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China is preparing to launch a program that will create the same complex debt-instruments that triggered the global financial crisis in 2008.
The purpose of securitization is not to boost lending to consumers or businesses, but to recycle securities and cash between the banks themselves in a way that masks the buildup of leverage. (“the buyers of the securities will be mostly banks.”) And the buildup of leverage is done in a way that puts the entire financial system at risk. (“securitization …could leave China’s banking system with less of a buffer for loans that default.”) In other words, the banks may not have enough capital to meet their liabilities. This is precisely what happened in the so called shadow banking system prior to the Lehman Brothers default. China is now taking the first step on that same path.
Securitization makes periodic meltdowns unavoidable since bank leverage is not regulated and since the underlying collateral used in the bonds is not supervised. It’s “anything goes”, which means disaster is never far off.
So, the 1 percent can scoop the cream off the top (like they did in the US and EU) before the whole thing blows up in their faces. That’s why.
"Chinese and Japanese banks, they are really following and supporting their clients into the Australian resources industry, and filling the gaps left by the withdrawal of the European banks," said Andrew Dickinson, a partner in KPMG's Australian Financial Services division.
“Despite the cautious approach adopted by Chinese regulators, securitization boasts risks that could leave China’s banking system with less of a buffer for loans that default. That is because any buyers of such repackaged products sold in China’s still-underdeveloped capital markets are likely to be banks themselves. “In China, risk transferring through securitization will be limited because the buyers of the securities will be mostly banks, and, therefore, most of the risks remain in the banking system,” said Yvonne Zhang, a Beijing-based senior banking analyst at Moody’s Investors Service. In addition, Ms. Zhang said, “If banks, with the capital relief, go on to take on more risks in their new lending, it could also increase the risks for the banking system.”
China began allowing asset securitization on an experimental basis in 2005, but put the experiment on hold in 2007 when the technique became a byword for problems in the West.
Former billionaire Allen Stanford was sentenced to 110 years in prison on Thursday for running a US$7 billion scheme in which he stole money from his investors to finance an extravagant lifestyle in the Caribbean. U.S. District Judge David Hittner said Stanford's actions were among the most “egregious criminal frauds,” and investors who lost money said Stanford's crimes were worse than those of Bernard Madoff, another Ponzi schemer.