Ten years after Lehman Brothers collapsed, high-octane products like those which led to the destruction of the American banking giant are making a comeback.
A decade ago Lehman heavily pursued subprime mortgage-backed loans, which were put into complex bundles obscuring their risk and value. This left the firm highly exposed to movements in the housing market and eventually triggered the biggest bankruptcy in US history.
These mortgage-backed securities which have become the most identifiable trigger for the financial crisis are now attracting fresh interest among investors. This is despite some market experts describing the housing market as a “bubble on a bubble”.
Nowt wrong with sub prime mortgages as long as they’re priced right. And as long as the holders aren’t leveraged banks.
What’s the problem?
Because of asymmetric information. The seller (the bank which issued the mortgage) knows all about the thing they’re selling, whereas the buyer only knows those facts that the seller chooses to disclose. In the worst case, a bank could flog off all the mortgages it suspects to be flaky, while keeping on its books the ones that look sound.
This risk ought to be reflected in the price paid for the products.
@AndrewM
I know that ‘The Big Short’ wasn’t a documentary, but I do recall that yr man got all the info he needed to know the bonds were shit. So did the buyers and the credit agencies… they just weren’t reading it.