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Let’s wind back the clock to September, 2008, when the actions of US banks and the mortgage-backed derivatives market brought the US and global economies to a grinding halt. Very quickly it became clear that many players had acted irresponsibly. The trillions of dollars of debt, the endless creation of complex securities, the bundling of various forms of debt to be traded on the derivatives market and the frenzied buying of these instruments all contributed to the disaster. It all ended abruptly and investors were soon looking for someone to blame.
Global investment powerhouse Goldman Sachs was one of many major financial institutions to narrowly escape a momentous fall and even bankruptcy. US banks controversially offloaded large chunks of mortgaged-backed securities, in the process washing their hands of debt that was soon to go from A-rated to toxic. Those stuck with the debt found themselves in a precarious position as the US mortgage market spiraled downward.
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Above: US markets reel as the mortgage market implodes in late-2007.
Fast forward to August, 2012 and we find the US housing market trying to recover and the aftershocks of 2008 still reverberating through global economies. US stock markets have recovered better than most, especially Europe, whose travails needs no introduction. Asian markets look set to experience a prolonged pull-back and Australia continues to struggle as reduced demand and a high Australian dollar combine to stifle our export-reliant economy.
While US markets appear to have found support, what has become of those major banks, which so readily traded the mortgage-backed securities market? It seems they have turned full-circle.
The very banks that traded in instruments responsible for the collapse of the US mortgage market are now taking advantage of the situation they helped to create. Housing prices are at an historic low and shares still carry high volatility, yet the US housing market appears to be finding traction. And major banks are setting up funds to buy properties at rock-bottom prices.
Former Goldman Sachs executive Roger Mullen is reportedly raising up to $500 million to buy foreclosed homes. And Mullen isn’t alone. Private Equity firm Blackstone Group also announced last week that it would be spending $300 million to buy 200,000 foreclosed homes.
It appears that this market has turned full-circle and those who contributed to creating the greatest global downturn in a generation look set to profit from its recovery.
Stay Ahead of the Game,
Lachlan McPherson
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