Euro-trash by Chan Akya
When the US Fed last week made an announcement that it would expand its Term Auction Facility (TAF), the idea was greeted with sardonic smiles across the boardrooms of European banks. After all, the Fed had only made operational in March what the ECB had been doing since last summer.
How it operates is quite simple. Banks gather all the collateral on their books that cannot be sold into the wider market and provide it to the ECB against which, following some minor valuation adjustments, the central bank provides immediate liquidity. This has proven quite useful in the current climate of poor liquidity in various market instruments.
Thus, we have found out that European banks have continued to issue billions of euros-worth of residential mortgage backed securities (RMBS) that are never sold to any investor. After securing the rating, the securities, which are simply paper representing actual mortgages in the books of various banks, are pledged as collateral to the ECB and liquidity lines are drawn.
In turn, this borrowing from the ECB is used to support the uneconomic overseas operations of European banks, ie their investments in US subprime collateral, poorly constructed collateralized debt obligations (CDOs) and the like. By not being forced to sell such assets, European banks continue to pretend that they have taken fewer losses than their US counterparts when the truth is the exact opposite.
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