The collapse of the global marketplace would be a traumatic event with unimaginable consequences. Yet I find it easier to imagine than the continuation of the present regime.
George SorosRead
The securitisation of mortgages added a new dimension of systemic risk. Financial engineers claimed they were reducing risks through geographic diversification: in fact they were increasing them by creating an agency problem. The agents were more interested in maximising fee income than in protecting the interests of bondholders. That is the verity that was ignored by regulators and market participants alike.
Interpretation
What this quote means
The quote highlights how the securitization of mortgages, intended to reduce risk, actually increased it due to misaligned interests between agents and bondholders.
George Soros's quote reflects on the complexities of financial engineering, particularly in the context of mortgage securitization. While the intention behind this practice was to mitigate risks through diversification, it inadvertently created new risks due to the agency problem, where financial agents prioritized their fee earnings over the welfare of bondholders. This fundamental misalignment of interests was overlooked by both regulators and market participants, underscoring a critical failure in the financial system.
Themes
SecuritisationMortgagesSystemic RiskAgency ProblemFinancial Engineering
In practice
Example use cases
In a financial seminar discussing the housing market, this quote can illustrate the unintended consequences of securitization.
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My foundations support people in the country who care about an open society. It's their work that I'm supporting. So it's not me doing it. But I can empower them. I can support them, and I can help them.
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The criminalization of marijuana did not prevent marijuana from becoming the most widely used illegal substance in the United States and many other countries. But it did result in extensive costs and negative consequences.
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Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.
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