Risk Rap

Rapping About a World at Risk

Pennies from Heaven

Morgan Stanley and Goldman Sachs have changed their charters and are now bank holding companies. I believe this was necessary for Goldman and Morgan Stanley to have access to Federal bailout money in the newly proposed bank workout plan.

Paulson insists that we must move with great dispatch. I get nervous when these types of transactions occur with such velocity that I have a hard time understanding the value proposition. After all, if me and my countrymen are being asked to belly up to the bar and put $1Trillion into the game I want more of an understanding then believing Chris Dodd has seen the horror if we don’t act and it ain’t pretty.

Couple of questions:

Does this allow Goldman Sachs and Morgan Stanley to purchase commercial banks? Will Goldman and Morgan be opening up S&L’s and local community banks? If that is the case should we allow them to take over the management of the banking system considering their poor track records of managing investment banks? A disturbing characteristic of our managed economy is that the more colossal the failure the greater reward is bestowed.

Second question is a small technicality. Paulson’s suggestion to segregate good bank assets and bad bank assets centers around FAS:157 Level Three Assets. If the current holders of these assets cannot value them now, how will the Treasury acquire them from the failed banks and at what value will they carry them on their books? We should also assume that since the US Treasury will want to sell these assets how will it know its getting a good price or “fair value” when it liquidates its position?

Will Level Three assets be used as collateral for the new bank holding companies capitalization requirements? If these assets are not performing now, how can we assume these assets will perform in times of “real economic duress” to meet defaults in the future?

Level Three Assets are principally the CLO, MBS and Credit Default Swaps (CDS) that lie at the root of this crisis. If they functioned as they should, all credit risk should have been hedged out of the system and we should not be experiencing this economic crisis because of insurance CDS provided. Seems to me that the CDS were more snake oil then insurance. If they didn’t work when they were needed (see AIG) why would the US Treasury think there will be a market for them in the future?

Will the investment banks and financial engineers who enriched themselves on the creation and sales of CDS instruments be required to return the money they earned in commissions on the sale of this worthless junk?

Just asking.

Music: Billie Holiday with Lester Young: Pennies from Heaven

Risk: bank, managed economy, bank capitalization,

Advertisements

September 22, 2008 - Posted by | banking, credit crisis, FASB, jazz, Paulson, TARP | , , , , , , , , , ,

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: