Think Twice Finance

Mortgage Debt Crisis: The Smoking Gun!

The thing that has been bugging me most about this crisis is the absurdly heroic stance taken by bank regulators as they scrambled to protect what they now call “the shadow banking system.” Only the Bank of England has appeared cognizant of the impropriety associated with this dip into the pool of moral hazard.

In particular the attack on the Rating Agencies by bank regulators and Their Political Masters is scapegoating at the lowest level. Now I find a 2006 report by Fitch that shows that Basel II created enormous incentives for large banks to invest in off-balance sheet Collateralized Debt Obligations with middling (A and BBB+) ratings. It was in the public domain 1 ½ years before the crisis, complete with estimates of the size of the arbitrage!

You can access the article “Part I – Bottomline Impact on Securitization Markets,” Kim P. Olsen, Fitch Ratings, March 20, 2006 at http://www.gtnews.com