Nov 07. The investment banks came up with a clever idea whereby they buy all mortgage loans, pool them together, then slice and dice them and finally sell them to investors.
No problem there - they are just transferring risk from the retail / mortgage banks to investors who are hungry for better returns. Plus the investment banks get a killer fee in the process.
The problem arose as the mortgage providers were no longer bearing the risk of a loan foreclosing and were being paid to produce them irrespective of the risk. As they were no longer concerned with the credit rating of the mortgage - they become increasing interested in producing more loans that they could then sell onto the investment banks. The investment banks were in a similar position...they were just passing the buck onto the investors.
Well we all now see that some of the investment banks decided to hold onto some of these investments...and well are now paying the price - $50 billion in writedowns and counting.
But this makes me think - most of the CDOs were sold onto investors - the banks are only holding a tiny proportion. So the real question is - who is going to pay the price for the subprime mess? I just hope that my pension fund manager stuck to more traditional investments...
