April 22, 2014

Mr. Jacques de Larosiėre. You are not telling the truth and nothing but the truth

Sir, I refer to Jacques de Larosiėre’s “Securitised debt could give Europe’s economy the kiss of life” April 22. Yeah, but he must mean a “kiss of life” for the financial intermediaries.

Securitization is the process whereby you lend at the highest possible rate, achievable by convincing the borrower of how risky he is, and then resell it discounted at the lowest possible rate, achievable by convincing the investor of how safe the borrower is…. so neither investors nor borrowers stand to benefit much.

For instance, a $300.000 - 11% - 30 years mortgage to the subprime sector, when it was resold discounted at 6%, yielded the intermediaries a tidy immediate profit of $210.000!

And de Larosiėre ends stating “Reviving the market for securitized loans is the fastest way to bring Europe’s credit shortage to an end”. Not so! The only sustainable way to devolve sanity into the European bank credit markets, is to get rid of those capital requirements which allow banks to earn much higher risk-adjusted returns on equity when lending to the “safe” than when lending to the risky”

Who not an “infallible sovereign”, or a member of the AAAristocracy, can compete for bank credit under such circumstances?

Europe, start by getting rid of all those working on Basel III, they are too busy covering up for their fatal mistake of Basel II.