Analysis of Cases

Lack of Transparency and Opaqueness: Off-balance sheet transactions can mislead regulators, stockholders and depositors about the financial health of bank, and the quality of its management. Banks assets could be in much more risk than they want to assume.

Manipulate Regulatory Assessment: Capital requirements cause banks to keep those loans that carry a greater risk premium than their cost of capital, i.e., their regulated assessment. These are the less creditworthy loans. They securitize those loans than have less risk and therefore are given a lower rate by the market. The bank’s gain comes at the cost of FDIC.

Pricing Securities: Regulators have a great deal of trouble assessing the risk to the banks or other institutions in their packaging, servicing, and selling of these securities and their optimal pricing. While Institutions favor “Marking-to-Model” due to lack of active secondary markets, “Marking-to Market” may be more appropriate.

Evaluating Risk: Regulators also have trouble assessing the proper capital reserves requirement for any commitments made by these banks to enhance the creditworthiness of the securities. The most common enhancement offered are: SLC, a standby letter of credit, is issued by the bank for a fee and the bank then insures the loan up to a specified amount. SLC are senior claims in the event of bank failure, and thus shift risk to the FDIC.

Leveraging: Global Crisis of Confidence and Contagion Risk

Historically banks, and other loan originators sold fixed-rate mortgages to government-sponsored agencies.

The FHA and the VA insure home mortgages, which makes them more marketable. They do not purchase mortgages themselves. These agencies issue guarantees or insurance, reducing the risk for investors in these loans.

The Loan originators packaged these loans into mortgage