On Fri, 14 Feb 2003 Nomiprins at aol.com wrote:
> I think the exact [Glass Steagall] legislation was written to avoid
> banks being able to repackage bad loans and resell them to investors.
That's my understanding as well.
> Of course, now that's done all the time. Has been since the CMOs of the
> 80s. (discussed in both Liar's Poker and Wall Street). Today, the
> repackaged loans are parts of various securitization deals or CDOs
> (collateralized (corporate) debt obligations) where an investor can't
> tell which loan they're getting, because they're buying the risk of a
> whole portfolio of loans.
But to be fair, these aren't quite the same as the repackaged Bolivia and Peru loans of the late 20s, are they? I thought the securitization process considerably reduced the risk, so that while mortagage backed securities are high risk high gain compared with money market funds, and thus shouldn't have been sold to retirees as they were during the 80s, they aren't in themselves considered flaming disasters that no one in their right mind would hold. I remember how fobbing off bonds that were considered too bad to sell earned you the sobriquet of Big Swinging Dick in Liar's Poker, but I thought those sales were to large and usually institutional investors. Wasn't the sale that earned the author that nickname a French institutional investor?
> issuance and deposit / loan business was split up.
Right, that part I understand. But I thought there was also another clause that said banks couldn't invest in stocks the way they can say in bonds, specically to protect their capital from plunging if there were another crash. Is that just my imagination? I seem to remember people saying during the early 90s that those Japanese banks, they were in big trouble because they owned lots of stock, but our American banks didn't have that problem.
And I guess I sort of assumed this extended to loans collaterialized by stock, margin loans, etc., since all of those would be bank assets with the same problem.
> Also now, banks can own stocks as assets, but at the holding company
> level.
Right, but aren't loans still made at the bank level, beneath the holding company level? So wouldn't this still stop a loan from being collateralized by stock?
Lastly, am I right in understanding from you're saying that this is all out the window now? Banks can now invest in stocks just like Japanese banks, and can now collaterialize loans with stock all they want?
Michael