Banks are reviving risky investments

Paul Schwietering
By Paul Schwietering

I was reading the front page of The New York Times a few day ago (April 19) when I noticed an article by Nathaniel Popper headlined “Back on Street, Arcane Names Hiding Big Risk.” The article began “The alchemists of Wall Street are at it again.”

“The banks that created risky amalgams of mortgages and loans during the boom – the kind that went so wrong during the bust – are busy reviving the same types of investments that many thought were gone for good. Once more, arcane-sounding financial products like collateralized debt obligations are being minted on Wall Street.”

I can assure you that I have had nothing to drink and that I am not making this up. You can go on the Internet and look up the articles printed in The Times for April 19, and with the information already provided, verify the existence of this article.

According to Mr. Popper, it seems that the “revival” of these “financial products” is mostly due to the fact that the “safest” of these “new investments” offer “interest rates almost double” those paid by United States Treasury securities. Glory be! Imagine that!

However, Mr. Popper goes on to note, “but the revival also underscores how these investments, known as structured financial products, have largely escaped new regulations that were supposed to prevent a repeat of the last financial crisis.” You don’t say.

I will now quote a few paragraphs from Mr. Popper’s article to give the reader a brief summary. “All of this seems like a fairly quick round trip” said Manus Clancy, a managing director at Trepp, a research firm that focuses on commercial real estate.
“You are seeing a fair number of sins being forgiven.”

“Banks are turning out some types of structured products as fast or faster than they did before the bottom fell out. So far this year, for instance, banks have issued $33.5 billion in bonds backed by commercial mortgages, slightly more than they did in 2005, when the real estate market was flying high, according to dat from Thomson Reuters.”

“The players in the business are generally the same as they were before,” said Tad Phillips, a commercial real estate analyst at Moody’s rating agency. “Because it’s the old players, they know how to push the boundaries.”

“The Dodd-Frank regulatory overhall is forcing banks to take extra steps in the process of bundling loans, but it does not change the basic approach.”

Before I chanced upon Mr. Popper’s article, I had been thinking about some of the seemingly insurmountable problems that our nation faces, one of which is where to store the radioactive waste from our nuclear power plants. It has just occurred to me that I know the perfect spot.

Paul Schwietering is a former Democratic state central committeeman for the 14th state senate distict.