Why would Wall Street go back into the same risky investments that toppled some of its biggest firms and nearly crippled the financial sector? Simple: The deals are just too good to pass up and, as the 2008 bailout showed, those on top will probably not suffer.

 

Once again, investors are putting their money into securities built from subprime mortgages—investments that were so bad six years ago, players were betting they’d fail.

 

Those banking on these risky deals include mutual funds like Fidelity and various hedge funds. Investors are watching the actions of the federal government. According to Azam Ahmed of The New York Times, “If banks have to pay for loans they issued under dubious circumstances, it would be a home run for investors, who could receive full payment for a mortgage in a security they bought at a discount.” But if large numbers of underwater borrowers are allowed to reduce their principals, mortgage bond investors could lose money.

 

Still, as Ahmed writes, “The attraction is the price. Some mortgage bonds are so cheap that even in the worst forecasts, with home prices falling as much as 10 percent and foreclosures rising, investors say they can still make money.”

 

Despite their toxic reputation, the mortgage bond market is still worth $1.3 trillion.

-David Wallechinsky, Noel Brinkerhoff

 

Bonds Backed by Mortgages Regain Allure (by Azam Ahmed, Hew York Times)