Showing posts with label mortgage backed securities. Show all posts
Showing posts with label mortgage backed securities. Show all posts

Monday, January 13, 2014

The Economist likes securitisation.

Securitisation, the banking scam that brought us great depression 2.0.  The Economist thinks we should bring it back.   Used to be, when banks or companies needed to borrow money, they issued bonds.  Pieces of paper that promised to pay back with interest, money in the future.  Investors pay cash to receive a paper promise.  If the promiser is creditable (for example Boeing, or US Treasury, or Apple)  investors line up happily to exchange cash for promises of more money in the future.  If the promiser is not credible (for example Greece)  no one will buy them. Banks, are something of a special case.  There are limits to the number of bonds a bank can issue.
   So, in the early 2000's the banks invented a new deal.  They issued "bonds" that were "backed" by something, home mortgages, or accounts receivable, or other intangible paper assets.  The banks said "the asset backing this bond makes it like a car loan or a home mortgage.  If the borrower doesn't pay on time we can repossess the car or the house."   Investors were gullible enough to buy these "backed" band bonds.   Things blew up in 2007 when investors found that the "assets" "backing" these bonds were sub prime home mortgages in default.  And they found that they didn't have the right to repossess the houses.  Losses from "mortgage backed securities" were bad enough to kill GM, Lehman Brothers, AIG, and some Euro banks whose names escape me now.  This kicked off Great Depression 2.0 from which we have still not recovered.
   The mortgage backed securities are way for banks to borrow money from gullible investors.  Actually, banks should not borrow money.  They are supposed to lend it.  Banks should acquire funds to lend by attracting depositors, and selling bank stock.  Depositors are insured so they will park their money anywhere with the  FDIC sign.  Investors who buy bank stock know their investment is only as safe as the bank itself.  So stockholders insist that the bank be careful with their money and not make loans that may not be paid back, no matter how lush the returns are.  In short, bank stock holders are conservative and will keep their bank from doing stupid things.  Like lending money to Greece.  The way we create a stable financial system is to make the big players into careful players.
   If the big players borrow money, they pretty much do what they please.  If they have to raise money by selling stock, they give up a certain amount of control  to the investors, which keeps 'em careful. 

Sunday, December 8, 2013

Good Day at BlackRock

The Economist is unhappy about BlackRock in a cover story.  The cover cartoon shows an enormous jet black Rock-of-Gibraltar leaning over the two lane road ahead, threatening to topple and block all traffic forever.  BlackRock is a Wall St brokerage house, that buys and sells stock for its clients.  It was founded in the '80s and has done pretty well, it has $4 trillion in assets.  Part of BlackRock's success is a computer back office that tracks stocks and has made some canny predictions.  It was canny enough to keep BlackRock out of the mortgage backed security black hole back in 2006.  In fact it was so good that BlackRock now leases access to the system, bringing in $400 million in fees per year.  The system, dubbed Aladdin, is so popular on the street that the Economist reckons that another $11 trillion in stocks is controlled by Aladdin, giving a grand total of $15 trillion under the influence, or perhaps control, of this one piece of software.  That's quite a chunk of change, the entire US economy is about that size.
   This concentration clearly bothers the Economist.  If they had a say in the matter, they would put BlackRock under strict government regulation, lest they hiccup and crash the stock market.  Good thing the Economist isn't in charge.