When Mortgages Were First Bundled - In 1979
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What with the current debacle in the home mortgage market, we forget that this isn't the first time home mortgages wrecked the securities markets. It seems that folks have decided that this is something new. Well, time to re-think that one.
Wall Street started trading residential home mortgages in the late seventies when Salomon Brothers, realizing that the savings and loans were dominating a market place that had real possibilities for packaging loans and selling them to investors, started the ball rolling. In 1980 the mortgage market surpassed the equity markets on size alone (Lewis, 83).
A simple analysis of what happened then might include the words "hayseed" (for the thrift industry managers) and "shark" (for the Wall Street sales people). Wall Street sharks ended up bundling mortgages and selling them to the hayseed thrifts. Why? Thrifts were limited in the markets they could sell mortgages to, but, and here is the big but, they wanted to grow. How to grow? Buy mortgage backed securities from Wall Street. They were able to expand their portfolios, lessen their risks, and become more profitable, all at the same time.
We all know what happened. The thrift crisis is a thing of beauty, to be studied in Harvard case studies for years.
One thing has happened. The knowledge we gained from the thrift crisis was forgotten. Harvard - or somebody - didn't do their job. Once again we have mortgage backed securities threatening the market.
My point? Studying history is boring for some folks. At the same time, history is crucial, as it allows us to avoid mistakes that have been make before.
A little bit of soap box story telling? Probably. A good idea to check your new strategy against the history of your industry? Absolutely. You might learn something that will save you a bundle.
Reference
Lewis, Michael. Liar's Poker. Rising Through the Wreckage on Wall Street. Penguin Books. 1989.