Re: Greenspan' and Derivatives

["Gary Santos" <evs@xxxxxxxxxxxx>]

There's a way without relaxing standards. These banker types are sneaky.

Past due loans or non-performing assets are defined as a 90-day non-payment
of interest or principal according to the terms agreed. Once past due, all
booked and accrued interest is reversed on banks' balance sheets. These
NPL's are reported.

I noted that NPL's as a percent of total loans decreased as time went by
after 1997. The analysts around applauded this. The rating agencies took
positive note of this. But, having come from corporate lending many years
ago, I know that this was just the magic of restructuring the loans. What
was "past due" became "current" overnight as restructuring documents were
signed. The cash inflow (interest and principal repayment) to the banks did
not change as economic conditions remained stagnant and even got worse.
(Which was why NPL ratios increased in 2000. And as these new past due loans
were restructured with 5 years or more grace periods, NPL ratios went back
down again to the applause of the analysts and rating agencies.) It makes
for good press in the business section.

Corollary to this, since cashflows were not improving, the "system" needed a
way to recapitalize the banks, else one might run into liquidity problems.
This is how they are doing it in part: New long term treasuries at high
yields are cornered by the banks with the consent of the central bank. What
the banks do is to sell on a repro basis a 5-year 13% bond on 90-day terms
at 5%-8% (depending on the interest rate set by inflation targetting) to the
retail market. Effectively making a 5%-8% spread for doing paper work on
bond paper printed with an inkjet printer. Talk about moral hazard!


----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, March 14, 2003 3:23 PM
Subject: Re: Greenspan' and Derivatives


Or the Fed relaxing regulatory standards such as capital ratios or
definition of default.  That was how the Fed got Citibank to roll over
the Korean loans in 1998 from short term to  long term with moratorium
of interest payments, but allowing Citibank to list the defaulted loans
as still performing.

Henry C.K. Liu


Gary Santos wrote:
> Counterparty risk goes beyond collateralization. Even if the derivatives
are
> collateralized, the question of liquidity still has to be addressed, i.e.
> the collateral may not be able to answer for cash demands especially under
a
> liquidation scenario. What valuation on collateral was used?
> Collateralization only addresses static balance sheet solvency issues via
> "dacion en pago" or the surrender of collateral as payment. And, may I add
> that the only real solution to a counterparty failure and a demand for
cash
> payment is for the Bernanke to step in with cold fiat credit via some
credit
> window at the Fed.
>
>
>