Tom Jacobs

When Banks Stop Underwriting

First off, banks have historically used these loans and lines as loss leaders with the internal argument that getting at the rest of the wallet requires using the balance sheet to get in the door. The regulatory differences between commercial and investment banks regarding how these were booked used to dramatically favor the commercial banks (obviously not an issue anymore). Thus, the development of the CDS market provided a means for those within commercial banks trying to impose some discipline on the large corporate loan business to provide an external metric as opposed to asset swapping illiquid bond spreads. Tying to CDS while as you say somewhat removes the monitoring function, is it really believable that loan officers really have much in the way of unique private information on the large companies which have active CDS markets like Nokia? I don't think so.

On the evils of derivatives arguments it just gets worse and worse. Just because Warren Buffet blew his due diligence on General Re:

"When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.

But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability."

(from:

www.myprops.org/conten.../

we are now saddled with the endless doom and gloom over products that are great for clients when they reach commodity status but always cause problems when banks first develop them since clients are so easily convinced to pay a lot for something they don't need unlike the rest of human experience with the sales process. The misrepresentation by all of these ignorant pundits is really sickening.