A renewed call for regulation in the financial industry has brought back the Volcker Rule. The Volcker Rule tries to stop banks from building up large positions in financial assets to profit. However, many people complain that this rule will prevent banks from being a market-maker which is an important part of the market. Regulators have tried to revise the rules so that banks can still be market-makers but the regulators still can enforce the Volcker Rule. So far it appears to not have satisfied the individuals against the rule.
The resurgence of the economy has started to entice the banks to start up in mortgage-backed securities again, which have not been really in demand since 2008. The only mortgage-backed securities that banks and investors wanted were the ones that the US government backed. However, Credit Suisse recently said that they have been selling non-government backed mortgage bonds to investors.
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The difference between the way Credit Suisse Group AG (NYSE:CS) sold the mortgage-backed securities, and the way banks did it in 2008 is quite genius. Credit Suisse set up the buyers and seller of the mortgage securities beforehand, so that the bank doesn’t have to hold onto the securities. This prevented a repeat of how many banks lost lots of money in 2008 as the market froze up. The other important piece here, is that banks have found a way to sell mortgage backed securities and comply with the Volcker Rule at the same time.
It is interesting because whenever banks are faced with new regulation, they always find little loopholes and ways to get around the regulation legally. Now, mortgage-backed securities live on with a rebirth of support. Now that Credit Suisse has shown that it can be done and how, you can bet that other banks will be following their footsteps. However, it is scary that once we finally get our recovery going, these securities that got us into the horrible situation in the first place, are gaining popularity again. You can bet that the government is going to be a lot less tolerant of any shenanigans that misuse these risky securities again.
It took three years to get out of the mess, and here we are starting to sell them again. I sometimes question Wall Street’s use of intelligence. On one hand they are very intelligent when it comes to getting around regulation and getting money. However, they seem to have short term memory loss; one would think that after 2008 we would stay away from mortgage-backed securities for awhile, but that is not the case.
DealBook NYTimes (By: Peter Eavis)