Credit Crunch Visionary

A thousand plagues on Wall Street’s financial engineers. They created the boom in exotic trading instruments that blew up last year, leading to the collapse of the subprime mortgage market. That failure produced the current credit squeeze, which in turn sent the nation into an economic downturn.

It would be convenient to buy this argument and leave it at that. Jim Kragenbring offers a more nuanced perspective: There were many enablers of this mess, most importantly the money managers and investors who bought the securities that have become so toxic. Had they done their homework, they might have avoided them. And there can be considerable value in financial innovation.

Kragenbring is a vice president and senior investment officer in the structured finance unit of Advantus Capital Management, part of the Securian Financial Group in St. Paul. Since the credit markets seized up last August, The Wall Street Journal and New York Times have cited him for raising concerns early on about the failure of the credit rating agencies to detect the poor quality of much subprime debt.

In an interview, we talked about who is to blame for the subprime crisis. There’s no shortage of targets: the bankers who sold the bad loans; the originators of the loans, Wall Street packagers who wrapped the good loans in with the bad, homebuyers who took out mortgages they couldn’t afford to repay, lax regulation, the Federal Reserve’s easy money policies, fraudulent operators, the ratings agencies.

“There is ample blame to go around,” Kragenbring says. But the onus is on the money managers and investors who are directly responsible for committing capital.

Structured Finance Cools Down

Kragenbring is originally from St. Louis and, like many of that city’s natives, an intense fan of the St. Louis Cardinals. He sprinkles his investment commentaries with baseball analogies.

He remembers listening to the 1987 World Series, when the Minnesota Twins defeated the Cardinals: “As a 12-year-old, when I would go out to dinner with my family, I’d have my transistor radio with me.”

His field, structured finance, embraces the financial sector that transfers risk through the use of complex legal and financial entities. This industry has been around for years, but expanded immensely starting in the mid- to late 1990s, thanks in part to the rapid growth of derivatives—futures, options, swaps, and other instruments whose values change with shifts in the variables underlying them. These variables include many different forms of equity, debt, and commodities, as well as interest rates, exchange rates, and a wide variety of market and economic indexes. Today, structured finance is struggling given the turmoil in the credit markets.