Banks in `Downward Spiral' Buying Capital in CDOs Distrusted by Regulators

Banks in ‘Downward Spiral’ Buying Capital in CDOs (Update2)
By Yalman Onaran and Jody Shenn


June 8 (Bloomberg) -- U.S. banks are fighting to preserve the use of securities that help them appear better capitalized, even as their investments in each others’ notes perpetuate what one regulator calls a “downward spiral” of losses.

The cross-ownership, largely unnoticed by bank supervisors who generally discourage the practice, was made possible by a Wall Street innovation like the ones that allowed subprime mortgages to flourish. Small lenders, such as Riverside National Bank of Florida, were able to sell trust-preferred securities, known as TruPS, because investment bankers packaged them with those issued by dozens of other financial institutions.

Riverside, which started in a trailer in 1982, bought collateralized debt obligations made up of TruPS as it grew to 65 branches and $4.8 billion assets. When real estate soured and lenders racked up loan losses, Riverside and about 400 of its peers suspended interest payments on their TruPS, causing the CDOs to default or lose value and inflicting more harm on an industry suffering from the worst economy since the 1930s.

“The industry was self-financing, using loopholes in rules,” said Joseph Mason, a professor of finance at Louisiana State University in Baton Rouge. “Regulators weren’t keeping track of ownership of the capital, which became more difficult to do with the use of CDOs. The losses fed on each other.” ..........(more)

The complete piece is at: http://www.bloomberg.com/apps/news?pid=20601109&sid=at1nMiPm1tUE&pos=10

All the while they are sucking their own banks dry. This is what we bailed out.

Putting them up against a wall and shooting them would work too.