No Conscience on Wall Street
If you thought big banks on Wall Street learned a lesson from the Great Recession, think again. After encouraging Americans to buy far more house than they could afford, bundling the soon-to-be sour loans into pretty packages, paying their buddies at the ratings agencies to slap a triple-A stamp on them, and pushing the bundled loans as solid investments to all of us, they then asked the U.S. taxpayer to bail them out and provide golden parachutes to the executives who helped cause all the trouble.
Big Banks & Small Customers
And they’re back at it again. Goldman Sachs is working on a new subsidiary it’s calling “Mosaic.” It’s basically an online lending platform that will offer small, short-term loans to borrowers of all types of credit. Sounds like an okay idea until you really dig into it.
You see, in order for the business to really be profitable, it’ll have to extend these loans to subprime consumers — people with poor or no credit. Sound familiar? Just wait, because it gets even better.
While the bank itself hasn’t announced any details, some have leaked, and the rest can pretty much be derived with a little critical thinking.
Goldman recently bought an online banking business from GE Capital and gained access to around $16 billion in deposits to add to the $98 billion it already had in GS Bank. That’s money it’ll likely use to fund these loans from Mosaic (or whatever it ends up calling it).
But the bank will need to be able to put that money back into customers’ accounts before they want to withdraw it, so (and this is just me using common sense) they’ll probably not hold onto the loans themselves.
NBS: Nothing-Backed Securities
With the experience the company has and the technology at its fingertips, I wouldn’t be a bit surprised to see these loans bundled into pretty little packages and sold to retail investors just like mortgage-backed securities in the early 2000s.
I mean, what could possibly go wrong?
Subprime loans with absolutely nothing securing them (no collateral whatsoever) with triple-A ratings from Moody’s and Standard & Poor’s flooding the market… I can’t imagine anything better to invest in.
Short Memories and No Morals
Sorry for the sarcasm, but I’m just flabbergasted here. This is exactly the same thing that happened with subprime mortgages. The only real difference is that when someone defaults on a home loan, there’s a home that can be sold to at least make up some of the loss. These loans will have zero collateral, so when (not if) people default on them, there’ll be nothing to take to recover any of the money.
But that’s not going to hurt the banks selling them. Because they’ll have already made back the loan amount plus some by passing the risk on down the line to retail investors and anyone with a 401(k).
It’s disheartening that nobody else is talking about this. And it’s downright scary that anyone thinks it’s a good idea. So, when this does happen — because it will — stay far away from those securities. No matter how good they look, they’ll end up being just like the MBSs that cut retirement savings in half just a few short years ago.
The Big Short: Part Two
I’ll be keeping a close watch on the situation and looking for ways to profit when it all falls apart again. I’m not hoping for disaster, but I’m also a pragmatist, and I know a bad idea when I hear one. So as soon as I see an opportunity to get into a position that’ll protect your portfolio or bring in profits from the downfall of this terrible scheme, you’ll be the first to know.
To investing with integrity,
Follow me on Twitter @AllBeingsEqual
P.S. If you’re looking for some ideas for smart places to invest, don’t forget to check out the Wealth Daily archives. You’ll find articles ranging from how to get started investing to what kind of investments are best for getting paid while you save. You can learn about the future of the automotive industry, how to invest in legal cannabis, and even how to safely add an extra 20% in profits to your most successful trades.