Wednesday, September 24, 2008

Pension funds behind the subprime mess

Tnis is taken from Warren Mosler's blog:

Did you know that ERISA was amended on November 2000 to allow pension funds and employee benefit programs to buy ABSs with investment grade below A; and to buy senior tranches of CDOs as long as they have an investment grade of at least AA.

Here is the sentence taken from this amendment:

“The Amendment permits inclusion of assets with LTVs in excess of 100%. However, securities backed by such collateral (a) must be senior i.e., non-subordinated securities and (b) must be rated in either of the two highest generic ratings categories by a rating agency.”

It seems to me that this is what was behind the bubble in the2000s, i.e., the explosion in the growth of CDOS, CDOs-squared, under-regulated mortgage companies etc."

By the way, we are doing the same thing with oil and commodities now by allowing pension funds to essentially buy and hoard these "assets." Unless stopped, there is no upward limit to the price of oil, corn, food, etc.

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