2008-11-11ml-implode.com

Counting deferred tax assets as “regulatory capital” is totally foolish. The regulatory capital of a financial institution is supposed to be the reserves it has on hand to pay off liabilities in case it hits the skids.

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Capital adequacy rules are the only financial regulations that count. Having a government beauracrat look over a financial institution’s shoulder doesn’t mean anything unless you force the institution to keep enough money in REAL RESERVES to protect depositors, bondholders and others to whom it would owes money in the case of default. In their continuing idiocy, both Democrats and Republicans (but especially Dems) encouraged Fannie and Freddie to lend hundreds of billions without making any additions to their capital base.

And even though our biggest banks are themselves WAY overlevered (think 100:1 when you back out faux reserves and include off-balance sheet liabilities) Congress is telling them to lend more to keep the economy going! This is beyond foolish.


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