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Wednesday, September 7, 2011

shady EU bank legislation

The EU is crossing the fine line of mark-to-model to mark-to-imaginary. I find this troubling if not handled very properly. It is troubling because if not handled properly it will allow for  (literally) imaginary markings of bonds. The regulators themselves will not know which banks are legitimately going under. It will add to the decrease in transparency, and further prevent interbank lending.

I did not think the EU policy makers can get stupider, but it is showing me it can.

If we were in a credit freeze, mark-to-model is legitimate because there is no liquidity to drive true price discovery that mark-to-market depends on.  However, the above proposal blatantly ignores the actively true price discovery of a functioning market, and says that market is wrong. Despite plenty of liquidity, and no credit freeze.  Basically, the banks can declare the value of a bond what ever the fuck they want to declare it.  Hence, mark-to-imaginary.

The banks will wake up one day and realize they have no money in reserves. Oh wait, no, the Fed will give them the heads up that their reserves are dwindling fast (as they did in mid August), and then realize they have no capital left.

This proposal is stupid, stupid, stupid!!!!!

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