Analysts on Wall Street may have come up with a way to extricate itself from the mounds of toxic debt and bask mortgages that have blockaded the nation’s financial markets.
The concept is a familiar one since it has been compared to the processes that lead to all the trouble with the banks in the first place.
In the last few months, a number of investment banks have been repackaging old mortgage securities and preparing them for resell as new products. This strategy is nearly identical to the investment packages that caused the market collapse.
Economists, such as Arizona State University economics professor Herbert Kaufman, has said that the strategy could provide a solution to one of the lingering problems of the financial crisis: namely, what should be done about hundreds of billions of dollars in mortgages that are still dragging down the system and which account for the reticence of banks to establish new loans.
Financial institutions have considered another potential solution for the last few months. This option would involve bundling good bonds with those with weaker ratings.
The banks offering the packages provide extra incentives to entice investors to purchase them so they can receive AAA ratings, the markets own stamp of approval that states that the bonds are a very safe investment option.
Those bonds with the weakest performance that are not repackaged are sold off at pennies on the dollar to both investors and hedge funds that mitigate the inherent risks in various ways for the opportunity to make a big break.
Professor Kauffman said, “We’re back to financial engineering, absolutely.” He added, “But I think it’s being done at least differently than it was before the meltdown.”
The Obama administration has joined the struggle to develop a plan that would encourage banks to start buying and selling bonds with higher risk factors. The so-called “public-private partnership” that was announced earlier in the spring is still under development, yet it has helped investors figure out what those bonds might be worth.
Tags: strategy, wall street, solution, performance, place, investment option, toxic debt, AAA
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