Basel III - Bank Reform For Our Children
The news came in over the weekend, the world received the announcement out of Basel, Switzerland concerning new bank regulations to guard against another meltdown. The upshot? Allow banks to leverage ONLY 20 times capital, intstead of the current 40 times capital, and give banks a mere 9 years to implement the change. If you are scratching your head wondering how this does anything to shore up bank finances in what would be thought of as the near term, I’m with you.
We are still in the the mode of marking securities (putting an estimated price on them) at levels where they cannot be sold. Banks are carrying paper at what is called mark-to-make-believe, instead of mark-to-market, prices. This can be observed by the $400 billion in second-mortgage paper that is being carried near 100% of value. Who among us believes that most 2nd mortgages in the US are worth much of anything at all?
However, because banks were given almost a decade to comply with a rule that is ridiculously inadequate, financial firms are flying today, giving the markets renewed strength.
This continues our foray into bizzarro world, where down is up and up is down. As GDP slides, jobs are lost, and banks are not required to take an honest accounting of their positions nor stop their shenanigans anytime soon, the equity markets post gains.
The reporting by the Economist that 58% of trading activity is High Frequency Trading firms keeps coming back to me. I wonder how much of the current activity is just algorithim-driven firms trading shares back and forth, with no desire to ever hold shares as an investment? What happens when this game comes to an end, or perhaps all the algorithims point down on the same day?
Read the original story at H. S. Dent
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