One of the causes identified for the meltdown in the US property securitisation market – those CDOs, CDOs squared and the CDSs used to back them up – is that even when it was obvious that the US housing market was in trouble, commercial banks continued pushing for higher originations, and investment banks kept pushing out synthetic products to securitise them.
And the reason for that was simply because pay was tied to performance, which in this case involved pushing product out the door, whether or not it was in the long term interests of the employees and the financial firms doing the pushing, much less the investors doing the buying. As Charles Prince of Citi put it, “…as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
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