NEW YORK TIMES Banks Look to Investors to Offload Risk | As they work to meet new regulations, banks are making deals with investors to partially guarantee assets, so that the banks do not have to hold as much capital against losses, The Financial Times reports.
The financial sector, which is still living off an array of hidden government guarantees, asset purchases, and cheap money, is making enormous profits again.
Four companies Ambac, MBIA, Financial Guaranty Insurance Company and Financial Security Assurance have guaranteed asset-backed securities, such as collateralised debt obligations and credit derivatives, worth $160 billion.
It enables Citigroup to treat the guaranteed assets as being relatively safe, thereby improving its apparent capital position.
To anyone who has studied the private finance initiative, this story - of guaranteed assets and reduced liabilities - will be familiar.
Of these guaranteed assets 16.2%, or $77.0 billion of the total amount guaranteed, is classified as multi-sector, which actually includes Alt-A as well subprime.
That flash point in September 2008 caused the U.S. Treasury to put a floor under money market funds, effectively guaranteeing assets held in money funds prior to the announcement.
Finally, ICT is improving our understanding of the role different long-term instruments play (such as guarantees, asset-backed and asset-based structures), how they're used, and what challenges they pose for SME financing.
To sidestep the thorny valuation problem, some have suggested that the bad bank acquire only assets that have already been marked down significantly and guarantee other assets, but officials would have just as difficult a task in determining how much to charge for insuring risky assets.
The government is likely, for example, to guarantee banks' assets.
