Sometimes its good to think back to the way we were. Just to see how far we’ve come.
Let’s go back to March 08. Seems like another era – because it was.
Back then Trichet, head of the ECB said, the ECB did not approve of the FED’s policy of accepting rather dubious mortgage backed assets as collateral. To accept them was, he said, ‘to make the tax payer bail out the banks’. That would be morally hazardous, right? The ECB like the BoE accepted only the highest rated AAA assets and the BoE was loathed to accept mortgage backed assets at all. At the time I and many others applauded. So what happened?
This week the ECB lowered yet again what it will accept as collateral to BBB- rated assets. These are called ‘speculative’ and are just above junk bonds. If it were not for this most recent of many ‘easings’, Greece for one would not be able to exchange its government bonds for ECB loans. But it’s not only Greece. Spain, Portugal, Ireland, the list goes on, would all have much less to offer as qualifiying collateral were it not for the cash-for-any-old-muck policy that currently reigns.
Last year banks deposited 2.03 Trillion euros worth of assets with the ECB. That is a 28% increase from 2008. Why is it all at the ECB? Answer, they’ve no where else to go. If those assets had to be sold on the markets, buyers, real ones, would see what they were actually worth. Or so I claim. But am I right or just being a cassandra? What quality are all these assets really?
Well the ECB has started to ask itself the same question. You see, insane as it sounds the ECB doesn’t know. The banks have been bundling all sorts of different kinds of consumer and property loans together and call them Asset Backed Securities, ABS. Another name for them is Ask No Questions assets.
The bankers will tell you without this help, banks and whole nations would be in trouble. And they’re right. But does the danger go away if the EBC accepts all this stuff? Well in 2008 the ECB got shafted by 5 banks including part of Lehmans, when they defaulted on asset backed securities they had pledged at the ECB. The ECB had given them cash in return for asset backed bits of paper but when it came to it, the banks involved just said, ‘Oops! There’s nothing there actually. Bye and ‘thanks’ Sucker’!
Belatedly the ECB says it will start to insist that banks provide information about actual assets that underlie the securities. So don’t panic. The ‘preliminary’ work will be done on this proposal by September of this year and then the banks will have another year to comply. So that’s OK then.
In short the ECB is stuffed with crap.