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TheDumbMoney (57.79)

Excellent Explanation of Why Euro Crisis is so Scary

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October 07, 2011 – Comments (6) | RELATED TICKERS: SPY , UPV , EPV

From the worldwide bloggelspweb:

"A primary fallacy of the Basel Accord is that OECD government debt is risk free and requires no bank reserves. Better yet, the banks can count the government debt they hold as Tier 1 capital, reserving against other debt assets. The Basel Accords assume all OECD government debt is a cash proxy, being liquid in all market conditions…

Roughly, the risk weights of the main asset classes under Basel I were:
– zero for Zone A (EEA and OECD) government debt of all maturities and Zone B (non-OECD) government debt of less than one year;
– 20 percent for Zone A inter-bank obligations and public sector entity debt (e.g. Fannie Mae, Freddie Mac, et al.);
– 50 percent for fully secured mortgage debt;
– 100 percent for all corporate debt…

With Basel II they could reduce capital even further by writing each other a daisy chain of credit default swaps for all categories of exposure…

OECD government debt is zero risk weighted and accounts for a disproportionate bulk of Tier 1 capital of major banks."

For more see here. (Global Macro Monitor) Itself linking to this original post. (London Banker).

That about sums it up, folks.

6 Comments – Post Your Own

#1) On October 09, 2011 at 3:40 PM, TheDumbMoney (57.79) wrote:

Yes, I'm bumping myself.  It's not for me, it's for the content!  :-)

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#2) On October 25, 2011 at 4:34 PM, TheDumbMoney (57.79) wrote:

These two links above are worth another look if you missed them, BTW.

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#3) On October 25, 2011 at 4:38 PM, dbtheonly (< 20) wrote:

No need to bump yourself datf,.we'll do it for you.

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#4) On October 25, 2011 at 4:44 PM, TheDumbMoney (57.79) wrote:

It's OK, I am at peace with my patheticness.  I just thought these were excellent pieces and I have not seen such thoughts adequately discussed, pretty much anywhere else.

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#5) On October 26, 2011 at 1:02 PM, TheDumbMoney (57.79) wrote:

Let me spell out another very interesting implication of this:

It was regulators and popularly elected parliamentarians who appointed those regulators who told banks they could consider OECD debt as a zero risk-weighted asset.  Accordingly, there is actually an argument that bailouts of banks are somewhat correct, from a moral perspective.  They should not be bailed out and recapitalized completely, but the failure here ultimately lies as much with the government, and the people who elected those politicians, as it does with the European banks and other bondholders.  That is not to say the whole loss should be dumped on the taxpayers' shoulders.  But it is appropriate that some of it should be.  It is also appropriate that banks and other bondholders take serious, serious haircuts on Greek and other government debt, and that not ALL of that loss be absorbed by the public.

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#6) On October 27, 2011 at 6:59 AM, dbtheonly (< 20) wrote:

dtaf,

The risk & expense of doing nothing needs to be considered also. At the time of the 2008 TARP action; one of the concerns was the effect of doing nothing, letting the big banks & AIG go broke, and then trying to clean up the pieces. It got scary.

Just for it, you are highly though of by those out here with whom I am in regular contact. Pathetic might apply to others; not you.

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