Pacific Views

Different year, same old sh*t.

Guess what? The financial industry that was so important in bringing us last fall's financial meltdown is back to the same old tricks, coming up with all sorts of risky financial products to take Texas-sized chances on. Only this time, the banks that were 'too big to fail' last year have gotten even bigger. And the new regulations to keep them under control are nowhere in sight.

Big banks and their traders are ... still packaging risky mortgages into securities and selling them to investors, who can earn higher returns by purchasing the securities tied to the riskiest mortgages. That was the practice that helped inflate the real estate bubble and eventually spread financial pain around the globe.

In a way, the government has emboldened banks to keep selling risky securities: Since the crisis erupted, federal emergency programs have helped keep the banks from failing. But now, as the financial system recovers, the government plans to phase out these backstops — leaving banks more vulnerable to big bets that go bad.

One investment gaining popularity is a direct descendant of the mortgage-backed securities that devastated many banks last year. To get some lesser performing assets off their books, banks are taking slices of bonds made up of high-risk mortgage securities and pooling them with slices of bonds comprised of low-risk mortgage securities. With the blessing of debt ratings agencies, banks are then selling this class of bonds as a low-risk investment. The market for these products has hit $30 billion, according to Morgan Stanley.

I'm sure that the same experts who failed to predict last fall's financial meltdown are telling us not to worry about all this new risk-taking activity. After all, those reckless financiers really learned their lesson after the drubbings they took from the savings & loan collapse   dot.com bubble   Enron scandal   home mortgage bubble, didn't they?

The AP has more details here.

Posted by Magpie at September 13, 2009 01:30 PM | Banking/Finance | Technorati links |