In reading the book by Extreme Money by Satyajit Das, FT Press, 2012,  the book provides a history of investment banking both the ups and downs, being cynical and the good it provides. The perspective a reader can gain from reading is understanding that investment banking, financiers did what they had always done – whatever it takes to make money, only they did it with financial alchemy.

For example the concept of securitization or asset-backed mortgages is a wonderful one – it generates fees, it increases the ability of the banks to lend more, and it provides product to investors. Those are all very good things to be in the system. The key to securitization is the allocation of risks between different investors. The issue is divided into 4 segments, each of them carrying higher risks and higher interest rates. The risky piece needs fewer defaults but should not lose all their money because of possible home re-sales. The middle group would only lose money if more than 10% defaulted and everyone loses if all the mortgages went into default. If 2008 some of the bonds had a default rate of greater than 90%. Historically that had never happened before, but with no income, no job and getting a mortgage with payments for the first two years to match your limited income, to be reset in year 3, you have to wonder, that is betting on a lot of hope. The other important aspect is there needs to be  high standards of home owners putting money down (the more the better), the rating of their ability to repay is high, and there are checks and balances in the system to ensure the standards do not go astray. It is one of those situations if one person or 1% of the people cheats, the system can handle it, if everyone cheats in pursuit of greater fees and profits, the system falls apart. The question was and always is who is the policeman to ensure the high standards. In the mortgage crisis all those with the ability to be a policeman passed the responsibility to someone else and we all know who job that is.

Linking to dividend paying stocks, in every self regulating profession, the people who deal out penalties or regulate the profession for very good reasons are reluctant to penalize those in the professions. This is why every few years something goes wrong in an industry, in the financial markets the normal has been 4 year cycles or the Olympic cycle or Presidential cycle. When a company has paid a dividend consistently, there tends to be more people watching the company to ensure it can continue to pay the dividend, if the company can not pay, the President is replaced.

There are more questions than answers, till next time – to raising questions.