King Charles II, circa 1660

It’s been exactly a decade since the collapse of Bear Stearns that prefaced the banking crisis of 2008. So you would think that by now investors might have absorbed and learned their lessons from financial history, namely that purchasing debt backed by questionable cash flows can backfire.

Yet, last weekend the Financial Times reported that in the first quarter of 2018 a total of $1.3 billion of bonds backed by sub-prime loans were purchased by investors. This is more than double the amount that was issued in the first quarter of 2017 and up from practically zero issuance during the financial crisis.

Recall that these instruments — and the mistakes made in their valuation — were at the heart of the problems that led to the financial crisis and the Great Recession.

If markets can forgive and forget after only a decade of history, then I guess there is little hope they will learn from lessons that took place centuries ago. And yet, there are eerie similarities between the mortgage-backed securities of the 21st century and a financial product that was issued over three centuries ago, in the 17th century, known as collateralized treasury obligations.

In an era before the Bank of England, the London Stock Exchange, rocket scientists and Wall Street, there were securitized bonds that led to financial crises. The names are different, but the drama is the same.

Here is a summary of what happened to a prior generation of bankers and investors who believed that securities backed by a collection of promised cash-flows were safer than the individual cash-flows themselves. Get into your time machine.

In late 1671, King Charles II of England — also known in history as the Merry Monarch — was preparing for a war against the Dutch, which was then the financial and commercial center of continental Europe.

The sentiment in the English street was that the Dutch were getting the better of the English in international trade deals (sea routes, colonies and such). They ventured that a good war would help resolve commercial matters in their favor.

Sounds familiar? The problem was that the perennially short-of-money King Charles II didn’t have the funds required. What to do? In the fall of 1671 he called in the major goldsmith-bankers of the day and asked them for a (very big) loan to outfit a fleet of 60 ships.

These influential and wealthy bankers flat-out refused to give him a single shilling. Strutting their financial muscles, they claimed that they had already extended the king enough credit via the collateralized treasury orders (CTOs) they held.

These instruments were not dissimilar from modern day mortgage backed securities (MBS) and the impetus…