Bond Market Innovation

Bond market innovation develops from a market deficiency recognized by one or more individuals. For example, Robert Dall becomes aware demand for financing in the thrift industry will outstrip capital provided by its current financing mechanisms. Similarly, Michael Milken knows demand for financing the corporate bond market is satisfied for blue chip firms because they are considered investment grade by credit agency ratings. However, developing companies on the way to profitability have no ready market for public financing because they are not investment grade—they are "junk."

Salomon creates the collateralized mortgage obligation (CMO) to overcome mortgage inefficiencies in 1983 and takes over the mortgage market by 1986. Ranieri improves and assures tradability of the mortgage loan instrument by a stamp from one of three government agencies. Government guaranteed mortgage loan documents must let homeowners prepay the principal balance due. This provision makes maturity date of a...