateral swaps are a reflexive response to changes in the post-crisis market and regulatory environment"
As one of the comments on the source site says it's "The new shell game".
In other words - hunt the toxic assets.
The financial companies appear to completely contort any legal concept of ownership here. They are playing a curious game of Shroedinger's cat, in which the "low risk assets" can appear to be both on the books of the Banks to satisfy regulatory compliance but simultaneously underpinning the private pension of Joe Public.
The wool is just being pulled over eyes again.
- Hawkeye
I guess Schroedinger's old moggy is a good analogy for the stuation we are all in. At the moment the box contains a world economy that is either alive & well but temporarily sick, or totally dead. The majority believe the former, we believe the latter.
ReplyDeleteIn the particular parallel universe I inhabit I read an article which gave some details of RBS RoBS pension funds, unfortunately I'v lost the link. At the end of the day these people have already proved that they will sink to any level to protect their habit.
Here's a site that you might, or might not be all aware of, mainly concerning the US, it's like a terrier in it's pursuit of the shysters, which I like.
http://dailybail.com/
This is a video, admittedly quite old, that they want people to pass on. I think it sums up the situation in as much as the content is so incredible. It should be an international scandal, but is for the main part ignored, no wonder the criminal elite act with impunity.
http://www.youtube.com/watch?v=cJqM2tFOxLQ&feature=player_embedded
Is this an example of selling short?
ReplyDeleteAmerica is setting to sue the banks that sold it suspect mortgage packages for $900 million that cost it $30 billion?
Does this mean the principles of fractional reserves work in reverse when applied to the costs of public finances?