Slideshow: The Origin of Toxic Assets

Thanks to the holiday we’ve had more time to look through older stories we can’t necessarily get to on a daily basis. Today, we bring you an article from early 2009. In it Michael Osinski, an instrumental character in writing the software that turned mortgages into bonds, explains from his unique perspective how toxic assets came to life.

First, he describes the process of creating mortgage-backed securities in a nutshell:

“…I asked Leszek what the busy group did that sat next to us, he told me they created mortgage-backed securities. It was an instrument, he claimed, designed to keep programmers employed … ‘You put chicken into the grinder’ — he laughed with that infectious Wall Street black humor — ‘and out comes sirloin.'”

After mastering the basic chicken-to-sirloin alchemy, Osinki’s meat grinding skills advanced:

“…I used the time to extend our structuring model to subordinated bonds. Allow me to expand Professor Gesiak’s analogy a bit: For deals with non-agency loans — that is, not Freddie or Fannie — in addition to the sirloin that comes out of the grinder, there is a small percentage of offal. By running that offal through the grinder again, in effect bundling together all the pieces from various deals that absorbed the default risk, we then created some andouille and some real dog food. The rise in price of the sausage over the offal more than compensated for the unsalable leftovers. That junk typically couldn’t be sold and stayed in-house, eventually becoming known as a ‘toxic asset.'”

For decades he “slaved away at the sausage grinder,” designing and marketing the software that enabled toxic assets to proliferate throughout the financial services industry. His story is covered in detail, and is even animated into a slideshow, in New York Magazine’s coverage of how Michael Osinski helped build the bomb that blew up Wall Street.