The BIS & Basel Accords by James Jaeger
Just as the Fed practices fractional reserve banking at the national level, a similar scheme is also carried on at the international level at the Bank for International Settlements in Basel Switzerland. This is the central bankers' bank, also known as the BIS.
Under the BASEL ACCORDS, the "capital adequacy rule" requires that each central bank that banks with the BIS must maintain a certain ratio of capital to assets. This ratio is determined by the RISK WEIGHT certain assets have as opposed to other assets. For instance, regular loans equal a risk of one (1); federal bonds and FRNs equal a risk of zero (0); securitized mortgage bonds have a risk weight of one half (.5).
The capital requirements ratio is augmented by a process known as MARK-TO-MARKET. This means the world's central banks must value their assets by determining what they would sell for on the open market EACH DAY. They must thus be MARKED to the market for valuation everyday.
The RISK WEIGHT and the asset value (as provided by MARK-TO-MARKET assessment), give the capital requirements each central bank must maintain at the BIS. This is like reserve requirements at the Federal Reserve System.
Since the mortgages that many Americans gave their banks in consideration for loans were securitized into BONDS by those banks (at places like Fannie Mae and Freddie Mac), these bonds were expected to constantly appreciate because they were "backed" by real estate. This is why these assets had a "risk weight" of even LESS than zero, real estate "never goes down" went the meme.
Thus the bozos at Goldman Sachs, and other places like Citi and Leahman, sold insurance policies (CREDIT DEFAULT SWAPS) that DERRIVED their value from the "fact" that the mortgage-backed bonds would never depreciate. The premiums on these CDS brought in serious revenues for the investment banks that sold them, such sums amounting to hundreds of millions per year and I think $400 million per year in the case of Goldman.
Suddenly, when so many sub-prime borrowers defaulted on their loans, the underlying collateral for securitized mortgages, the bonds, upon which the CDS were PLACED -- not "based on" as a derivative HAS no underlying asset, it's only a BET -- crashed. When this happened these Goldman's had to pay out.
Since the Goldman's of Wall Street were also involved with other banks and entities owing THEM win-money -- money these other banks and entities didn't have because banks were defaulting to THEM -- they could not collect, thus they could not pay out. Since the event of default/payout/evaluation complexity was so great, the valuation of the bonds was almost impossible to determine (i.e., not transparent) thus, under the Accord rules, these assets had to be marked-to-market at a valuation of ZERO.
To make matters worse, the whole mass of banks went into default because the Basel Accords require ASSETS be marked to market-to-market, NOT liabilities. Thus, balance sheets all went wacko. Assets dropped and, since liabilities weren't also marked-to-market at zero, all these banks technically went insolvent.
Fortunately, THIS crises is only limited to a few of the huge banks like Goldman and Citi as only they have the significant derivative exposure. But in first quarter 2008 the outstanding derivative exposure on the books of these banks amounted to $180 trillion. $90 trillion alone was on books of J.P. Morgan Chase and BofA and Citi each had about $36 trillion on their books. Obviously these banks were the ones that got first-call on the TARP money. Unfortunately the billions the Fed is giving them is going to derivative bailout by larger bank buying up smaller banks rather than making credit more available to the system. This will probably spread the derivative cancer, so you can probably kiss the system goodbye.
These are the kind of greed-games intellectual pigs play with WE THE PEOPLE'S money when an elite of banks can monetize debt and collect interest on fractional money created out of thin air. This is why the Founders wrote the US Constitution as they did. This is why they stipulated that money must be backed by gold and silver so WE THE PEOPLE can curtail speculation by exercising our checks and balances by asking for redemption of fiat paper.
14 January 2009
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