Regulators To Treat Calif Warrants Like General Obligations

Dow Jones via Beurs ^ | Donderdag 09 Juli 2009 | Michael R. Crittenden

[PAR35]

WASHINGTON -(Dow Jones)- U.S. regulators told banks Wednesday that registered warrants being issued by the state of California will be treated similarly to other general obligations of the state.... For capital purposes, the guidance from regulators said, this means the warrants would receive a 20% risk weight

[PAR35]

Short story, not much can be posted after excerpting.

It appears that the feds have come through and will give the banks favorable treatment on the Calif. warrants, rather than forcing them to recognize the true risk.

[PAR35]

Pingworthy?

[icwhatudo]

In English please-lol

[rabscuttle385]

*Ping!*

[steve86]

In English please

Backdoor bailout.

[TenthAmendmentChampion]

Warrants = IOUs.

[PAR35]

In calculating capital adequacy, the risk of the asset is factored in. So if the asset is a loan secured by real estate worth twice the debt (or a more extreme example, a $50,000 loan secured by a $100,000 CD) the ratio might be zero - there is almost no risk. An unsecured loan to someone who wanders in off the street, where no credit check is done, should probably get a 100% ratio.

What the regulators have said here is that the California warrants are no worse than any other state general obligation from any state, so they will get a 20% ratio for determining capital adequacy. For regulatory purposes, warrants are almost as good as cash reserves. (Remember, loans are assets, checking and other deposit accounts are liabilities).

For a general discussion, see

http://en.wikipedia.org/wiki/Capital_adequacy_ratio

[Costumed Vigilante]

Calling these IOUs "warrants" is quite disingenuous. Warrants are effectively liens on shares with value based on capital or liquidity.

California's future tax receipts are not in this category.

They are Monopoly money.

A verbis ad verbera

[Leo Farnsworth]

During the Depression, my Grandfather - a judge - was issued warrants by the state of Montana for 1 1/2 years. He just kept them, knowing one day he would get paid. Yes, he had some wealth, but it was a difficult time.

My point: warrants are nothing new...

[bankcritic]

The trouble will come when banks start trading those warrents off to other buyers and charging a premium on them. This kind of seems like the banks buying savings bonds from the state, only they’re more liquid.