Dividends and Boomerang part 4

Many people have read or watched the movie the Big Short, the author Michael Lewis wanted to know who made money on the housing crisis? In investing you can make money when the market goes up, down or sideways. In the book Boomerang written by Michael Lewis published by W.W. Norton & Company, New York, 2011 Mr. Lewis examines countries outside the United States and how they were affected by the housing market collapse. Mr. Lewis picked  4 countries – Iceland, Greece, Ireland and Germany all countries which had made the news prior to 2008.

In the Big Short and it various other books and movies, the Wall Street firms were selling Mortgaged Backed Securities to firms outside the US. Outside of the firms themselves because they all ended up owning billions of worthless securities, one of the biggest buyers were German financial institutions. Mr. Lewis tries to find out why? were they willing buyers or were they duped or what other factors were there?

In 2004, IKB was becoming Wall Street’s biggest customer. IKB had been created in 1924 to securitize German war reparation payments to the Allies and over the years had changed to a lender to midsize German companies.

The company saw an opportunity to borrow money for short period of time by issuing commercial paper and investing in structured credit which turned out to be bonds backed by American consumer loans. For a time, it was profitable that a $20 billion dollar portfolio was making $ 200 million dollars a year. This was good.

The not so good thing was computer programs to monitor the investments made no distinction between prime and subprime debt. It was taken at face value: the program looked at the history of triple A bonds and accepted the official story that triple A bonds were essentially risk free. The bank was still buying when the market collapsed and the President of the Bank when asked about subprime debt, believed he did not own any.

The traders in Germany were not paid on how many loans they booked, what is termed a decent salary of $100,000 plus up to half bonus. So as long as the bond remained good on the outside, the traders could tick the appropriate boxes and be comfortable buying. It was the insides that had turned from Triple A ratings to D ratings.

Linking to dividend paying stocks, as investors we want to trust management and tick the proper boxes. We think we are doing the correct thing but then something happens and there is little explanation we did not know? Why did they not know it I had thought about it? When things go well, fewer questions are raised.

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


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