In February 2005, a bunch of smart people met to eat Chinese
food and talk about a new way to make money. This included
Greg Lippman, a trader at Deutsche Bank; Rajiv Kamilla, a trader at
Goldman Sachs Group Inc. with a background in nuclear physics;
and Todd Kushman, who led a contingent from Bear
Stearns Cos. There were about 50 people at the meeting.
What did they discuss? The design of a new financial product:
securities based upon subprime mortgages. As reported at Bloomberg, they thought they
had figured something out…
The new standardized contracts they
created would allow
firms to protect themselves from the risks of subprime
mortgages, enable speculators to bet against the U.S. housing
market, and help meet demand from institutional investors for
the high yields of loans to homeowners with poor credit.
I suspect all those people are still pretty well off, even though they
may have brought about one of the biggest financial catastophes of all
time. I guess that remains to be seen, but it is looking
pretty bad right now.
The tools also magnified losses so much
that a small number of defaulting subprime borrowers could devastate
securities held by banks and pension funds globally, freeze corporate
lending, and bring the world’s credit markets to a standstill.
Does anyone still believe that a free-market economy is the way to go?