Great Article Summarizing Securitization Risks


This was originally hailed as a brilliant financial innovation as US Fed chair Alan Greenspan believed that CDOs transferred risk from banks to investors able and willing to take it on. But securitization not only increased systemic risks, but also did not reduce risk to the originating banks who had sold off the loans.

The US subprime mortgage crisis, which started in 2007, quickly spread, via related CDOs and CDSs, to much of the rest of the financial system and across national borders, with repercussions for the real economy worldwide, not least through trade and other policy responses, including protectionism.

Risks and rewards have increased as collateral is rehypothecated, i.e., used by lenders for their own purposes. Such leveraging allows lenders to become borrowers. Mark-to-market practices, shorting and rehypothecation thus increase risks for the financial system. [e.s.]

CDO losses accounted for nearly half the total losses sustained by financial institutions between 2007 and early 2009, when the collapse of Lehman Brothers triggered a run on global repo markets that triggered banking and European sovereign debt crises.

Financial regulators recognize the systemic significance of these financial developments. Although the Financial Stability Board, created in the wake of the 2008 crisis, identified securitization and repo markets as critical priorities for shadow banking reform, securitization is back on financial development agendas, especially for developing countries.

4 Responses

  1. Java — “Lender” totally distorted/concealed at origination. There was NO “Lender.” Restructuring of “reported” default debt, even though there was no default at origination, and without disclosure to ANYONE. And — “Default Debt” cannot be securitized. Hence – the collapse. Those in the know – know this.

    Bob G is correct. Hedge Funds, private equity, distressed debt buyers from the onset. He is right on. They remain, and unregulated.

    Now, in theory, it is possible to pass through cash flows on anything. But, once you start calling it “securitization” — there is a problem because not derived from ANY asset. This is the problem we have and cause for collapse. Always, have to realize – the fake documents – they are the effect and NOT the cause. Basic. Need to PRESENT the cause. Neil can do it — just go back Neil Go back. Give that to those who trust you. Don’t fail them. Go back. I don’t see this here yet. Until I do — not enough.

    Very complex. Need help — or to be very lucky. Luck is evasive. .


  2. […] Source: Great Article Summarizing Securitization Risks […]

  3. Bank of America N.A. is NOT a lender. They lied at origination !

  4. As Ben Bernanke said at financial crisis – these securitizations passed through cash flows only , and not the loan itself or title . Federal Reserve has confirmed that by its opinion , now codified as law, to changes to TILA by Dodd Frank. What this article does not explain is the “originator”. Non banks were stated as Lender, but they lent nothing . In fact, the investment banks lent nothing (except any cash out) . So what was being securitized ? True securitization required a lender and an asset on the accounting books. None here This is fundamental reason for collapse. They got away with fake securitization for awhile and took other risks because – no one was watching.

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