Oh oh....( #2)

[dixiegrrrrl]

I am providing link below, but want to tease out the important issue in plain English.

the Basel Committee on Banking Supervision ( read: the bank that runs the IMF and World Bank)
has proposed new rules for banks across the globe ( meaning USA and Europe, etc)

One proposal is this:

The proposals claim to "tighten" a bank's capital requirements, one way they propose to do this is to count
the dodgy mortgage bonds from Freddie and Fannie Mae as "liquidity reserves".

These bonds have NO underlying guarantee.
They are garbage, and have been passed around from banks to Freddie/Fannie like rotten hot potatoes.
Now the banks can legally buy them back and claim they have value, as "capital reserves".

In other words, short term bank cover-up now, extend and pretend solvency.

For those of you who want the bigger story, here is the key part, link under that:

The Basel Committee decided to include the debt of “Government Sponsored Entitites”—bureaucratic code for Fannie and Freddie—in the definition of “high quality liquid assets.” What’s more, it also included mortgage-backed securities guaranteed by Fannie and Freddie in the definition.

Up to 40% of a bank’s liquidity reserve can be made up of GSE obligations, under the rules likely to be approved in the next few weeks. And while it is true that these obligations get a 15% haircut under the rules because they are considered “Level 2” liquidity assets, compared with the cash, central bank reserves and sovereign debt that will now be considered Level 1 assets.

This creates a huge subsidy for Fannie and Freddie. Banks will load up on GSE obligations, especially in an era where central bank reserves and Treasury bond yields are being depressed by policy-makers seeking to keep sputtering economies afloat. This artificial demand will scramble market signals about the risk taken on by Fannie and Freddie—all but ensuring that Fannie and Freddie will once again unwittingly take on more risk than they can handle. In short, the very same toxic situation created by the once implicit government subsidy of Fannie and Freddie is being baked right into Basel III.

Perhaps even more troubling, this will create a vicious cycle that will make reform of Fannie and Freddie next to impossible. Once banks have loaded up on Fannie and Freddie obligations, there will be no way for the U.S. government to remove government guarantees without triggering a liquidity crisis in banks around the world.

http://www.economicpolicyjournal.com/2010/09/stunning-new-global-regulations-that.html