Mortgage Securitization in the Roaring Twenties

Floyd Norris has a fascinating column today on new research that shows, yet again, that there’s nothing new under the sun—even on Wall Street.

And I thought mortgage securitization was something invented by Lewis Ranieri in the ’80s.

Norris writes about a paper released by the National Bureau of Economic Research, the same guys who bring you the recession (or call it, anyway), that found real estate securitization was huge in the 1920’s and may have played a big roll in causing the Great Depression—or at least the crash. Hmmm.

To be sure, the securitizations were not as complex as the ones invented in recent years, but they were not all simple either. Most were bonds backed by one commercial building whose construction was being financed, but there were also pools of residential mortgages. Some of the bonds included warrants for partial ownership of the building, and some were convertible into stock.

There was even something similar to the exotic C.D.O.’s, or collateralized debt obligations, that failed so spectacularly. Those securities were not directly backed by real estate, but were instead supported by other securities that had such backing. One 1920s bond was called a “collateral trust” security, with a claim on a building’s profits but not on the building itself.

Norris points out how stunning it is that we haven’t known about this and shivs legendary Depression student Ben Bernanke a bit:

“The breakdown in their valuation, through the mechanism of the collateral cycle, may have led to the subsequent stock market crash of 1929-30,” they wrote.

If Ben Bernanke had been thinking of that, do you think he might have been more hesitant to say that the subprime mortgage crisis had been “contained” in 2007?

Probably, but who knows? Bernanke has proven himself to be about as prophetic an oracle as the discredited Alan Greenspan. And we’ve got him for another four years now. Better hope Bernanke can foretell the consequences of the new bubble he’s inflated better than he could the one his predecessor did.

And Norris uses this column to come to the right conclusion—or at least to ask the right question:

That fact should raise questions about whether the securitization machine should be patched up and back in business to operate without government guarantees.

Perhaps, instead, we should find a way to get banks and other long-term investors, like insurance companies, to make — and keep — most of the real estate loans that are needed in society.

Norris calls this

the same old speculative enthusiasm, even if it was wearing fancy new clothes. Investors who had seen real estate prices rise thought that trend could not end. Wall Street sharpies thought they had found a way to make lots of money while not bearing the ultimate risk if the game suddenly ended.

Same as it ever was.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.