Despite the past, Europe exploring mortgage-backed securities

A general view of the skyscrapers of Canary Wharf in London

TEXT OF INTERVIEW

Steve Chiotakis: Investment banks, including many in Europe, are returning to the mortgage-backed security business. Probably wouldn't be such a big deal had many of those same securities not almost ruined the financial system. Stephen Beard is with us live from London with that story. Good morning, Stephen.

Stephen Beard: Hello, Steve.

Chiotakis: So forgive me for being a doubting Thomas here, but I can't help but feel a little scared. I mean, what's going on?

Beard: Yes, the nightmare returns. You can almost hear the coffin lid creaking open, can't you? Yeah, the signs are that investment banks are once again hiring people to trade in these packages of loans, mortgage-backed securities. And some of the banks who are hiring were among the hardest hit in the subprime crisis -- UBS, Royal Bank of Scotland and BNP Paribas.

Chiotakis: And haven't they learned their lesson, Stephen? I mean, why are they doing this?

Beard: Well, there is a shortage of securities for banks and other investors to invest in. Stock markets are looking pretty dodgy, very erratic at the moment, and European government bonds don't look to hot. So investors need something to invest in. And moving back into mortgage-backed securities may not be as scary as it sounds; the U.S. housing market is nothing like as frothy as it once was, and these mortgages are backed by Freddie Mac and Fannie Mae. Nevertheless, independent bank analyst Michael Prest says we should be wary: we're in a period of very low interest rates right now, and we know the trouble that caused the last time around.

Michael Prest If you get low interest rates fueling a rather sort of insubstantial but very frothy real estate boom, its going to be very hard for some of these banks to resist the temptation to reverting to the bad, old ways.

But the general thinking seems to be the banks have learned a very bitter lesson, they're on their guard. And for investors, there's the old adage: the safest time to fly is usually directly after a monumental air crash. So maybe mortgage-backed securities will be safer this time.

Chiotakis: And indeed, was monumental. Marketplace's Stephen Beard, reporting from London. Stephen, thanks.

Beard: OK, Steve.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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