Inside Financial Services

REMINDER: BAD PAPER IS BAD PAPER, REGARDLESS OF WHO OWNS IT

Here's a fun thought experiment: suppose the let's-break-up-the-big-banks crew had had its wish granted prior to the credit crunch, so that the doomed subprime mortgage paper created during the runup of the housing market wasn't owned by a relatively

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Here’s a fun thought experiment: suppose the let’s-break-up-the-big-banks crew had had its wish granted prior to the credit crunch, so that the doomed subprime mortgage paper created during the runup of the housing market wasn’t owned by a relatively few large institutions, but was sprinkled instead among dozens or even hundreds of the kind of smaller lenders the anti-biggies seem to think would be preferable. What would have happened then?

It still would have been ugly. First, the wave of defaults still would have occurred, except that its pattern would’ve been more reminiscent of the credit crackup of the early 1990s-during which hundreds of small thrifts did indeed collectively keel over-than what actually happened. That might even have been a worse result, since (as I recall from those days) the S&Ls back then weren’t especially well-diversified and were thus more vulnerable to a credit shock. In any event, if you’re looking for ways to protect the taxpayer in the wake the next financial panic, the experience of 20 years ago isn’t encouraging.

The more I think about this anti-big-bank obsession, the more I’m puzzled by it.

2 Responses to “REMINDER: BAD PAPER IS BAD PAPER, REGARDLESS OF WHO OWNS IT”

  1. I wonder as I wander

    Interesting question but somehow I doubt that a large number of small institutions would’ve had the appetite for that crappy paper. Nobody could rationally think that no doc, 100% (or more) LTVs were a good idea unless they drank the koolaid served up by the “sophisticated” models that only the big boys had. For the smaller banks in that arena, it was all about selling the crap upstream. It’s the big guys that thought they could manage the risk.

  2. I wonder as I wander

    Interesting question but somehow I doubt that a large number of small institutions would’ve had the appetite for that crappy paper. Nobody could rationally think that no doc, 100% (or more) LTVs were a good idea unless they drank the koolaid served up by the “sophisticated” models that only the big boys had. For the smaller banks in that arena, it was all about selling the crap upstream. It’s the big guys that thought they could manage the risk.

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