BarCap, Goldman Up To Their Old Securities Tricks

It looked for a while there like the banking world might be forced into the totally boring world of responsibility and safety, thanks to the high levels of capital now being demanded by regulators. But the banks have waved their collective wands around and come up with a whole new bunch of ways to get around such demands, by packaging up assets into new securities. Sound familiar? Yes, packaged-up assets were exactly what got us into this mess in the first place!

One of the big causes of the financial crisis was the CDO, a gloop of different assets, some of which were potentially toxic, that was put in a pretty dress and bought and sold. The ratings agencies thought they looked hot, so rated them highly despite the underlying dangers. When the mortgages tied to these securities went down the pan, suddenly the securities were worth next to nothing, hence losses, hence banking crisis. To sum it up quickly.

Now, according to the FT this morn, BarCap and Goldman Sachs are making new kinds of packages, and calling them different things like “insurance” and “smart securitisation”. Goldman’s “insurance” is like the asset-insurance provided by Darling to Lloyds et al – in allowing risk to be accounted for by insuring against losses (and buying that insurance off Goldman), banks are therefore protected against losses, and don’t need to have such high capital requirements. The hope here is that the gains stood to be made from having lower capital requirements outdo the amount that banks have to spend on their insurance premiums. Goldman, whose gains from other areas of its balance sheet are eye-poppingly massive, is as good a place as any to have the risk transferred – even if they suffer losses from failing assets that they didn’t take a big enough insurance premium on, they’re unlikely to be big enough to truly dent the financial world, or even Goldman themselves.

Barclays’ “smart securitisation” (nice branding!) is a bit different – in packaging up assets into securities, it effectively reduces the number of assets, and so therefore less capital is required to be shored up against them all. They’re different from the old pesky securities because the risk attached to them is much clearer, and because they’re packages of existing assets, rather than packages of new lending that were much harder to ascertain the riskiness of, as was the case with CDOs.

Even so, to simply streamline assets and then buy them back off yourself in order to reduce your required capital levels, as Barclays are doing, is the kind of financial conjuring that distorts the true levels of risk that a bank is involved with. Barclays are highlighting the “efficiency” of these “less complex” methods, but crucially the underlying assets they’re referring to haven’t changed – they’re still just as risky as before, just grouped together. The capital needs to insure against them haven’t changed, but Barclays has lowered them by creating these “efficiencies”. It’s looking like the next generation of financial innovations is going to be awfully similar to the last lot – and the results could end up being remarkably similar too.

Posted by Ben Beaumont-Thomas in Hot Money | July 6, 2009 12:33PM |