Friday, April 04, 2008

Congress Determines There Were No Buyers of Toxic Structured Finance Instruments- Only Sellers!

This week's appearance by Bernanke in front of a joint Congressional committee provided another pathetic example of Ted Kennedy's failing grasp of reality. To be fair, not only Teddy, but many of his Democratic and Republican fellow Senators and Representatives, too.


Brow beating the Fed Chairman, Ted repeatedly asked Bernanke why the Fed didn't 'remove harmful financial products' from the 'shelves' of America's banks, just like the Congress forced toy retailers to clear their shelves of lead-contaminated painted toys. Judging from Kennedy's assault on Bernanke, it is clear that Ted thinks there were no buyers of structured finance instruments, only sellers.


Here's a little piece of information you evidently missed, Ted.


Wall Street's investment banks, and commercial banks, too, wouldn't have securitized toxic loans if there weren't informed, willing adult institutional buyers.


That's right. Nobody actually put a gun to anybody's head to make them buy CDOs or auction-rate securities.


As I wrote in this post last year, every institutional investor who bought CDOs, shares of an SIV, or other structured finance instruments surely believed they were receiving excess returns for no commensurate additional risk.


Without willing buyers, none of the risky, opaque structured instruments now so roundly criticized and reviled by regulators and Congressional pooh bahs would have ever been created and sold.


Further, very few retail investors seem to have bought CDOs. Those were mostly institutional investors including your typical local county or state pension or sinking funds. Those people are paid to make informed investment decisions. They can't blame the rating agencies or their investment bank advisers for decisions for which they are handsomely paid.


These investment professionals, the ones who willingly bought CDOs, SIV shares, and similar structured finance instruments, are, it seems to me, the real source of the financial market excesses. These people, whoever and wherever they are to be found, failed to exercise due diligence in understanding what they were buying on behalf of their investing organizations.


How does Senator Kennedy propose to stop this consensual buying behavior?


Maybe we should be realistic and stop denying the obvious. We have financial market turmoil because a lot of institutional investors failed to do their jobs, became greedy, and believed excess returns could be had for no added risk.


It turns out that they were, as usual in every financial cycle, wrong on all counts.


Don't blame the sellers of these instruments. Or at least, not them alone.


Blame the buyers who provided the market demand for the toxic financial paper that lies at the root of the credit market mess.

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