The origin of the debt crisis lies with the evolution of America's financial markets using financial engineering and leverage to finance the credit expansion. Financial institutions created a Frankenstein with the change from simply lending money and taking fees to securitizing and selling trillions of loans in every market from Iowa to Germany. Credit risk was replaced by the 'slicing and dicing' of risk, enabling the banks to act as principals, spreading that risk among various financial institutions. Securitization allowed a vast array of long term liabilities once parked away with collateral to be resold along side more traditional forms of short term assets. Wall Street created an illusion that risk was somehow disseminated among the masses. Private equity too used piles of this debt to launch ever bigger buyouts. And, awash in liquidity and very sophisticated algorithms, investment bankers found willing hedge funds around the world seeking higher yielding assets. Risk was piled upon risk. We believe that the subprime crisis is not a 'one off' event but the beginning of a significant sea change in the modern-day financial markets.

Eben Esterhuizen  Stocks  Wall Street 

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