Crime Against Humanity: the Holy GAAP, 27
Whereupon what follows is a brave new form of banking they deemed fit to label, more and more suggestively, “contingent commitment banking”, “assetless banking”, “banking below the bottom line”, “invisible banking” or “shadow banking system”, which is characterised by a slightly different – actually antithetical, as we’ll see – model, called “Originate−to−Distribute”. The banker originates the loan, and then sells it; he cashes in the payment, and the buyer becomes the holder of the related credit the borrower shall pay back. The corresponding receivable is booked as an asset in the purchaser’s balance sheet, not in the banker’s, where only the proceeds from the sale remain.
The reason for this shift from “Originate−to−Hold” to “Originate−to−Distribute” may in turn be labelled, “throw the stone and hide the hand”.
Still leaving aside that negligible detail that what is loaned is originated out of thin air and its very existence is rather ambiguous, as well as the considerable implications, when one loans something one exposes oneself to the risk of losing that something, should the borrower fail to return it, in all or in part. Hence, due diligence in granting loans. A twofold due diligence: self−imposed and required.
Self−imposed due diligence is merely dictated by the awareness of the risk: to the degree of the risk one is aware of, one commits to minimize it.
Required due diligence is dictated by law and it is aimed at preventing one from becoming too big a risk to others. By nature, the community and the state as its expression are bound to pick up the pieces and patch things up when someone’s out−ethics behaviour produces more damage than benefit, therefore on this ground they tend to guard against such behaviours in advance. In the case of banking, the term “moral hazard” explains this well: the newspaper “The Economist” of 18thDecember 1987, on page 92, has been quoted as stating that “banks simply booked the fees and forgot the risk”, relying on the assumption that customers were protected by explicit and implicit insurance coverage… just from the very regulatory agencies. Hence, required due diligence in banking takes the form of capital requirements.
