October 23, 2018

The Return of Wall Street’s Toxic Alphabet Soup

“In the years leading up to the financial crisis, Wall Street figured out how to spin relatively obscure activities into gold.

What resulted was a jumble of products designed to profit off of the relatively mundane business of mortgage lending. From the mortgages themselves to products created to bet on risk and credit worthiness, soon enough, Wall Street had created an extensive and complex array of securities with funky acronyms, in some cases magnifying the risks two- and three-fold.

Banks, insurance companies, hedge funds and others were hungry to partake, but what seemed like easy profit at first stopped working when borrowers stopped paying on their loans. Losses cascaded across the financial market, requiring massive intervention to prevent the banking system from failing.

On Sept. 19, 2008, days after the failure of Lehman Brothers and the government action to shore up American International Group, the Treasury announced its remedy in the form of its own acronym: the $700 billion TARP. The Troubled Asset Relief Program would buy the toxic securities from banks and infuse them with capital to get over the crisis. TARP ultimately bought $426 billion of these assets and recovered $441 billion for a profit of $15 billion.”

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