THE PROBLEM ISN'T RISKY LOANS, BUT HIDING THE RISK:

Some Bankers Never Learn (GRETCHEN MORGENSON, 7/31/11, NY Times)

[D]odd-Frank also required regulators to define the characteristics of loans that would most likely be repaid. The idea was to ensure that banks had skin in the game when they bundled risky mortgages into securities.

The proposal was this: If a mortgage security contains only high-quality loans, the banks can sell the entire offering. If the investments included riskier mortgages, the underwriters must keep 5 percent of the issue on their own books.

Sure, they'd like to be able to deceive folks into buying more risk than they're aware of, but there will also be a market for instruments that just bundle the higher risk loans, just as there is a market for "junk" bonds.

Posted by oj at July 31, 2011 10:13 AM
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