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Let's go back to the financial crisis and the practices that brought this country to its knees. Banks developed a fancy scheme whereby they absolved themselves of all risk from the loans they made. They simply wrapped them up in a bundle and sold them to someone else. What they were doing is essentially packaging and reselling "junk."
When the news of how bad things were became known, the markets froze and collapsed. No one knew who had which securities, and if they did, they didn't know their true value.
Three years later we still have the fallout from the meltdown. For example Allstate (ALL) is suing Bank of America (BAC) for misrepresentation of mortgage investments they sold, as reported in Fortune.
There is a provision in the 2010 Dodd-Frank law that requires banks to retain some "credit risk." That means that they must keep a portion of their loans on their books and assume the responsibility if they go bad. One voice of reason is from John Gibbons of Wells Fargo (WFC) who said that banks should retain some credit risk.
As you might guess, banks want no part of sharing credit risk. Bank of America is lobbying strongly against the practice. Banks argue that "securitization" lets them free up more money for new loans. We know from what happened during the meltdown that banks used the new money to further speculate and gamble in the markets, taking huge risks that backfired and the U.S. Federal Reserve had to bail them out.
The argument boils down to this: Do want our banks to take some "risk retention" or do you do you want business as usual with banks packaging and reselling their loans, absolving themselves from taking any losses for their mistakes?
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Reader Comments (Page 1 of 1)
4-02-2011 @ 3:52PM
william lindblad said...
Yes, they should go back to the "old days" when the kept mortgage notes for vairous periods of time and usually sold the riskier ones while keeping those that were the equivilant of an 800 credit score with 20% or better down.
The risk factor with those was near zero and the bank had a virtual sure bet on making money. Secruitization/derivative is a voodoo practice and Allstate has grounds to sue. These "package" "mortgage backed" creations were just a quick method of disposing of responsibility, and a great way to the quick buck. Allowing this freewheeling would be same as letting everyone deal in naked shorts and the rest of the high risk areas. We already have inexperienced speculation in the oil markets and everyone can see the result. Would you have the banks as speculators in the commodity market?
4-03-2011 @ 1:09PM
wdmurphy said...
No surprise here with BofA, Why doesn't the government just give them the keys to Fort Knox and maybe then they will be happy. This Country has become a den of thieves We the people need to clean out both houses of congress completely and start fresh.
4-03-2011 @ 1:15PM
reopentainment said...
The old way was fine. The problem we had was simply that the people that were supposed to be analyzing the risks associated with their holdings but saw AAA on the cover and approved it without further inquiry.
Basically I'm saying this from an insurance point of view, that if we accurately underwrite these junk bonds, it frees up capital for banks while providing revenue for insurance companies. Again, speculation, imo, is good, as long as people speculate frugally. If 100 people are speculating $1 will become $2, there's no way they can all turn profit even if they are right. It's like the roulette if everybody picked 15 black, even if it was 15 black, the casino takes a cut and everybody gets half their money back.