E Hoarding The New Gold: Early History About Structured Finance

Structured finance is best known for taking real world assets, or debt backed by assets, and pushing them off the balance sheet of the banks. Alan Greenspan and others looked for ways to keep banks lending in the face of the need to carry loans on the books. But debt backed by assets was only part of the scheme to pass risk on to counterparties. Treasury debt backed by only faith in the United States allowed counterparties to collateralize risk with a new valuable tool, bonds as collateral. This new gold was hoarded early as you will see.

Alan Greenspan was obsessed with pushing risk off of the banks and placing it into the hands of someone else. He worked in the S&L industry and saw the S&L's get crushed. He said in a speech in 2005:

Derivatives have permitted the unbundling of financial risks. Because risks can be unbundled, individual financial instruments now can be analyzed in terms of their common underlying risk factors, and risks can be managed on a portfolio basis. Partly because of the proposed Basel II capital requirements, the sophisticated risk-management approaches that derivatives have facilitated are being employed more widely and systematically in the banking and financial services industries.

To be sure, the benefits of derivatives, both to individual institutions and to the financial system and the economy as a whole, could be diminished, and financial instability could result, if the risks associated with their use are not managed effectively. Of particular importance is the management of counterparty credit risks. Risk transfer through derivatives is effective only if the parties to whom risk is transferred can perform their contractual obligations. These parties include both derivatives dealers that act as intermediaries in these markets and hedge funds and other nonbank financial entities that increasingly are the ultimate bearers of risk. [emphasis mine]

Securitization  of asset backed securities was the preferred way that banks passed the risk to investors, gaining the power to loan again and again.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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