The Anatomy of the Mortgage Securitization Crisis

Abstract:

The current crisis in the mortgage securitization industry highlights significant failures in our models of how markets work and our political will, organizational capability, and ideological desire to intervene in markets. This paper shows that one of the main sources of failure has been the lack of a coherent understanding of how these markets came into existence, how tactics and strategies of the principal firms in these markets have evolved over time, and how we ended up with the economic collapse of the main firms. It seeks to provide some insight into these processes by compiling both historical and quantitative data on the emergence and spread of these tactics across the largest investment banks and their principal competitors from the mortgage origination industry. It ends by offering some policy proscriptions based on the analysis.

SOURCE:

The Anatomy of the Mortgage Securitization Crisis.

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2 Responses

  1. God Help Us–this is so naive——these people are ideal regulators-clueless

    its not complicated; these financial gurus have only one truth —-get as much as you can as fast as you can however you can do it!

    there are no limits until a higher power just comes along and grabs em and tosses them in prison—-anglo law evolved a numbe of simple solutions;
    disgorgement of illicit gains, unjust enrichment, courts in equity that will not enforce illegal contracts such as predatory notes, then if that isnt enuff —prison or the scaffold

    there will be no prison here, no matter what they say and do——–its all theater—–give em a 20 million fine and promise to not engage in trading for 3 years—really bug em –having to do nothing but travel by their private jets from one private paradise to another-no joy of seeing people really screwed-over, no joy of victory–forget the agony thing–that doesnt happen to the smartest guys on the street

  2. …ball you have. I know, but that is our job. …

    Excerpt from Wilbur Ross interview speaking about buying distressed financials at discounted values. Transcript follows.
    American Home Mortgage Sold To Wilbur Ross, Or What Is Left Of It
    by Admin on October 25, 2007
    Exclusive Interview with Wilbur Ross (Part 1). Judge Rules Ross Can Buy American Home Service Unit.
    Transcript: welcome back to “in focus.” i am Brian Sullivan. thank you for joining finance — thank you for joining us. as they fall, hard for the market to stay afloat. the NASDAQ down, the Dow Jones down 142 points. 231 names regional financial, thrift as well. that is down about 1.8. if you want to find a silver lining, it is that the index at the beginning of the show a half an hour goat is down 2.3%. we have seen a couple of buyers come in and test the waters. all the damage with subprime is not turning in everyone into sellers. some very smart ancestors — some very smart investors are becoming buyers, a case in point, Wilbur Ross. he wanted to buy a unit of American home mortgage, a guest today that deal was approved by a judge. Good to see you again. nice to see you, Brian. i have to ask you, we are not one to pick on Merrill lynch, to be fair. the couple of weeks ago that came out with a loss estimate. two weeks later, that loss estimate has grown in terms of it right down by $3 billion. why don’ t wall street banks — most wall street banks, have any visibility right now. i think it is very hard to price some of these mortgage assets. how do you price something in the absence of the bid. , but does no bid mean no value? No, it just means that people are so uncertain about value, people are not willing to put down any substantial money. ball you have. I know, but that is our job. (emphasis added) With other investors we have talked to who are starting funds to pick and choose what assets they are looking at. there’ s obvious some value here. there certainly is some value, particularly in the high rate of security. whether the price of a group like ours will take someone like Merrill is someone that they could bear to sellout is a different ” question. $8.4 billion were the aggregate what they said, is bigger now than the entire market cap of countrywide financial. in a way, they basically broke down the value of countrywide financial in some respects, the same size. — of countrywide financial. in some respects, the same size. you have to have some visibility, right, because aren’t they the markets? they are and they are not. people talk about liquidity as though it is a physical thing, and as i think i have said with you before. liquidity is a psychological thing. it does not have much to do with the amount of cash but, are you willing to deploy the cash, and that is psychology. psychology has gotten very bad in the subprime sector. take a look, for example, that northern rock, another company we are interested in. and we interviewed Richard Branson last week about that exactly. we are part of Branson syndicate. less than one-half of 1% delinquencies, and they’ getting more and more in hock to the bank of england. if it ever failed, it would be the first time a bank failed without having assets. these assets are perfectly good. that is an interesting case. northern rock might be — do you think we will see northern rock- like situations here? we already have. the difference being that the bank of england is basically coming out and guaranteed northern rock. do you think we need some higher level guarantees h re in the united states? i do not think so because remember, it is a thrift institution, had a lot of little depositors and all that. it will be the first run under bank in the u.k. since 1866. so it was a prefer the government to do that. i cannot imagine the government bailing out a countrywide or a Merrill lynch or somebody like that. it is a different thing. i want to go into this question. you said it is a matter of psychology. the fed — are they the doctor? can the provide — can they provide the psychological boost, or is it going to be a case of counterparty risk being assumed. naqoura to the degree to the degree that people felt nothing would happen, that probably helped some. whether that ind approach will exist, i think at the end of the day, the subprime problem is going to be with — where going to have these periodic — something will explode here or there pretty good news is with the dispersion of it, it will not be a gigantic institution that blows up. it is a big thing. it did not blow up Merrill lynch. we are back with more with Wilbur Ross about the subprime market. right after this. stick around.

    http://www.businessweek.com/bwdaily/dnflash/content/aug2007/db2007088_157817.htm
    Top News August 9, 2007, 7:47PM EST text size:
    Why Wilbur Ross Likes Subprime
    The master of distress talks about the risks and rewards of scooping up ailing portfolios after his American Home deal
    BW Exclusives
    … predatory practices. Going to uneducated people and conning them into believing they can get a home at 1%…
    Wilbur Ross

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