Last Call

K-Drum on the re-securitization of stupidity:

As you probably know by now (you have been paying attention, haven't you?), banks are required to retain a certain amount of capital on their books. The capital is there to keep them solvent even if their assets lose value, so the amount they're required to have depends on how risky their assets are. If they have, say, a bunch of crummy C-rated securities on their books, they have to maintain a full load of capital to back them up. But A-rated securities are less likely to lose value, so for those they only have to maintain 50% of the normal capital levels. And for AAA securities, they can get by with only 20% or less. After all, AAA securities are pretty unlikely to lose value. Right?

This was one of the reasons behind the CDO frenzy of the past few years. If you slice and dice a bundle of securities so that most of them are AAA-rated, then you can reduce the capital you need to back them up, which frees up that capital for other uses.

But then everything came crashing down, the ratings on those bundles tumbled, and suddenly banks had to pony up more capital to back them up. What to do? Answer: slice 'em and dice 'em all over again.

And people wonder why I'm pessimistic about America's economy over the next several years and why I think another even worse meltdown is on the way.