If Europe’s sovereign debt is to be securitized, who’s going to earn those origination and packaging profits?

Sir, with respect to the European Systemic Risk Board —recommendations of pooling, packaging and tranching sovereign bonds from all members of the single currency into synthetic securities you opine: “Having a safe asset proposal in the mix would make it less risky, for example, to introduce a sovereign debt restructuring mechanism or risk weights for banks’ government bond holdings.” “Eurozone ‘safe asset’ is crucial to banking union” May 22.

Once securities with mortgages to the subprime housing sector in the US got a high rating, that allowed the originators of very long, very high interest and very lousily awarded mortgages, to sell these of at very low discount rates, and thereby generate huge immediate profits for them and the packagers. Did this benefit in any way the subprime sector? No! On the contrary… it got much more mortgages that it could reasonably swallow.

In the same vein, let me ask, how are subprime rated nations like Greece to benefit by having its public debt packaged together with higher rated nations like Germany? If its debt is sold off in riskier tranches, then all remains the same. If its debt remains in the safer tranches is there then not a build up of a new crisis?

Sir, what Europe does not need is to try to hide away in some new securities, the regulators’ fatal use of risk weighted capital requirements for banks, that which favored way too much sovereign indebtedness. 

What Europe, and the western world need the most is to get rid of that regulation in order to allow banks to again become banks that earn their return on equity by giving loans with calculated risk taking, and not by reducing equity.

A Systemic Risk Board that does not understand the systemic risk bad and intrusive regulations pose is a joke of a Board. 

PS. Yesterday I visited the Bank of England’s Museum

@PerKurowski

Secretariat of the European Systemic Risk Board… wow!

Sir on April 8, 2010, in the Financial Times I read the European Central Bank seeking candidates to occupy several positions in the Secretariat of the European Systemic Risk Board, “established with the purpose of identifying, monitoring and assessing potential risks to financial stability in the EU that arises from macroeconomic and financial developments”. I had to say wow! ... and cut it out to save it as a memento.

When will they ever learn? They set up the Basel Committee, which allowed those truly miniscule capital requirements like 1.6 percent so that helped already big banks grow to be the too-big-to-fail banks and they empowered the credit rating agencies so much that half of Europe followed them to dig nonexistent subprime gold in California… and they do not yet even know, much less accept, that they were themselves the largest creators of systemic risk.

And ECB wants to send out a message that they’ve got Europe’s systemic risks under control? Who is going to tell ECB that the candidates most likely to be useful in such a monumental quest are probably the least likely to be accepted by them?