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CHAPTER 8 Riskless Arbitrage—Stand-Alone Collateralized Mortgage Obligations (CMOs)

As deregulation progressed, the effects of the monopolies created to overcome the Great Depression and Axis nations finally faded. The first sprouts of a level playing field in finance began to emerge within U.S. trading markets and among our trading partners. Without new risk averse transaction structures to support new entrants, however, the advantages of deposit insurance prevented the sprouts from growing enough to support U.S. capital market needs.

In all trade, riskless arbitrage is the process that moves markets from monopoly to competition. If a local monopolist raises prices or rates, its profits are restricted when outsiders find ways to use lower prices elsewhere to bring goods (or money) into the monopolist’s market, risk free, to sell at a price lower than what the monopolist charges. The key to creating a true level playing field in finance, therefore, is to generate true riskless arbitrages that are indubitably safe and allow the new sources of money to grow and compete with former monopolists.

Many people are shocked when we say that the hangover of the Great Depression lasted nearly half a century, but this is the reality in terms of credit creation and private-sector growth. “Contrary to conventional wisdom, FDR’s New Deal did not rescue the economy from The Great Depression,” notes author and columnist Sol Sanders. “That took the unprecedented World War II mobilization which ...