Wall Street tries the hair of the dog

Great news!  The wizards of Wall Street have discovered a new way to repackage the toxic assets clogging the nation’s ledgers and provide an antidote to the poison that has handicapped the American economy.  They want to create new mortgage-backed securities that will absorb the old MBSs, which are languishing at junk-bond status, with stable-valuation assets, in a new bond series that will garner a AAA rating.

Hey, what could go wrong with trying exactly what Fannie Mae and Freddie Mac did that put us in the position we’re in now something new?

Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It’s a lot like what got banks in trouble in the first place.

In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that’s nearly identical to the complicated investment packages at the heart of the market’s collapse. …

In recent months, banks have tiptoed toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they’re the safest investment you can buy.

“You’ve now taken what was an A-rated security and made it eligible for AAA treatment,” said Richard Reilly, a partner with White & Case in New York.

Wonderful!  It’s kind of like assuming that Fannie/Freddie MBSs were solid investments, because they had the backing of the federal government.  Look how well that turned out for America and the investor class!

Advocates say that this differs from the previous round of stupidity because investors will know exactly the risk they’re taking.  If that’s the case, though, then the sellers of these bonds wouldn’t be trying so hard to get that gold-plated AAA rating for the securities.  In fact, that rating obscures the risk by making bonds carrying toxic assets look like a sure bet, a reliable instrument for growth, when in fact it carries a significant risk.

I’m no populist.  I believe in a free market with sensible regulation.  This, however, demonstrates that occasionally capitalists are capitalism’s worst enemies.

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