Wall Street's Latest Trick

It's been more than a year, and we have not taken a single step towards stopping this problem. It was suggested we break the banks into smaller units and *you* balked.

Nothing is going to happen.

We lost. The bankers and their buddies (Obama) won.

Deal with it.

The reslicing is not per se particularly "financial alchemy" (although it takes a strong stomach to buy the lower rated sections), as taking a known bond and repackaging the "primary" income streams. That's actually a fairly old procedure. The US in fact successfully promoted such an approach with the Latin de

Securitised instruments rarely go entirely belly-up, and if the models are conservative enough regarding component credits default rates, the procedure is a perfectly valid method separating lower risk income streams from higher risk. I would take JS's observation supra, and affirm the later, it is not the ratings agencies at fault (and yes, it's like breaking up a company and selling its parts), but the over dependency of prudential capital requirements on a tool that was intended originally for other purposes.

The general problem here is that the Regulatory world has tried to exploit a mechanism - ratings - for a purpose it was never intended for. Ratings, I would remind (in fact, I suspect teach) Drum readers were invented in the private sector for the private sector own consumption. It was not until about 30-40 years ago that regulators seized on ratings as a tool to exploit. However, investment ratings and prudential ratings probably don't serve the same precise purpose, and putting the two into one basket has clearly polluted investment ratings to the detriment of their regulatory usage. The Golden Goose of ratings was killed by over exploitation by regulation.

of the underlying mortgages are being paid on time? That's what counts isn't it? Is it still 90%? Not everybody is under water in an overpriced house with a liar loan and separating the almost certain to default from the viable mortgages is a first step.

After the first sentence I thought maybe they'd invented a "capital-like substance", perhaps a currency propped up by a yet to be popped bubble.

Somehow, this bright shiny new financial gimmick looks like last year's bright shiny new financial gimmick. Wall Street is playing the part of Lucy and they are encouraging us Charlie Browns that we'll kick the field goal this time. We can't be so stupid that we let this happen again, can we???

Don't be surprised when the American taxpayers wind up flat on the ground after Lucy pulls the football (and more tax dollars) away yet again.

On the face of it, this is a reasonable solution to the problem and simply amounts to the rating agencies correcting their mistakes. The Fed/government may buy up the bad securities, but in case you haven't noticed that is just what they have been trying to do all along. As far as current CDO's are concerned this solution is as good as any. Whether CDOs should be quashed in the future is another question.

There have been bad consequences to the bad ratings and the ratings outfits will have an incentive to get them right, at least for a while until the attention of the public and the regulatory agencies wanders.

Whenever I get depressed about Wall Street criminals and their assorted enablers in government and regulatory agencies, I find solace in knowing that Roman Polanski is being extradited. After law enforcement sat on their hands for thirty years, their action at this moment sends a strong message to elite law-breakers and child molesters everywhere that justice never sleeps and the legal guardians of this great nation will hunt down all those reprobates who believe they can flee the litigation of a plea bargain. The world has become an infinitely safer place. American law will in fact punish the wealthy and privileged in special circumstances (especially those sybarites of perversion stupid enough to express an interest in returning to this country). Money is no obstacle in such a pursuit, for it is well-known that ivory towers, though expensive to maintain, repay their investors three-fold. Lady Justice, resplendent in her blindfolded nakedness, sweaty and enseamed chastity belt lagging behind her, thus staggers defiantly onward down her whimsical path toward parody.

Why should the banks take care to do anything right? The public bought their bad assets, they got their bonuses. Where is their incentive to take less risk, to be responsible with the money of third parties?

They will do it, do it again, until they have all the money.

To your last question what could go wrong i think this is a no brainer and that a lot if not everything can go wrong but lets be real things have been off for quite sometime and to assume everything is going to be right now would be not a good bet.