One of the key ingredients of the 2008 debt crisis was the way in which subprime mortgage debt was re-packaged by financial geniuses in new and innovative ways. For sure it’s a complicated story, but at the bottom of it all…
- The world offered large home loans to people with bad credit ratings.
- Those were considered subprime loans at the moment of creation.
- But the clever financial people in the stock market bought up big packages of these cheap assets, mixed them with a few assets with better credit ratings and, with the compliance of the oversight bodies, turned the whole new package into AAA rated investment vehicles.
- The market didn’t look at what was inside these new and wonderful packages, didn’t check out the quality of the assets that backed up the paper, didn’t think to ask whether they were viable or whether their apparent fixed asset value was a mirage and simply created out of somebody’s fertile imagination. No, the market in all its wisdom fell for the story and just bought the wrapping paper.
- The people behind this imaginative and innovative idea to re-package near-worthless fixed assets to make it look like a gilt-edged investment opportunity made a lot of money for themselves and their bosses and were hailed as financial heroes, for a while at least.
- And the rest is history.
Here’s a 12 month chart of First Mining Finance (FF.v):
We love innovation.