Wall Street Insanity: Cooking The Books With "Re-remics"
October 2, 2009 (LPAC)—On the surface it sounds insane, and it is: Wall Street is resorting to its old "financial engineering" tricks—the same ones that helped blow up the world. And as weird as it sounds, there is a strange, book-cooking consistency to this madness.
Though a lot of activities fit that description, we're talking specifically here about "re-remics," or the re-securitization of real estate mortgage investment conduits ("remics"), a process in which existing mortgage-related derivatives are broken up and repackaged into new securities. In a re-remic, the assets of a remic are sorted into "good" and "bad" piles, and new securities created out of each pile. The new securities are then given new ratings by the ratings agencies, such that the capital the financial institutions have to set aside to cover those assets is reduced, even though the assets are the same. If this sounds nuts to you, you're on the right track.
The re-remic scam is one aspect of "Let's Pretend We're Not Broke," the most popular game on Wall Street these days. The more loaded down the banks' books get with toxic waste, the more capital they have to have to cover their "potential" losses, and the lower their capital ratios. Since they've got mountains of toxic waste on their books, the banks are expending considerable effort to reduce the level of capital they are required to set aside, and the re-remic gimmick is one of the techniques being used. The banks are also holding as many government-guaranteed loans and securities as they can, for the same reason. The polite phrase for this is "regulatory capital arbitrage," but "accounting fraud" is more accurate. The end result is to produce a phony statistic that can be used to claim that the bank—or insurance company, etc.—is healthy, when it is not.
This sort of nonsense is what killed the financial system in the first place. The derivatives market itself was created to hide the bankruptcy of the banking system and transfer future losses on unpayable debts from the banks into the securities markets, where it could be sold to pension funds and other suckers. A big part of AIG's credit default swap (CDS) business was just this sort of regulatory capital game: banks bought CDSs from AIG as a way of reducing the capital they had to set aside as reserves, and when AIG exploded, it was bailed out in order to save those banks. It should never have been allowed.
The fact that Wall Street thinks it can get away with such criminality today shows both that the players on the Street have learned nothing from the blowout, and that the so-called regulators have done nothing to clean up the system. The whole thing reeks of corruption and collusion, and demands a new Pecora Commission investigation. Had the Federal government put the financial system into bankruptcy protection, as it should have done, this activity would not be possible. That such activity is occurring again, serves as an indictment of the President and his administration, the Congress and the Federal Reserve. It is time to end the corruption, and end the monetary system which is preying upon us all. Enough is enough!