Wall St. Practice that Led to ’08 Recession is Making a Comeback

Financial Crisis

For most of us the ugly memories of the the financial crisis of 2007 & 2008, where Wall Street combined loans & mortgages into investment packages and then sold them to anxious investors, is still very fresh in our minds. The so-called “peer to peer” selling practices (known as asset-backed securities) became a horrible symbol of the worst economic downturn since the Great Depression. The bad news is: the practice of bundling loans together and packaging them to sell to investors is still around, and they’re making a comeback.

According to CNBC

Peer-to-peer lending, also known as marketplace lending, is a burgeoning business and involves private loans between lenders and borrowers, usually arranged through web sites such as Prosper, Lending Tree and SoFi, along with a growing array of other entrants to the field. Investors like the loans for the yield they provide, and individuals and business people enjoy the ease of going to a site and being able to procure funding relatively quickly. But as the industry is growing, so are its funding needs. That’s where big Wall Street banks are stepping in. Peer to peer platforms increasingly are bundling loans together and selling them off to institutional investors as “asset-backed securities.”

All of this brings back fresh memories of the “great recession” that began in 2007 with a crisis in the subprime mortgage market. It then quickly led to the international banking crisis with the collapse of the investment bank Lehman Brothers in 2008. What followed were bailouts and Quantitative Easing efforts to prevent a possible collapse of the world’s financial system. The crisis was followed by a global economic downturn, the Great Recession, and then the Eurozone crisis which hit the banking system of the European countries using the euro.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was then created to lessen the chance of a recurrence, but now Dodd-Frank is being tabled by Pres.Trump, and may possibly be dismantled.

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