On the money

Per Kurowski is absolutely right [Holy moly: Banks were drugged by Basel’s rulebook, yesterday]: the reason for the evolution of the collateralised debt obligation (CDO) debacle and especially the emergence of the synthetic variety of this was that decision making was driven by an artificial “risk structure” for asset holdings propagated by the idea that you could mark certain assets as having effectively no risk. It was not that the markets took too much risk and blew up, so much as the stuff that did blow up was classified as having zero risk in (shadow bank) balance sheets under Basel rules. Now everyone is suddenly buying into European banking shares because they see a de facto long-term refinancing operation (LTRO) bail-out of banks’ risk profiles – once again, banks can own “risk free” assets, known as government debt.

Chris Tinker