As you probably know, one of the main causes of the huge debt bubble of the last few years was the fact banks created Special Investment Vehicles (SIVs) – or off-balance-sheet virtual companies – which then bought trillions of dollars in securitized debt (or asset-backed securities – ABS).
This enabled banks to lend like mad – in loans, mortgages, credit cards etc – then securitize the loans into ABS, take them off their balance sheet, insure them, then buy them back via the SIVs.
This led to the growth of a $60 trillion – yes, a $60 trillion – securitization market, according to ECB estimates, with average issuance every quarter of $900bn.
Then the market collapsed, because it turned out a lot of the mortgages that had been securitized were dodgier than thought, and the rating agencies had got the ratings wrong, and the insurers didn’t have enough capital to cover the losses, and, well, it got a bit messy.
Then no one wanted to lend to the SIVs anymore, so they went bust or were unwound. That meant suddenly there was no demand left for ABS in the securitization market, so no financing for all those mortgage and credit card lenders out there.
Faced with the prospect of the collapse of retail lending, US and European central banks stepped in and agreed to buy banks’ mortgage-backed bonds from them, to try and get demand going in the securitization market.
The Fed, for example, has said it will buy $1.25 trillion in mortgage-backed bonds from the market. Its buying around $20 billion in mortgage bonds a week.
The ECB has also agreed to buy ABS and MBS from the market, via its repo auction system – essentially, banks can use ABS as collateral for ECB liquidity, as long as the ABS was once rated AAA and is now rated no lower than A (or, at one point, BB -).
European banks have leapt on this magnanimous gesture from the ECB, and raced to re-securitize their toxic waste and swap it with the ECB for something worth a bit more.
I rang up the ECB to ask them how much ABS it had accepted as repo collateral from European banks. I was told:
‘Oh, we don’t tell people. You won’t be able to find it out. We don’t reveal that information.’
Can you imagine – this is a public bail-out of private European banks for their bad decisions in buying so much asset-backed debt, and we can’t even find out how big the bail out is, or what sort of price the ECB paid for the debt.
All we know is that, in contrast to the UK Treasury’s programme, banks have fallen over themselves to participate, suggesting the ECB’s terms are more than generous to the hapless banks.
And we also know that many banks – Barclays Capital, HSBC and others – have posted record profits this quarter…
But we have no way of knowing quite how much we have helped the banks to their record profits, because the ECB won’t reveal the terms. I rang up some securitization analysts at investment banks to find out how much the ECB had bought, but funnily enough, they wouldn’t tell me either.
This isn’t democracy. It’s a financial oligarchy.