I’m shocked. Absolutely shocked, I tell you.
From the Market Ticker:
Me thinks you doth protest too much…..
“The European Central Bank on Thursday voiced its ‘high concern’ at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged.”
“Investment bankers who work in securitisation say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover.”
What in the Sam Hell did you think was going to happen?
Bernanke, by the way, did the same thing you know.
Both The Fed and the ECB set up these “liquidity conduits” to take collateral that nobody else will loan against and provide “liquidity.”
Well, now suddenly there’s a problem with swapping that garbage for perfectly-good treasury bonds?
Who’d a thunk that when you advertise that you’ll take used toilet paper and treat it like its “money good” that you will get, indeed, used toilet paper?
And if its toilet paper (that is, nobody else will buy it for any amount of money) then is it really an “asset” or is it, in fact, a zero that someone is hiding? What sort of capital position do you think these banks might have if they were forced to value these things at what they could get for them in the open market?
Hell, there is evidence that Lehman has put together synthetics (e.g. CLOs, etc) especially for presentation to these facilities in the United States. That is, they took securities and created a synthetic specifically for the purpose of swapping it for treasuries!
What is with the ECB and Bernanke?
I am absolutely stunned that anyone would expect anything different out of these bankers.
You put together a system that is just screaming “scam me!” and then you complain when that is exactly what happens?
Three, four, five, eight years of these very same bankers claiming that “liar loans” are “prime paper” wasn’t enough evidence that folks in the banking system would do the very same thing to the central banks, quite confident that in the end the taxpayers would get the bill?
Mish has a few more comments on the subject:
Pawned Garbage Expands
The garbage being pawned off on the ECB is expanding: Spanish, Dutch, and UK housing, but more amazingly, securitisation of Australian motor loans. Remember the original premise behind the Swap-O-Ramas?
The Swap-O-Rama was supposed to increase bank to bank lending. Instead, the Fed and the ECB have become veritable garbage dumps. This was easily predictable.
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First Law Of Swap-O-Rama
Let’s apply Parkinson’s Law to the Fed’s and ECB’s Swap-O-Ramas. Here goes: The garbage dump will expand in direct relation to the willingness of the dump to accept garbage.
Second Law Of Swap-O-Rama
Over time, the dump will consist of increasingly toxic waste. That toxic waste will eventually have to be cleared out. If those dumping the toxic waste cannot afford the cleanup, taxpayers will have to foot the bill.
No Exit Strategy In Place
The above laws should be intuitively obvious. However, the ECB seems to have just figured it out. The Fed either has not figured it out, or in typical fashion will not care until the mess blows sky high.
