Wednesday, August 26, 2009
Experts on Wall Street have come up with a plan for moving the billions of dollars in mortgages that are still clogging the financial system and keeping banks from offering new loans: Take some bad loans, package them with some good ones, and sell them to investors willing to take a risk.
Wait. Isn’t that what they did before?
In what some observers are calling a case of déjà vu, industry executives are indeed using the same tactic employed before the financial collapse that resulted in a lot of money being tied up in high-risk ventures. “We’re back to financial engineering, absolutely,” Arizona State University economics professor Herbert Kaufman told the Associated Press. “But I think it’s being done at least differently than it was before the meltdown.”
One difference this time is investors who buy up the most toxic of packages must also be willing to guarantee a safer return for other investors who are more risk averse, in order to get enough buyers involved in the plan.
“There’s no voodoo going on here. It’s just math,” insists Sue Allon, chief executive of Allonhill, an investment advisory firm.
But this is a kind of math that could end up colored in red if the housing market doesn’t improve, or falls again.
-Noel Brinkerhoff
Solution or Just Deja Vu? Wall Street has New Way to Turn Mortgage Debt into AAA Bonds (by Matt Apuzzo, Associated Press)
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