Investment Banks Are Afraid of Your Mortgage

While House reps sleep in after their weekend health care marathon, this afternoon the Senate Banking Committee starts poring over the financial reform bill introduced by Senator Christopher Dodd (D-CT).

A little detail in there is set to have a huge impact. It boils down to a prudent bit of behavior known colloquially as "eating your own dog food."

Dodd's bill asks the investment banks that package and sell mortgage-backed securities to keep 5 percent of everything they sell on their own books. And no cheating allowed, so they can't use derivatives like credit default swaps to protect themselves from taking a hit on stinker securities.

The idea is simple: if investment banks share the risk, even a little piece of it, they'll think twice before backing risky mortgages and then dumping them them in the form of toxic securities on unsuspecting investors.

Good idea, right? Well, be prepared to defend it, because the lobbyists are lining up.