Structured Financial Products: Back to the Bad Old Days?

Tuesday, 23 Apr 2013 09:20 AM

By Dan Weil

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Banks are reviving structured financial products, the investment animals that helped precipitate the 2008-09 financial crisis.

These products are mostly securitized loans, such as mortgage-backed securities, which went sour after real estate began tanking in 2007.

What’s bringing them back now are the same animal spirits in financial markets that have pushed stocks to record highs and bond yields to near-record lows, The New York Times reports.

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

The low interest-rate environment also adds luster to the structured products, which sport yields almost double that of Treasurys, according to RBS Securities.

And not many investors are worried about another financial crisis coming around

Surprisingly enough, the structured products aren’t bound by new bank regulations. “All of this seems like a fairly quick round trip,” Manus Clancy, a managing director at Trepp, a commercial-real-estate research firm, tells The Times.

“You are seeing a fair number of sins being forgiven.”

The securities are supposed to be safer this time around, but security may be slipping.
“The players in the business are generally the same as they were before,” Tad Philipp, of Moody’s Investors Service, tells The Times.

“Because it’s the old players, they know how to push the boundaries.”

The role of interest rates is quite interesting in all of this. The Federal Reserve cut rates to lift the economy to a sustained growth path, but it risks igniting bubbles in financial markets with the very same low rates.

Minneapolis Fed President Narayana Kocherlakota said in the text of a speech recently that the Fed "will only be able to achieve its congressionally mandated objectives [low unemployment and inflation] by following policies that result in signs of financial market instability."

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

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