Voodoo Banking Part 1

Over the last 15 years, increased competition (within the industry and increasingly from non-banking institutions) and the reduction of earning from the commoditization of products forced banks to rely on “voodoo banking” - performance enhancement to boost returns. Focus on risk adjusted returns (introduced in the early 1990s by JP Morgan (JPM) and Bankers Trust) changed the “business model”.

Traditionally banks made loans that tied up their capital for long periods - e.g. up to 25/30 years in a mortgage. In the new “originate to distribute” model, banks “underwrote” the loan, “warehoused” it on its balance sheet for a short time and then parceled them up with other loans and created securities that could be sold to investors (“securitization”).