America's
"to big-To-Fail", banks are at it again…
The
Volcker Rule is supposed to ban the banks from making speculative and
risky trades or investments. But the big banks are begging for the
chance to make the same kind of moves that got us into the 2008
global credit crisis, one of the worst in the modern world. It’s
like they never learned their lesson. They’re even enlisting
Congressional cronies to do their bidding. One way or another TBTF
banks are going to find a way to speculate us all American people
into another crisis…
Here’s
everything you need to know…
Trading For Trillions… At common man's Expense
The
truth is that the banks have been fighting the Volcker Rule since it
was floated.
The
Rule, named after legendary former Federal Reserve chairman of the
1980s, Paul A. Volcker, goes into effect in 2015 and has lots of
moving pieces. For instance, it says banks can’t have ownership
stakes in hedge funds or private equity shops and can’t gamble in
the markets like they did in their good-old “Trading for Trillions”
days. Loan Obligations of Indirect types are one of the “instruments”
or “products” banks still want to trade.
Volcker
Rule says, Banks can trade the simplest version of Collateral Loan
Obligation CLO, those that have commercial loans in them. But they’re
not allowed to trade CLOs that contain bonds, or equity, or other
assets papered around CLO packages. Not that there is anything simple
about collateralized loan obligations. They’re complex from the
start! And some varieties are a lot more complex and dangerous than
others, though to the naked eye they look pretty much the same. What
the banks are bitching about is how they’ll be restricted in their
ability to trade the CLOs they want to own. I hope you understand it.
That’s
right: They want to “trade” these things. That is important. A
lot of the CLOs will be put together by hedge funds and private
equity (PE) shops. And that’s one of the big problems: Hedge fund
and PE products are supposed to to be off limits. What are
collateralized loan obligations anyway? For the most part, the ones
being targeted are made up of leveraged loans. Hedge funds and
private equity (PE) shops and banks make loans to commercial
companies that already have above (their industry) average debt on
their balance sheets, hence they are said to be “leveraged.” The
issuers of these loans to leveraged companies call the loans
“leveraged loans.” I hope you understand it now.
But
because leveraged loans are made to leveraged companies there may not
be any buyers willing to purchase them from the original issuers, who
have no intention of keeping these loans on their own books. So, to
sell them, issuers and other product factories lump a bunch of these
leveraged loans into a pool. Yes, like a giant mortgage-backed pool.
And since these are leveraged loans made to leveraged companies
they’re a tad bit closer to those infamous sub-prime
mortgage-backed securities.
Just
because you pool a bunch of leveraged loans into a package, doesn’t
mean they are less leveraged, higher rated and more desirable. That
is until you add the magic elixir called collateralization, sometimes
referred to as 'structuring'. This trick works the same way it worked
for sub-prime mortgage pools.
The
pools are sliced and diced into “tranches” that are sub-pools.
These sub-pools are assigned certain rights over other sub-pools in
the big pool. They may get more interest payments directed to them.
They may have more collateral backing their portion of the pool. The
end result is that each of the tranches have different risk and
payment structures and different ratings. And like magic, the total
pool becomes a series of sub-pools that will fit the bill of the
investors they are structured to attract. They get sold off and
everyone is happy.
The
banks are crying that these products are loans, and banks are
supposed to be in the loan business. They want to own these loan
products even if they were originated by hedge funds or private
equity (PE) shops. It usually gets lost in translation, but I’m
here to remind you. The original loans are made to leveraged
companies because they are usually part of a leveraged buyout deal.
That’s
right, leveraged companies need more money because their leveraged
buyout owners (LBO) want to leverage them up more to pay themselves
the fees they extract for taking them private in the first place. Or,
they leverage them up to pay themselves dividends with the money they
borrow from the PE shops and hedge funds who only lend it to them
temporarily. No wonder they want to package them up and get them off
their books. The Banks, they like the yield on these loans. They want
to buy them. The big banks own most of these CLOs. And they want to
be able to sell them, like they can do with their other loans. If
they can buy these CLOs and sell these CLOs they are trading them,
buying and selling amounts to trading. They want to be able to trade
them. The big banks that want to play in this sandbox are enlisting
their Congressional cronies to do their bidding. Andy Barr, a House
Republican from Kentucky introduced a bill recently to allow banks
the latitude they demand. He was speaking on behalf of the “small
banks” in his state that would have to let go employees if this
seal-clubbing was allowed to continue.
It
doesn’t matter that small banks don’t trade this stuff and the
handful that buy do not have trading desks to trade them. But the big
banks do. That’s why House Financial Services Committee chairman,
Jeb Hensarling, a Texas republican, said the Volcker Rule is a job
destroyer.
If
big banks think these are good loans to hold, why don’t they just
originate them, themselves and keep them on their books? Why do they
want to trade them?
Maybe
because if they can trade them, they can hedge them. If they can
hedge them, they can over-hedge or under-hedge or cross-hedge, all of
which means they want to use their hedging operations to engage in
their favorite game… speculative trading.
American
economy is always in trouble due to this type of constant pulling by
speculative forces who want to make gambling money at the cost of
real economics. Banks use money of depositors to play these risky
games and often they lose the game and finally it is the depositor
who has to suffer. To save real economics from this onslaught of
speculative economics people should be educated about this subject.
Fortunately, as yet RBI in India is conservative (Americans are
laughing at us for that) in all its economic policies and that is
good for us.
You
may contact me on my Email ID given below,
You
are, invited to visit my other blogs if interested.
Ashok
Kothare
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of Expression
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reckon
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