Fear of the unknown, the maybe will happen, and the presumptions of unfounded populist possibilities have prompted the calm and collected, the otherwise prudent and measured into a frenzied gathering of the befuddled, confused, and frazzled. No one seems to be able to define the problem in simplistic terms; speaking only of a clog in the financial markets…
I am going to take a shot of explaining this real time financial concern. It all started in the early 1980’s with the development of “Securitization of Credit.” The word Securitization was made-up by the inventors of this particular financing technique; the concept was/is to bundle (rated for high credit worthiness) receivables into determined revenue packages that emit a yield similar to a bond and sell off these revenue-tied-to-a yield instruments to institutional investors.
When the founding derivative of the collateral used for Securitization is American Express cardholder receivables the measure of value is a tangible subject to transparent factors such as volume, percentage of default, interest earned, etc; but, when the collateral derivative is mortgages purchased from banks by Fannie or Freddie there was no sense of ownership as to the principle value, no due diligence recourse, prudence stepped aside and the irrational spearheaded by Chris Dodd and Barney Franks bullied their liberal agenda to counter good sense.
Because the method used to bundle these instruments of Securitization no one can access the bad from the good; the result is the ugliness we are now visualizing in Congress.
Often government acts wherein the result is a gigantic unintended negative consequence; for example, one of the founding reasons these financial institutions went under is simply a matter of accounting. Post Enron, the Congress, enacted wholly differing accounting standards; these standards substantially discounted assets to real-time value. The geniuses of all three branches of government once again panicked and rushed thru accounting standards before thinking though the process of unintended consequences.
The most recent great benefactors of such unintended consequences are JP Morgan Chase and Bank of America, certainly, not the American taxpayer.
Before Congress rushes though another issue of grave concern these provocateurs of unintended consequence hopefully will contemplate the most meaningful after action results.