Player3746 wrote:...The loans were repackaged as bonds that were sold to other banks and as a result of the repackaging, the loans could be removed from the accounts and the bank would believe (incorrectly) that they would be absolved of these loans. Consequently, by removing the loans, the banks would lend more money - albeit money they didn't have. As you said, bank workers would earn huge bonuses while having no care in the World for the impact this would have.
No, that's not how it worked. The loans were never "removed from the accounts". The loans remained in the accounts; they were simply being financed by securitised bonds, rather than by deposits. Banks cannot lend money that they don't have. They have to get the money from somewhere. Balance sheets always balance.
It was however the case that banks used Special Purpose Vehicles to issue these securitised bonds, and went through a a certain amount of jiggery-pokery so that they could exclude these SPVs from their risk weighted assets so that they didn't need any extra capital to support these loans. Following the argument that this lending posed no risk of loss to the bank because they were legally owned by the SPV. This was bonkers, and proved to be bonkers when it turned out that a lot of this lending was not of the 'best quality', and the banks concerned had to eat the losses.
Which is to say that, flag-waving populism about the greed of banks really misses the point. What we are talking about in terms of the cause of our recent banking problems is a failure of banking regulation. Which in terms of the UK, would be because the idiots in charge at the time (Bonkers Brown and Co) hadn't got a clue about banking regulation.
Thank all that is holy that the Coalition government that followed at least had a clue, put the Bank of England back in charge of banking regulation, and we at least now have someone going around telling banks they need more capital.