Wednesday, January 9, 2008

Does the Securitization Model actually work?

The advent of securitization by banks was promoted as the beginning of a new era. Suddenly due to the mathematical modeling of Wall Street wizards, risk could be distributed while profits would be increased.

This pipe dream has come to a shattering halt over the past few months; similar to the implosion of the tech bubble in 2000. The tech industry zealously believed that standard financial ratios did not matter anymore as stocks were bid up to obscene price levels, in the same manner the financial sector put forward that the old stoic ways of doing banking were a relic of the past. At least, until the house of cards started to collapse this past summer leaving many major institutions struggling for survival.

The Financial Times discussed this spectacle in a recent article titled Payback Time.