The banks are at it again. Salmon:
Here’s Matthew Richardson and Nouriel Roubini writing in the WSJ this morning:
Consider also recent bank risk-taking. The media has recently reported that Citigroup and Bank of America were buying up some of the AAA-tranches of nonprime mortgage-backed securities. Didn’t the government provide insurance on portfolios of $300 billion and $118 billion on the very same stuff for Citi and BofA this past year? These securities are at the heart of the financial crisis and the core of the PPIP. If true, this is egregious behavior and it’s incredible that there are no restrictions against it.
But if there were restrictions against this behavior in particular, the same banks, or other banks, would find other ways to chase risk, just because they’re so confident that they can make billions of dollars and get themselves out of their present hole by doing so. They might even be right: 95% of the time, they probably are right. But that’s the Rubin trade: it works until it doesn’t. And although it’s the easy solution to the problem, it’s also a very worrying solution to the problem, because it just sets up yet another inevitable meltdown at some unknown point in the future.
And the beat goes on.