How Could They? – Foreign Edition

One of the aspects of the financial crisis that caught me off guard was the widespread exposure of foreign banks to the U.S. subprime market.   A close friend who worked in fixed income derivatives for a major U.S. institution told me it was a simple, 3-point sales pitch: a) “These are rated AAA,” b) “they yield more than Treasuries,” and c) here’s the money quote- “We investing alongside you, putting this on our balance sheets too.”  Ouch!  So a key aspect of the pitch was essentially an admission of building systemic risk — “we’re all in this together.”  This should give pause to those who believe that requiring issuers to retain a portion of every securitized deal will be a cure-all;  Wall Street is a sales business at heart, and the best salesman always believe their pitch.  With many mortgage-backed securitizations, retaining interest in the pool was not a solution, but part of the problem.  There’s an interesting story on Bloomberg today which goes into greater depth on this important story.  The title gives you a sense of where the author is coming from: “Evil Wall Street…”

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