Regulators require new capital requirements in an effort (far too little, too late) to protect the financial system from derivatives, and the TBTF banksters mark b***s*** to fantasy to meet the new capital requirements by allowing customers to swap junk bonds in return for qualifying collateral such as T-bonds.
Meanwhile, the CME has begun accepting accepting as collateral bonds rated merely 4 levels above junk as acceptable collateral for derivatives.
You just can’t make this stuff up!
What do you expect when there hasn’t been a single criminal charge filed against a real bankster in 15 years?
JPMorgan Chase & Co. (JPM) and Bank of America Corp. are helping clients find an extra $2.6 trillion to back derivatives trades amid signs that a shortage of quality collateral will erode efforts to safeguard the financial system.
Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market.
The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” That’s raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead.
“The dealers look after their own interests, and they won’t necessarily look after the systemic risks that are associated with this,” said Darrell Duffie, a finance professor at Stanford University who has studied the derivatives and securities-lending markets. “Regulators are probably going to become aware of it once the practice gets big enough.”
Adding to the concern is the reaction of central clearinghouses, which collect from losers on derivatives trades and pay off winners. Some have responded to the collateral shortage by lowering standards, with the Chicago Mercantile Exchange accepting bonds rated four levels above junk.
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This sounds like the equivalent of buying a rusted out shell of a 78 Ford for 5 bucks and claiming it has the same value as shiny new one!
Rockets. I’ll one up you. They can have my 1972 Vega and 1975 Gremlin as collateral. Collector items, they are worth at least $500 billion each. Draghi is accepting Yugos and Citroen 2CVs to cover his OMT for Spain and Italy. FIAT–Fix it again Tony.
lol
Well folks, not being a financial Guru and trying to digest all of the mass of jargon.
How will all of the Repo affect the price of Gold and Silver?
Does this mean absolutely no QE3? just a band aid to prop up financials that won’t go
anywhere or what?
Enlighten me.
Ranger from Texas
“What do you expect when there hasn’t been a single criminal charge filed against a real bankster in 15 years?”
Curious. I read the other day that Bill Clinton’s admin had preferred charges against 1,000 people for financial crimes and that George W. Bush’s admin had preferred charges against 1,600 people. This was rounded out by the Obama regime, which has not charged a single person with financial crimes of any kind. Hmmm…
Wonderful, lets take a derivatives market that is already in deep trouble and make it even worse. Every step they take to pad their pockets now is leading to what will be an even deeper crash. When the crash happens and people can’t collect what they are owed I don’t think the people responsible will be able to find anywhere to hide.
I talked to my family that they shouldn’t keep their savings in bank accounts because they’ll lose them all if one day, the bank goes bankrupt. They told me that the banks are too popular so they will never collapse. I talked to them about the Lehman Brothers and they said that they never heard of it. It’s sad to see your family believing about the “To Big To Fail” banks.
And even if they don’t fail, holding your savings in dollar (or Euro or whatnot) denominated assets is tantamount to financial suicide. Not a shot to the head, that would be the coming bank failures, but a slow protracted demise. More like slit wrists that slowly bleed you dry. Sorry for the graphic example.