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Best Business Commentary
December 3, 2007
Innovating ourselves into a hole
Financial insiders are really “spooked,” says Paul Krugman in The New York Times, because they “don’t understand the complex financial system they created.” Blame “financial innovation,” a phrase that should now “strike fear into investors’ hearts.” Not all innovation—it’s nice that you can “withdraw cash on weekends”—but especially “the alphabet soup of CDO’s and SIV’s, RMBS and ABCP.” Instead of spreading risk, as advertised, they “spread confusion” and lured investors into bigger risks than they realized. We let the banking industry innovate, and “what it did was to innovate itself, and the rest of us, into a big, nasty mess.”
According to a federal judge in Ohio, it may turn out that nobody owns your mortgage, says Eric Weiner in the Los Angeles Times. Judge Christopher Boyko in Cleveland found that Deutsche Bank couldn’t repossess 14 homes because it held mortgage-backed securities on the properties, not mortgages. Such securities are “far too valuable to banks, investors, and homeowners” to be “legislated out of business,” but a ruling like Boyko’s “has been overdue.” We need to reexamine these sliced-and-diced mortgage-backed securities so investors know “what they’re buying,” and you know who owns your house.
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