with thanks to Jim Sinclair at http://www.jsmineset.com/ Posted On: Tuesday, November 13, 2007, 12:12:00 PM EST [SIZE=+1]Category 3 Assets and the Failure Of The Basel Agreement[/SIZE] Author: Jim Sinclair I have defined Asset Category 3 as a "Bat Guano Asset Category" Here is the why: Let's look at this through eyes of international investment banks, at least for starters. Please stay with me as this is the key to the crisis. There have been three basic agreements named the Basel Agreement of 1993, 1998, and 2006. The main objectives are limited to accounting community functions, categories, risk and therefore evaluation of those items where assets are concerned. It is apparent that the 1998 Basel Agreement had no idea what the size of off and on balance sheet assets were going to become via OTC derivatives, nor the complexity of these special performance contracts. The 2006 Basel Agreement was getting closer to knowing the size, but still did not entirely understand the operating risk of these awful pieces of paper. This accord of the 2006 Basel Agreement focused on the evaluation of risk based capital ratios as well as traditional leverage ratios. Their original focus was centered on the traditional category 1 and 2 assets. When looking at on balance sheet assets for category 3 and 4 they set potential risk at 50% and 100% respectively. Category 3 assets refer to loans fully secured by first liens on one to four family residential properties and the revenue for municipal bonds. What operation "White Noise" is used for is to camouflage the failure of the Basel Accord to consider or recognize that the assets in question are packed full of credit and default over the counter special performance contracts called OTC derivatives. As such the problem today really is not a category 3 asset, but is called that because there is some similarity. That is the foundation of operation "White Noise" in all its forms. The characteristics of the credit and default derivatives are: Without regulation. Without listing on public exchanges. Without standards. Therefore not in the least bit transparent. Therefore without an open market of the bid/ask type. Dealt in by private treaty negotiations. Without a clearinghouse. Unfunded without financial guarantee of any kind. Functioning as contracts of specific performance. Financial character or ability to perform is totally dependent on the balance sheet of the loser in the arrangement. Evaluated by computer assumptions made by geek, non market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions. Now in the credit and default category alone considered by accepted authorities as totaling more than USD$20 trillion in notional value. Notional value becomes real value when the agreement is forced to find a real market for ending the obligation which is how one says sell it. The Basel Accord coming out of the Basel Agreement of 2006 put the risk on these items as 50% of their stated worth. I propose the risk is greater that 100% on the items described above. The reason I say this is that the problem is credit and default OTC derivatives on CDOs which is a form of derivative themselves as a structured product, making these items exotic in their nature. Due to this, these special performance exotic options are impossible to value honestly. To value them at zero is a good start. When they kill a company it is zero plus the impact on that entity’s solvency which is therefore greater than 100% This entire dissertation is in defense of my statement that Category 3 assets under the Basel Accord of 2006 now equal “BAT GUANO ASSETS” under the cover of operation "White Noise." It is these bat guano assets that are melting down everywhere. As such this is without any question a derivative crisis.
As always, paper be damned. You have to rely on the words spoken by the ones you want to trust. There is a message there, alright, and those that believed the words on those derivatives simply wanted to do so. Paint a skunk cabbage red does NOT make a rose thereof.
