Err, no

We have just experienced an explosion of cheap credit driven by banks\’ belief that they could dramatically reduce their vulnerability by taking the loans they had made and selling them on to investors, in a process known as securitisation. What they have now realised is that this securitisation completely failed to spread risk.

Securitisation spread risk, all too well. When German banks go bust over Arizona mortgages you know that risk has been spread.

2 comments on “Err, no

  1. Is there a difference between spreading the risk and just transferring it? The toxic debts are just as toxic in my hands as they would be in yours.

    If you’re daft enough to keep buying these debts from me I will keep creating them. In a sense securitisation gave the banks a green light to lend to bad customers so long as there was some other mug to buy the toxic debt. In many cases these mugs were other banks. They seem to have believed that securitisation as they were practising it lessened the risk of risky lending as well as transfered it. It didn’t and it hasn’t.

    While asset prices were going up banks couldn’t help but roll over mortgages at breakneck rates. Does anyone know what caused the change in sentiment in the US housing market? If you’re house is falling in value you will not be keen to re-mortgage and so the supply of assets for banks to sell on diminished.

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