Creative Collateral

Over 20 years ago, Wall Street was rocked with a 'greed is good' persona. I don't know if I can fully endorse that; however, I do think greed is kept honest. What I mean by this is that over time, the ones who start something out of greed get hooked. Once they get hooked, it is very hard to turn away. It is the very ones who create an empire of out greed who lose everything on the way down. All the firms who made the biggest bets in the housing market were the ones who no longer exist. Greed isn't always good and it definitely doesn't always last.

As is prevalent on Wall Street, short term memory problems persist even today. Bonds and collateralized securities backed by mortgages finally started coming back around. It certainly isn't at the height that it was several years ago. As a result, bankers are creating new types of bonds known as esoteric bonds. These bonds are backed by unusual assets not usually seen in the banking business. Domino's Pizza has backed bonds with revenue from franchises. Drug companies are using patents to back bonds. Some bonds are even backed by time shares.

In this case I have to agree that greed is good. The need to raise money in whatever way possible has created a whole new class of bonds. The diversification of collateral helps to guard against the possibility of another bubble. The only trouble lies with the possibility that the ideas of collateral get out of hand. Could a handful of greed set up this class for another classic downfall or will this greed actually help small business get the types of loans they can to stimulate the economy? Where will it stop? When do bankers say collateral isn't sufficient? Today, everything can be quantitatively measured.