Sunday, September 5, 2010

The Stunning New Global Regulations that Will Put More Money in the Hands of Governments and the Power Elite

Governments like to operate deep in complex technical details, when they are up to really no good. Few in the general public understand or pay attention to complex technical details of obscure regulatory moves, though those moves can be highly damaging for a country's citizens.

In Basel, Switzerland, global banking capital regulations, known as the Basel III rules, are in the process of being finalized.  The rules are nothing but a stunning move by governments and the elite to direct money flows in their direction. When implemented, it will, over time, result in a lower standard of living on a global level for nearly all and greater separation between the super-wealthy tied in with global governments, and the rest of us.

The committee drafting the new Basel III rules will meet in Switzerland on Tuesday. A final set of rules is expected to be agreed on September 12. The leaders of the Group of 20 nations are expected to then endorse the rules when they meet in November.

I have regularly warned that banking capital requirements are a means by which governments can force banks into holding certain securities at the expense of other investments. Thus, those favored by capital requirements squeeze out other investments that banks would make on their own.

The stunning manner in which Basel III will force banks to make "investments" in government and elite favored organizations is like nothing ever seen before. Indeed, incredibly, ranked as top tier investments that banks will be forced into buying will be sovereign debt that is on the edge of collapse and the edgy paper of Fannie Mae and Freddie Mac!

CNBC's John Carney has the stunning news:

A little noticed change in the proposed rules...could throw a monkey wrench into plans to reform Fannie and Freddie, the two mortgage giants that have spent the last two years on government life-support. So far, U.S. taxpayers have been forced to pony up around $150 billion for Fannie and Freddie, and the Congressional Budget Office says that the total cost could amount to three times that much...

Policy makers who hoped to eventually remove the costly government subsidies and guarantees for Fannie and Freddie will run into a stumbling block, however, if the Basel III rules are implemented. That’s because Basel III includes a liquidity requirement for banks that will encourage them to buy the debt of the Fannie and Freddie as well as the mortgage-backed securities they back...

Right from the start, the way the Basel Committee defined “high-quality liquid assets” was problematic. It included cash and central bank reserves, relatively non-controversial highly liquid assets. But it also included sovereign debt, a move that would inevitably encourage banks to hold more sovereign debt than they otherwise would. This is problematic for two reasons—it created an implicit subsidy for spend-thrift governments and it created the danger of over-exposing banks to sovereign defaults.

Recent amendments to the Bear Stearns Rule have extended this subsidy to Fannie and Freddie. The Basel Committee decided to include the debt of “Government Sponsored Entitites”—bureaucratic code for Fannie and Freddie—in the definition of “high quality liquid assets.” What’s more, it also included mortgage-backed securities guaranteed by Fannie and Freddie in the definition.

Up to 40% of a bank’s liquidity reserve can be made up of GSE obligations, under the rules likely to be approved in the next few weeks. And while it is true that these obligations get a 15% haircut under the rules because they are considered “Level 2” liquidity assets, compared with the cash, central bank reserves and sovereign debt that will now be considered Level 1 assets.

This creates a huge subsidy for Fannie and Freddie. Banks will load up on GSE obligations, especially in an era where central bank reserves and Treasury bond yields are being depressed by policy-makers seeking to keep sputtering economies afloat. This artificial demand will scramble market signals about the risk taken on by Fannie and Freddie—all but ensuring that Fannie and Freddie will once again unwittingly take on more risk than they can handle. In short, the very same toxic situation created by the once implicit government subsidy of Fannie and Freddie is being baked right into Basel III.

Perhaps even more troubling, this will create a vicious cycle that will make reform of Fannie and Freddie next to impossible. Once banks have loaded up on Fannie and Freddie obligations, there will be no way for the U.S. government to remove government guarantees without triggering a liquidity crisis in banks around the world.
Bottom line: The highly technical Basel III rules are all about driving bank money, on a global scale, away from making what banks would consider prudent investments and forcing them into investments into often highly questionable paper such as sovereign debt and Fannie and Freddie paper.

This on the one hand creates huge moral hazard since the banks know that they can buy this paper without fear of default, since with the Basel III rules stuffing this paper in banks globally, they know that this creates huge systemic risk and that, thus, governments will always protect this paper from default. Any such bail out would, of course, result in significant new inflation on a global scale.

Outside of various forms of government paper, the only other paper with a high ranking under Basel III rules will be certain non-financial large corporation debt. This will, of course, drive bankers to buy this debt, also over other investments. Thus making the interest rates cheaper for these corporations and creating a competitive advantage over other corporations who will not be able to get this favored interest rate, and will also crowd out other debt seekers.

Bottom line: The Basel III rules which are about to be approved by the Group of 20, in November, and will be trumpeted by governments and mainstream media as a major step toward global protection of the banking system from the type of financial crisis we just experienced, is nothing of the kind. It is nothing but a huge power grab directing money to governments and the elite. Further, since it drives banks to buy extremely risky debt, it will result in making the global banking system more unstable, and set the stage for a huge global inflation, when governments will be forced to bail out these bad investments by printing more money.


  1. I'd say this is very problematic, unfortunately the average person probably has no clue as to how serious all this is. In some regards that's a good thing for investor and consumer confidence, and in other regards, well, it's as scary as hell, because they just don't realize the impact of traveling down this road.

  2. Just when you thought it couldn't get any worse - it does!

  3. Robert, I like your article. I posted a similar article on Seeking Alpha. Please email me if you can find out about whether this nightmare comes true at bgamall4 at yahoo Here is my article which I hope I can show here:

    I don't see the Tea Party getting engaged in this. I don't think they want to see the casino end. This Basel 3 push will keep the casino going.

  4. I don't fully understand these Basel rules besides the fact they will pressure banks to invest in select government projects but do certain governments/countries receive preference? Who decides who gets what?