Tuesday, November 11, 2008

Risky assets

Brad Setser looks at the way that investment banks built up the level of risky securitised issues on their balance sheet.

Her article — which included the Winters quote — didn’t just look at Merrill though. She noted that Wall Street was a big buyer of mortgages for its “private label” mortgage backed securities at the peak of the housing boom. Morgenson reports that the Street issued $178 billion of mortgage and asset backed CDOS in 2005 – and an incredible $316 billion in 2006. 2006 was when the quest for yield was at its most intense. Short-term interest rates had been raised. That should have squeezed profits. The fact that it didn’t should have been a warning sign.

I would like to relate this to Setser's other interest - the purhcase of safe treasury bonds and agencies from the US and the shape of the US yield curve.

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