muses of the moment

May 5, 2012


Filed under: Credit Derivatives, Economic Crisis, ETF, Odds 'n ends, The Banking Crisis, The Financial Crisis — totallygroovygirlfriday @ 7:34 am

Golem XIV has two posts out on ETFs and his argument that exchange-traded funds will be the next crisis point. These are EXCELLENT descriptions of the ETF, how they work for the issuer funds and banks and work against the investors. And, more importantly, how banks have pumped them up even more in the last years and act as their own counter-party.

One excellent tidbit here, but read the both links:

In essence  it costs the banks money to have illiquid assets on their books. The repo markets won’t accept them as collateral unless they come with a deep haircut.   So the banks can do little with them except sit on them. Basically it costs the bank to have the illiquid, hard to sell or Repo, stocks on its books. But.. .if they happen to have created a handy synthetic ETF, then everything changes because,

For example, there could be incentives to post illiquid securities as collateral assets [in the ETF Swap]…. By posting them as collateral assets to the ETF sponsor in a swap transaction, the investment bank division can effectively fund these assets at zero cost….

Click here for part 1.

Click here for part 2.

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