

Three Myths about the Crisis: Bonuses, Irrationality, and Capitalism - cwan
http://causesofthecrisis.blogspot.com/2009/09/three-myths-about-crisis-bonuses.html

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miked
This was interesting:

 _...the question is why bankers bought those triple-A mortgage-backed
securities, and the answer may well lie in the regulations promulgated by
government officials.[6]

Had bankers been looking for the safety connoted by triple-A ratings, they
could have bought Treasurys, which were even safer. If they were looking for
yield, they could have bought double-A or lower-rated bonds. And why mortgage-
backed bonds? The answer seems to be an obscure rule enacted by the Fed, the
FDIC, the Office of the Comptroller of the Currency, and the Office of Thrift
Supervision in 2001: the Recourse Rule, an amendment to the Basel I accord
that governed banks' capital minima.

Under the Recourse Rule, an AA- or AAA-rated asset-backed security, such as a
mortgage-backed bond, received a 20-percent risk weight, compared to a zero
risk weight for cash and a 50-percent risk weight for an individual
(unsecuritized) mortgage. This meant that commercial banks could issue
mortgages regardless of how sound the borrowers were sell them to investment
banks to be securitized, and buy them back as part of a mortgage-backed
security, in the process freeing up 60 percent of the capital they would have
had to hold against individual mortgages. Capital held by a bank is capital
not lent out at interest; by reducing their capital holdings, banks could
increase their profitability._

Fascinating read.

