Leverage upon Leverage upon Leverage
Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is without exception a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory. The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another the creation of debt secured in greater or lesser adequacy by real assets. – John Kenneth Galbraith, A Short History of Financial Euphoria
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Modern banking is very similar to a Ponzi Scheme, with a couple differences. Most important, leverage is supposedly regulated to a certain degree and hopefully money lent bolsters "real" economic activity, which, as the old Supreme Court definition goes is like pornography, you know it when you see it.
The banks do everything they can to figure out how to get around these rules with "financial innovation." The last four decades, and especially the last decade and half, have been greatly inventive. So, when the FT writes,
US banks have increasingly turned to credit risk transfers — also known as synthetic risk transfers (SRTs) — to reduce the amount of capital they must use to guard against losses on the loans they have underwritten since domestic regulators blessed the deals in 2023.
one might have a little concern. Take notice these were Biden's regulators. On the issue of finance as with so many others, militarism at the top, there's been no difference between the parties for a long, long time. The FT adds a note of concern from someone investing in these SRTs, though not concerned enough to not invest,