Template:M intro repack ABS field guide
Transformation
Financial services are not immune to the civilisational sweep of the information revolution. As the consumer world glommed onto digital watches, space invaders calculators, Donkey Kong and the graphic user interface so was the banking world being rocked by a Cambrian explosion of sophisticated financial engineering. Swaps, securitisations and investment management mushroomed in the nineteen-eighties.
The revolution was, at first, curiously non-technological.
Egged on by the sweet sirocco breeze of economic liberalisation, pioneering financial innovations in the 1980s owed little to the digital age beyond a willingness to look at old things in a new way. The technology inside a swap, for example, is ancient — loans — the innovation being simply to juxtapose offsetting ones, in different currencies, between the same parties, and then do some clever monkey-business to calculate a net present value. Even mark-to-market accounting that facilitated this had been around since before the great depression.
Electronic booking systems made it easier to manage complicated cashflows, but to that extent, technology only sped the derivatives market up: it did not enable anything you could not have done with paper and pencil. Likewise, dematerialised clearing arrived in securities markets in the late 1970s, but had remarkably little impact on how deals were documented or the market infrastructure felt about them. It still doesn’t: indeed, bond market infrastructure is still predicated on the uneasy fear that clearing might be just a fever dream, or is liable to be rendered permanently inoperable by some kind of electromagnetic pulse whereupon the world will have to return to its old analogue security-printed ways, festooned with paying agents, coupons, talons, Belgian dentists, and Balearic benders.[1]
Lawyers are, after all, good at studiously ignoring progress when it promises to put them out of work, and just as adept at embracing any progress that promises to create more of it.
Therefore, the JC’s unfashionable view: sine qua non of financial innovation in the 1980s was the word processor.
Once you could type things on a computer, it just became easier to type out more things; to redraft, mash up, iterate, duplicate and propagate. You didn’t have to re-type every page from scratch. You didn’t need to faff around with carbon paper. Once you could send files electronically — you know, fax — everything became easier still. It was bummer for sub-60 bike couriers, but hey: Deliveroo.
Suddenly we had quite heavily structured derivatives, tediously documented, a neat way to aggregate and resell portfolios of small, idiosyncratic assets, and even ways to reallocate the portfolio risk among different classes of investors with different risk/return profiles. A brave new world beckoned, and all thanks to the ease of putting words on paper.
For the most part, it hasn’t disappointed.
- ↑ For those reading who may be of that belief, here is the thing: if such a catastrophe were to befall the securities market, and its worst consequence were the permanent failure of the clearing systems, there would not be the printing capacity on the planet to produce the necessary definitive notes, and that would be true even if the proprietors of said printing businesses weren’t spending their waking hours scavenging the post-apocalyptic streets for uncontaminated dog meat.