Remember how this (first) financial crisis happened? In one word - 'Securitization'. Banks normally couldn't - or wouldn't - extend too many high-risk loans because under the current rules capital requirements are 'risk-adjusted', which means you have to have higher capital buffers against higher risk loans. To get around this problem - a problem, that is, if you want to make a quick buck on the back of your creditors - the banks turned pools of these toxic loans into 'securities' that they then paid credit ratings agencies to stamp with their approval as 'ultra-safe'. Presto: minimal capital buffers required. What could possibly go wrong...?

So securitization turned out to be a big scam that the tax-payer is now footing the bill for. That seemed the end of securitization, everyone knows it's a scam. Right? ....RIGHT???

And yet, somehow all these banks with all these toxic assets still on the books seem to feel no need for raising capital and are posting bumper profits once again. What's going on? It seems those golden boys have found a wonderful solution to the securitization debacle: REsecuritization.

No, seriously. This isn't a joke. They are taking all those toxic securities in residential and commercial mortgages and repackaging them. Because the credit ratings agencies have had to start to concede the reality that these securities aren't really ultra safe. They are threatening to - horror, shock - downgrade the ratings on this stuff. Downgrades mean the bankers have to raise capital, which would be bad for their stock options (as shares get diluted), and post more in loss provisions, which is bad for profits. So that ain't going to happen. Instead, the banks have decided to transform the toxic securities into new securities that they are paying the ratings agencies to stamp with their oh so credible seal of approval as AAA. What could possibly go wrong?

This is how the banks are doubling down on their bets that the economy will, somehow, magically turn around and these supposedly toxic assets will turn out to be delicious honey. After all, they're not playing with their own money. It's the tax-payer who's guaranteeing all the bank's credit. Meanwhile the bankers get their bonuses and shareholders get their dividend.

This is what happens when you have Geithner, Summers and Bernanke running financial policy: see no evil, hear no evil, speak no evil. When these losses eventually need to be realized, and then socialized, they will give the only reasonable response: whocoodanode???!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeTzfvEedKpQ
http://www.ft.com/cms/s/0/47403c68-698f-11de-bc9f-00144feabdc0,dwp_uuid=eddfd4e0-4bc3-11da-997b-0000779e2340.html

(N.B. This new scam is just the last addition to the panoply of ways in which regulators are helping banks disguise eventual losses, among them, suspending mark to market accounting, misleading purchase accounting rules, etc.)