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23 September 2021

First & Second Quarter 2021

While the investment stories of names like Dogecoin, AMC and GME may or may not be familiar to the average client of True North, everyone under 35 can name friends and peers who have been participating in the ups and downs of these and other financial assets in 2021. Financial custodians are devoting hundreds of people to the task of determining how digital assets trading, custody, and services will fit into their platform seamlessly with the existing menu of stocks, bonds, and alternative investments.

The year 2008 earned its dubious distinction as the worst year ever for stocks, as the S&P 500 declined 37 percent. Now known as the Great Financial Crisis of 2007-2008, the precipitous slide of asset prices around the globe was catalyzed by several culprits. Newly-invented derivative structures called mortgage-backed securities began to circulate through financial markets in the early 2000s. This bundling of private mortgage credit risk allowed banks and mortgage companies to offload newly-issued mortgages almost before the signatures were dry.

With this outlet in place, and with government policy overtly in favor of increased home ownership rates, underwriting predictably became looser and the bubble began rapidly inflating. Housing prices shot higher, which spurred an even greater buying frenzy and even lower underwriting standards. Banks, mortgage companies, and investors ended up holding the bag on trillions of dollars of exposure to the housing market.

I closed on my second home in July 2007 right at the peak of the mania. I will never forget the bank encouraging me to consider taking out a second lien mortgage, which would have put my total loan-to-value at 105 percent of the home’s cost. When I asked why anyone would borrow more than the total cost of a home, I was told (with a straight face) that customers usually used the extra funds to purchase furniture for their new house.

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