[Pen-l] financial deregulation was okay??

[Sabri Oncu <sabri.oncu@xxxxxxxxx>]

Niall Ferguson aka the modern time Rudyard Kipling:

>>>>
For one thing, both the international rules governing bank-capital
adequacy so elaborately codified in the Basel I and Basel II accords
and the national rules administered by the Securities and Exchange
Commission failed miserably. It was the Basel system of weighting
assets by their supposed riskiness that essentially allowed the
Enronization of banks’ balance sheets, so that (for example) the ratio
of Citigroup’s tangible on- and off-balance-sheet assets to its common
equity reached a staggering 56 to 1 last year.
<<<<

Although what my beloved Niall states in the above is standing
up-side-down and needs to be turned the other way around, he is
pointing out a very important issue: Basel I, Basel II and the
national rules administered by the SEC failed miserably. When banks
realized that they can weigh their assets by their "supposed
riskiness," they started to play that usual game called regulatory
arbitrage and the rating agencies cooperated: much of the "risky"
assets (that is, "garbage" loans: read the NYT article Louis sent on
an NYT economics reporter's personal credit crisis to see what I mean)
were converted into AAA rated securities and kept on the balance
sheets of the banks, because they could have hold much less for such
"assets" in their reserves.

I do not know who were the creditors of these banks that allowed them
to built such huge leverages mentioned above when they were playing
that regulatory arbitrage game, but I suspect that they lent that
money to one another. I would not be too surprised if I learn that
BofA is one of the major long-term debt holders of Citigroup and vice
versa. Is there anyone here who knows who are the holders of long term
debts of Citi, BofA and the like?

Another puzzle: banks usually did not have long-term debt, especially
when much of their debt were demand deposits. Why is it that the
long-term debt of the current banks is so large by historical
standards?

Best,
Sabri
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