Crime Against Humanity: the Holy GAAP, 30
And third party investors must be enticed to purchase the loans the banker has to get rid of anyway, SIVs or not SIVs. This entails two strategies: information gap and enticing dividends; third party investors shall be less informed than the banker about the degree of credit risk of the credits he’s selling them, and about their tempting dividens being artificially high. And both facets obviously set up the explosive charge and the fuse of a pyramid scheme and its deflagration.
I previously noticed how the IAS/IFRS definitions, starting from that of financial instrument, may potentially pave the way for sharing the banker’s “privilege” of creating purchasing power out of nothing with all sorts of financial entities, and here we face the “Originate−to−Distribute” model give raise (in their own words…) along with the contagion of speculative greed, to a spreading of banking itself across all sorts of financial entities without banking licences and thus outside the perimeter of associated regulations. Not that such regulations, given their premises, are to be considered more than a fig leaf, but now even that gets dropped. All things considered, I’d say that what we are watching here is no less than petrol pouring from innumerable cracks in an immense fuel depot. Going to be quite hot down here in a while.
For instance, the epitome of this pyramidal speculative contagion is the hedge fund: an intrinsically speculative creature, aimed at playing with fire, walking a tightrope, eluding regulatory oversight and requirements in order to play confidence tricks right where the risk is higher. In short, not only the intrinsically out−ethics core of finance, appropriating money out of money instead than out of delivered ethical production, but even worse making it one’s modus operandi of exacerbating it without limit.
The banker himself is of course at the head of this speculative drift: the loans granted are palmed off, margins of capital requirements and “funds” are replenished and ready for new adventures in no time, so full speed ahead! And new adventures means that, since the credit risk isn’t the banker’s problem any more, since granting riskier loans brings more loans, and at higher fees and profits, and since his Dr. Frankenstein’s “creature”, the third party investors’ greed, grows, the banker has every reason to surrender to the lure of, euphemistically speaking, “quantity at the expense of quality”.
