Are U.S. banks repeating the mistakes of the past?

In the aftermath of the 2007-2008 financial crisis and subsequent Great Recession, it appeared as if the nation's largest banks would turn away from their old, economically dangerous practices. Exotic finance products like collateralized debt obligations, credit default swaps and subprime mortgages securities became taboo virtually overnight. Yet, in the years since, major U.S. banks appear to be slowly but steadily re-entering riskier sectors of the economy.

According to The New York Times, large financial institutions may not be as forthcoming about their risky investments. Rather, they are using an accounting tactic known as "capital relief trades" to essentially shift risk from one balance sheet to another. For example, a bank may transfer a portfolio of commercial loans to a hedge fund. While technically this reduces the immediate risk the bank faces, the complications that could arise if the investments sour are still very real. U.S. regulators don't currently have the tools to combat this behavior, despite the Dodd-Frank financial reform laws passed in 2010.

The pressure to take on riskier, revenue-driving assets is in response to flagging profits at the largest U.S. banks, which have seen most of their growth from mergers and acquisitions since the Great Recession. On April 10, the International Business Times, a finance-oriented media source, explicitly called for organic solutions to revenue problems as opposed to accounting gimmicks like the one described above. Whether or not this advice is taken remains to be seen.

If U.S. banks are returning to their old, dangerous tricks in a bid to boost profits, investors should tread carefully with their portfolios. Relying on consistent revenue-driven assets like cash flow real estate can help hedge against potential losses. To learn, download a "Free Game Plan Report" today.