Wall Street Carries on as Usual
Published in Z24
(Netherlands) on 10 September 2009
by Mathijs Bouman (link to original)
(Netherlands) on 10 September 2009
by Mathijs Bouman (link to original)
Translated from
by Dorian de Wind.
Edited by .
One year after the fall of Lehman Brothers, commercial banks are returning to their old ways. Who wants to buy a beautifully packaged mortgage?
"Financial weapons of mass destruction," that's what top investor Warren Buffet called the Wall Street credit derivatives already in 2003.
The "mega-catastrophic risks" of the new financial products posed a threat to the world economy. Five years later, Buffet proved to be more right than he himself would have imagined.
Background
The mortgage backed securities, collaterized debt obligations and credit default swaps of the American banks brought the world economy to the edge of the abyss.
Next week is exactly one year ago that Lehman Brothers went down. The remaining commercial Wall Street banks--kept standing with billions of American taxpayers' dollars--are slowly scrambling back up to their feet.
They are licking their wounds. And then...then they pick up where they left off. There is still so much money to be made in the derivatives market!
While politicians are tackling new rules for the sector, the whiz kids in Wall Street are already busy making plans for bursting the next bubble.
New Game
The buying and selling of life insurance policies is becoming the new game. Americans who do not want to wait until they die, sell their life insurance policies to an investment bank for half or less of the value of the future benefit.
The bank then clips the insurance policies into pieces, bundles pieces of various policies and resells the bundles---or bonds---to investors.
Potentially, we are talking about a $500 billion market, estimated an expert, Saturday, September 5, in the New York Times. Of course there is hardly any oversight over this market and the trading takes place "over the counter," thus not in a transparent exchange market.
Toxic Mortgages
In the meantime, other bankers are trying to breathe new life into the market for securitized mortgages. Why would you want to make the same mistakes with new derivatives, when you can do that with the old ones?
The banks still have many mortgage derivatives on their books, or on the books of a "shadow bank." There has to be something edible than one can bake from these toxic mortgages?
Of course. The new dish is called "re-remic." It stands for "Resecuritized Real Estate Mortgage Investment Conduits." Old derivatives are taken apart and with the remains bankers build new, marketable products. The same garbage dressed up as a crispy pastry.
Morgan Stanley estimates that at least $30 billion worth of re-remic products have been done. Who cried out that Wall Street has to change? Don't be silly. To change is so 2008!
More Risk
But weren't the Wall Street banks not compelled to take fewer risks? When all banks appealed for government support in 2008, that was only possible if they transformed themselves into "regular banks.”
The result was that they had to comply with stricter regulations. For example, Goldman Sachs would have to have much fewer risky investments on its books.
The Federal Reserve Bank gave the banks quite an amount of leeway to take care of the necessary adjustments. It turns out now that such was a strategic mistake.
According to a group of American Members of Congress, Goldman Sachs is taking on more risk now than in May of 2008. At the end of July, they sent a letter to Fed-president Ben Bernanke wherein the members of Congress ask for clarification.
On Wall Street they are laughing themselves silly. By the time that letter is answered the bankers will have blown three new bubbles--and burst them.
"Financial weapons of mass destruction," that's what top investor Warren Buffet called the Wall Street credit derivatives already in 2003.
The "mega-catastrophic risks" of the new financial products posed a threat to the world economy. Five years later, Buffet proved to be more right than he himself would have imagined.
Background
The mortgage backed securities, collaterized debt obligations and credit default swaps of the American banks brought the world economy to the edge of the abyss.
Next week is exactly one year ago that Lehman Brothers went down. The remaining commercial Wall Street banks--kept standing with billions of American taxpayers' dollars--are slowly scrambling back up to their feet.
They are licking their wounds. And then...then they pick up where they left off. There is still so much money to be made in the derivatives market!
While politicians are tackling new rules for the sector, the whiz kids in Wall Street are already busy making plans for bursting the next bubble.
New Game
The buying and selling of life insurance policies is becoming the new game. Americans who do not want to wait until they die, sell their life insurance policies to an investment bank for half or less of the value of the future benefit.
The bank then clips the insurance policies into pieces, bundles pieces of various policies and resells the bundles---or bonds---to investors.
Potentially, we are talking about a $500 billion market, estimated an expert, Saturday, September 5, in the New York Times. Of course there is hardly any oversight over this market and the trading takes place "over the counter," thus not in a transparent exchange market.
Toxic Mortgages
In the meantime, other bankers are trying to breathe new life into the market for securitized mortgages. Why would you want to make the same mistakes with new derivatives, when you can do that with the old ones?
The banks still have many mortgage derivatives on their books, or on the books of a "shadow bank." There has to be something edible than one can bake from these toxic mortgages?
Of course. The new dish is called "re-remic." It stands for "Resecuritized Real Estate Mortgage Investment Conduits." Old derivatives are taken apart and with the remains bankers build new, marketable products. The same garbage dressed up as a crispy pastry.
Morgan Stanley estimates that at least $30 billion worth of re-remic products have been done. Who cried out that Wall Street has to change? Don't be silly. To change is so 2008!
More Risk
But weren't the Wall Street banks not compelled to take fewer risks? When all banks appealed for government support in 2008, that was only possible if they transformed themselves into "regular banks.”
The result was that they had to comply with stricter regulations. For example, Goldman Sachs would have to have much fewer risky investments on its books.
The Federal Reserve Bank gave the banks quite an amount of leeway to take care of the necessary adjustments. It turns out now that such was a strategic mistake.
According to a group of American Members of Congress, Goldman Sachs is taking on more risk now than in May of 2008. At the end of July, they sent a letter to Fed-president Ben Bernanke wherein the members of Congress ask for clarification.
On Wall Street they are laughing themselves silly. By the time that letter is answered the bankers will have blown three new bubbles--and burst them.