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Two Proofs That Basel 2 Established the Housing Bubble and Foreclosuregate.

By   Follow Me on Twitter     Message Gary Anderson       (Page 1 of 2 pages)     Permalink    (# of views)   No comments

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Author 54876
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I get railed on now and then as I post at Seeking Alpha that off balance sheet banking allowed at Basel 2 in 1998 resulted in the ponzi housing bubble. One fellow who posts comments, Pier 0188, said while discussing Ellen Brown's article:
However, that doesn't get back to the truth. You know absolutely *NOTHING* about what you are blathering about online. You pretend to be erudite and literate, yet you are not a free thinker. You merely upchuck another cow's cud, another lost, blind, and senseless cow.

Well, Pier, moo to you too. I have never claimed to be erudite. I have never claimed to be an expert on the ins and outs of banking. However, I do believe that the banks had a plan, through the repeal of Glass-Steagall which tore down the barrier between banks who had mortgages and banks who securitized.

I believe that the banks had a plan to operate with less capital with Fannie and Freddie guaranteeing all manner of subprime loans. We know that they did not guarantee jumbos and many alt a loans, but subprime they did guarantee. So Fannie and Freddie were essential to the scam. We have seen how their monstrous child, MERS, has attempted to run around state governments in corrupting the recording of proper documents and notes. Clearly the central banks, investment banks, commercial banks and Fannie/Freddie were all involved in this scam. So then, what was the scam?

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In 2004, Chris Whalen offered an explanation of the scam, and this almost predicted what would subsequently happen in the mortgage markets. Well, Whalen says that the risk models were Enronesque:

"Second, Basel II is built around a suite of risk analysis tools that are, at best, a reflection of market sentiment rather than an accurate opinion on a company's financial statement. In May 2004, the Bank for International Settlements issued a statement indicating that the Basel Committee had reached a consensus on the new risk framework for financial restitutions. The statement said in part: "Basel 11 represents a major revision of the international standard on bank capital adequacy that was introduced in 1988. It aligns the capital measurement framework with sound contemporary practices in banking, promotes improvements in risk management, and is intended to enhance financial stability."

Translated into simple language, the New Basel Accord proposes to use precisely those measures of risk and credit quality that caused such fiascos as Enron, WorldCom, and Parmalat, to name the most familiar names. The largest banks will employ risk models that are based on derivative indicators and academic assumptions about the statistical distribution of such events (defaults and restatements, for example) that do not accurately describe the real world.

We know that Enron ended very badly. We are seeing Chris Whalen warning of a very bad ending here from that 1998 off balance sheet banking model that Basel 2 applies now in 2004. Mr Greenspan came out as a good soldier to proclaim that adjustable mortgages could be a "better deal" for homeowners, in February, 2004. So much for ever trusting a Fed Chairman ever again.

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So that we are not limited to one analyst, we have the Wall Street journal in 2007 saying essentially the same thing. Thomas Greco of Beyond Money tracks that article and here is his view:

If you don't believe the pre-meditation involved please read the quote below from the Wall Street Journal, Nov. 27th. 2007:

"In 1998 the Basle Accord created the opportunity for regulatory arbitrage whereby banks could shift loans off their balance sheets. A new capital discipline that was designed to "improve" risk management led to a PARALLEL BANKING SYSTEM whose lack of transparency explains how the market started to seize up.

The "originate-to-distribute" model REDUCED THE INCENTIVE for banks to monitor the CREDIT QUALITY of the loans they pumped into collateralized-

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loan-obligations and other structured vehicles, the rules failed to highlight contingent credit risk""With Basle II, the question is just how the markets will evolve over the next 20 years". as the new accord will require banks to hold LESS CAPITAL".

The theme of the Wall Street Journal article is the same as Whalen's views. Less capital is required because we have loan guarantees from the government, from Fannie and Freddie. And this gets worse, as Basel 3 apparently wants permanent guarantees for loans from Fannie and Freddie.

Government guarantees will subject greedy bankers to the temptation of writing bubble mortgages, knowing that they will be guaranteed by more and more bailouts by the government. That is probably why the Tea Party frightens both the Republicans and Democrats in their hatred of bailouts.

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I am retired from Fresno County, and have been published on Seeking Alpha under the handle, Gary A. I also publish articles on my blog and at Hubpages. I view the housing ponzi bubble as a premeditated scam, and I look upon the current financial (more...)

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