Sunday, November 4, 2012

Evolution or Intelligent Design?

1986, from Luke Smith:

What relevance are capital requirements when a special purpose vehicle (SPV) can be used to shift liabilities off the bank's balance sheet? That is what Citi and other banks had been doing after Basel II, initially created by the 1986 Tax Reform act.

1989, from William F Hummel:

In 1989 the U.S. adopted the capital requirements established by the Bank for International Settlements (BIS) in Basel, Switzerland.

Mighty convenient that the 1986 tax law changes preceded the 1989 adoption.


Two interesting sites, by the way
Luke Smith:
W.F. Hummel:

1 comment:

Luke Smith said...

The 1986 tax law created a tax strategy to promote mortgage origination - initially designed for the struggling S&L industry - called a Real Estate Mortgage Investment Conduit (REMIC). There was even a so called STREMIC (securitized-REMIC) which dealt with the complex "residual" payments from a CMO.

When SPVs created by banks like Citi had their credit downgraded it made it difficult (or impossible) for them to roll-over the asset-backed commercial paper (ABCP) issued to finance the mortgages.

Non-banks, like GE and Enron, haved used other SPVs. They have positive benefits but carry substantial risk.