Wikinvest Wire

Reflating the system

Monday, August 24, 2009

Anyone doubting that the system that failed so gloriously over the last year is now in the process of being pieced back together should have a look at this story at the Associated Press:

Remember me? Wall Street repackages debt for sale

Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It's a lot like what got banks in trouble in the first place.
In recent months, banks have been tiptoeing toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

"You've now taken what was an A-rated security and made it eligible for AAA treatment," said Richard Reilly, a partner with White & Case in New York.
The sweetener at the heart of the deal is a guarantee: Investors who buy into the really risky pool agree to also take some of the risk away from those who buy into the safer pool. The safe investors get paid first. The risk-taking investors lose money first.

That's how the safe stack of bonds gets it AAA rating, which is crucial to the deal. That rating lets banks sell to pension funds, insurance companies and other investors that are required to hold only top-rated investments.
Of course, if home prices go down instead of back up, the whole thing could fall apart...


Anonymous said...

With 90% good mortgages and 90% employment theres goy to be a market somewhere,

Anonymous said...

10% percent unemployment does not mean 90% employment. Clinton changed all of that in the 90's. More and more people are not being counted every month. Last month we lost 247,000 jobs and unemployment went down. If one out of every 3 mortgages are underwater then 90% are not good. Please people, learn this.

bevo said...

It seems that this scheme relies on the debt rating agencies. Aren't these the same agencies that got us in trouble early and late in this decade?

Why have we not changed the role and purpose of the ratings agencies?

Anonymous said...

The scheme relies on someone believing in the tooth fairy. Sadly, that is probably still viable.

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