The consequences were twofold. Many buyers had little understanding of the real nature of what they were buying, just that its apparent yield was higher than the dull alternatives on offer in what was a disinflationary, low interest rate environment. And many banks decided, fatefully, that rather than passing on all these derivatives to others – a business model that was known as “originate and distribute” – it would be more profitable to hold onto large bundles of derivatives themselves, placing them out of regulators’ sight in special off-balance-sheet entities. By these and other means,
...more
