Commentaries

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The capital games that banks play

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Treasury Secretary Timothy Geithner’s call for the global banks to set aside bigger capital cushions to better absorb losses on souring securities and ailing loans is a good idea. But that alone won’t be enough to prevent another crisis.

Regulators must also clamp down on the kind of AIG-engineered deals that legally enabled German, French, Dutch, Danish and other European banks to dodge existing capital rules and free up some $400 billion on their balance sheets.

It has become all too popular to characterize last year’s bailout of AIG as an attempt by the federal government to funnel about $50 billion to Goldman Sachs and a handful of other banks.

But the collapse of AIG would have caused even greater hardship for dozens of largely unknown European banks that entered into so-called “regulatory capital relief” transactions with the giant insurer.

You’ve come a long way baby

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Though Goldman likes to downplay its own vulnerability during the financial meltdown last fall, its CDS levels provided by CMA DataVision paint a different picture. They also show just how far the company has come since the government pledged to support the big Wall Street banks through TARP and the FDIC bank debt guarantee program.

Tuesday’s earnings, especially its record FICC net revenues, show that the bank is standing firmly on its two feet, but let’s not forget how it got there.

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