Government (not Wall Street) Financial Innovation Caused 2008 Financial Crisis_Part 1

[hac5x3]

Nonsense. The Savings and Loans created the garbage paper which the government bailed out using these methods. Just like today the banks and wall street created junk paper using no money down loans, no credit, no income verified loans which created enormous defaults, The banks took points on each loan from the borrowers and (before the defaults) bundled them and sold them on the secondary market. This created bundled junk and when the underlying loans defaulted created massive losses.

[Carolab62]

The S&L loans that were securitized were assets developed by the S&Ls themselves, NOT by the government. The RTC may have bundled toxic loans into AAA securities but it did not invent the mezzanine CDOs SWAPS). Salomon Brothers created the first private issue of MBS in 1977 when it persuaded Bank of America to sell the mortgages that it originated to homebuyers, and in 1983, created the CMO.

[Carolab62]

The first CDO was issued in 1987 by Drexel Burnham Lambert for Imperial Savings Association, which became insolvent and was taken over by the RTC in 1990. Synthetic (mezzanine) CDOs stacked multiple insurance policies/bets on the same CDO. Depository banks using CDOs as securitization, did not hold loans originated on their books and transferred them (and risk) to investors. This enabled extreme leverage, while complying with capital requirement laws, generating additional origination fees.

[ExZonie]

The S&L crisis was caused by government, too. They over-insured the savings and loans; restricted their ability to make a profit by limiting their charter to home loans and checking accounts; and distorted the market of the 1980s with wild swings in interest rates and 1930s-era banking laws. See more at EconLib dot org, and look for the article by Bert Ely called The Savings and Loan Crisis.

[cedec0]

FINANCIAL INNOVATION

"As to new financial instruments, experience establishes a firm rule ... that financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory. ...

[cedec0]

... The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another the creation of debt secured in greater or lesser adequacy by real assets, that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment"

-john Kenneth Galbraith, A Short History of Financial Euphoria

[adamnealis]

I follow your Market Skeptics blog.

In this case I have to say "Bad Title".

The long-standing abuse of the word "innovation" notwithstanding, if an "innovation" is damaging, then it is not innovation.

[JanPaulVB]

Excellent reporting

[tyronebiggums3]

Great analysis.

Did the video end prematurely?

It seemed like it ended, abruptly.

[itsneverthatserious]

@tyronebiggums3 theres part 2