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> The Romans forced engineers to sleep under a bridge once it was completed. This is exactly what is missing from the banking system. The mortgage madness wou

> The Romans forced engineers to sleep under a bridge once it was completed. This is exactly what is missing from the banking system. The mortgage madness would never had occurred if banks were forced to retain a portion of every loan (and put that portion in the first-loss position.)

yummyfajitas 14y ago
Many banks did retain a portion of their loans. WaMu, for example, and Countrywide. Typically they would sell off the AAA tranches of the loans to other banks (for use satisfying reserve requirements) while keeping the riskier tranches for themselves.
- 001sky 14y ago
  nah, the i-banks lost the skin in the game when they went corporate in the 1990s. leveraged loans of various stripes are not held by i-banks, as a rule. there is also the issue of derivatives, so bottom line is almost all fudamental underwriting is now a sales-job, a loss-leader and bait entre vous into a world of mirrors, assymetric information and, opaque market making. TLDR there is a reason glass-stegal was put in place.
  - yummyfajitas 14y ago
    Investment banks generally don't write mortgages, so asking them to keep some skin in the game is a little silly. Glass-Steagal had nothing whatsoever to do with preventing savings&loan banks from making bad loans, nor did it prevent savings&loans from selling mortgages to third parties for securitization.
    - 001sky 14y ago
      Not sure this makes sense. The example of leveraged loans is quite distinct from residential mortages, for example. Also, the credit risk of the latter is pawned off onto the federal gov't in the US. Either way, banks should be banks. They should be taking the risk they underwite. Shares and bonds are a slightly different animal than asset backed secured loans, but they are now essentially all treated alike: things to pawn off with zero net book exposure. Investment banks structured as partnerships also had downside risk -- that is one of the main structural differences in a legal sense -- and that also should not be overlooked. Lasltly, private capital being more illiquid does not display the option-like pricing response to Vol that comp tied to public equity does.

yummyfajitas 14y ago

Many banks did retain a portion of their loans. WaMu, for example, and Countrywide. Typically they would sell off the AAA tranches of the loans to other banks (for use satisfying reserve requirements) while keeping the riskier tranches for themselves.

001sky 14y ago
nah, the i-banks lost the skin in the game when they went corporate in the 1990s. leveraged loans of various stripes are not held by i-banks, as a rule. there is also the issue of derivatives, so bottom line is almost all fudamental underwriting is now a sales-job, a loss-leader and bait entre vous into a world of mirrors, assymetric information and, opaque market making. TLDR there is a reason glass-stegal was put in place.
- yummyfajitas 14y ago
  Investment banks generally don't write mortgages, so asking them to keep some skin in the game is a little silly. Glass-Steagal had nothing whatsoever to do with preventing savings&loan banks from making bad loans, nor did it prevent savings&loans from selling mortgages to third parties for securitization.
  - 001sky 14y ago
    Not sure this makes sense. The example of leveraged loans is quite distinct from residential mortages, for example. Also, the credit risk of the latter is pawned off onto the federal gov't in the US. Either way, banks should be banks. They should be taking the risk they underwite. Shares and bonds are a slightly different animal than asset backed secured loans, but they are now essentially all treated alike: things to pawn off with zero net book exposure. Investment banks structured as partnerships also had downside risk -- that is one of the main structural differences in a legal sense -- and that also should not be overlooked. Lasltly, private capital being more illiquid does not display the option-like pricing response to Vol that comp tied to public equity does.