Page 233 - TrumpsEconEra_Flat

Trump’s Economic Era

the loan types that firms securitized had met at least
minimum standards of creditworthiness, they would
have never contributed to the economic collapse.
However, instead of securitizing only top rated debts,
financial firms securitized high-risk loans in the toxic
waste category. When the bankers of JP Morgan, the
originator of the credit default swap, learned that other
banks were forming swaps made up of junk bonds, they
were appalled.

Despite the dealings in high-risk loans,
securitization would not have been a problem if the
transactions were small, which they were not. Charles
Morris does an excellent job in his book Two Trillion
Dollar Meltdown – Easy Money, High Rollers, and the
Great Credit Crash of explaining how we got into a
credit crunch. He explores the financial markets, the
policy misjudgments, and the delusions that led to the
largest credit bubble in history. Excessive debt led to a
massive disruption in global markets and government
leaders are still downplaying the problem—the
restructuring that is required to fix the problem will be
very painful.

CDOs, CDSs, &CREDIT RATINGS

Government and retirement funds mandate that
their investments must be of the highest credit rating,
Triple-A. Standard and Poor’s and Moody’s are credit
rating agencies that corporations pay to assess their debt
instruments. How is it that these agencies gave CDOs
made up of junk bonds a triple-A rating?

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