June 29, 2010

From a bank regulatory perspective, subprime and Greek debt were identical and perfect twins.

Sir Eric Posner in “Greek debt troubles reveal parallels with subprime crisis” June 29 fails to mention the most striking parallel, namely that both the securities collateralized with subprime mortgages and Greek debt, when held by banks, required these to hold only 1.6 percent in equity, in other worlds they were authorized to have a 62.5 to 1 leverage.

A bank, if it was making 50 basis points spread on Greek debt, then it was making 32 percent return a year, courtesy of the regulators… not bad eh?