Why would banks want to make loans that sound very risky?
Banks allow such high volumes of risky loans to be originated because days after the loan funds they get pooled together with millions of dollars of other loans and sold to financial institutions, pension companies, life insurance companies, foreign governments and the US federal government on Wall Street on what is called the secondary market. Between 40-50% of all outstanding loans in the United States are owned by the federal government. After the loans get sold, which is very easy to do in the secondary market, the banks earn a nice profit and go out to find more loans to originate. John R Vogt, the Executive Vice President of The Bond Market Association wrote in a letter to federal regulators that, “selling and securitizing loans is one of the most important ways financial institutions manage their risk exposure.
