First came into play in the early 90’s with the advent of packaged products trying to take advantage of these discrepanciesUsually offering 200-300 basis points above the 30 year

treasury bond, these products were marketed as a way for investors to earn a higher yield without taking on significantly more risk. The most popular of these products were mortgage-backed securities (MBS) and asset-backed securities (ABS).

Mortgage-backed securities were created by pooling together a large number of individual mortgage loans and selling shares of the pool to investors. The cash flows from the underlying mortgages, such as principal and interest payments, were passed through to the investors in the form of regular dividend payments. These securities were attractive to investors because they offered a higher yield than traditional government bonds, while still being considered relatively safe due to the underlying collateral of real estate.

Asset-backed securities, on the other hand, were created by pooling together a variety of assets, such as auto loans, credit card receivables, and student loans. Similar to MBS, shares of these pools were sold to investors, and the cash flows from the underlying assets were passed through to the investors. These securities allowed investors to diversify their portfolios by gaining exposure to different types of consumer debt.

The packaging of these securities allowed financial institutions to sell them to investors, earning fees and freeing up capital to make more loans. This increased liquidity in the market and fueled the growth of the housing and consumer credit markets.

However, the packaging of mortgages and other loans into securities also created a disconnect between the originators of the loans and the investors who held the securities. This led to a lack of accountability and oversight, as the originators were no longer responsible for the performance of the loans they originated. This, combined with lax lending standards and a housing market bubble, eventually led to the subprime mortgage crisis and the subsequent financial crisis of 2008.

Overall, the advent of packaged products in the early 90s provided investors with a way to earn higher yields, but it also created risks and vulnerabilities in the financial system that were ultimately exposed during the financial crisis