Description: The 2007 Meltdown in Structured Securitization : Searching for Lessons, Not Scapegoats

The 2007 Meltdown in Structured Securitization : Searching for Lessons, Not Scapegoats

The intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attenti...

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Bibliographic Details
Main Authors:	Caprio, Gerard, Jr., Demirgüç-Kunt, Aslı, Kane, Edward J.
Language:	English
Published:	Washington, DC: World Bank 2012
Subjects:	ACCOUNTABILITY ACCOUNTING PRINCIPLES AFFILIATES AMOUNT OF CAPITAL ARBITRAGE ASSET HOLDINGS ASSET POOL ASSET PRICES ASSET QUALITY ASSET SALES ASSET VALUES ASYMMETRIC INFORMATION AUDITING BAILOUTS BALANCE SHEET BALANCE SHEETS BANK LOANS BANK REGULATION BANK REGULATIONS BANKING CRISES BANKING CRISIS BANKING INDUSTRY BANKING SYSTEM BARRIERS TO ENTRY BID BOND ISSUE BOND ISSUES BONDS BOOK VALUE BORROWER BUSINESS CYCLE CAPITAL ADEQUACY CAPITAL REGULATION CAPITAL REQUIREMENTS CAPITAL SHORTAGE CASH FLOWS CDS CENTRAL BANK CENTRAL BANKS COLLATERAL COMMERCIAL BANKS COMMERCIAL PAPER CONFLICT OF INTEREST CONFLICTS OF INTEREST CORPORATE BONDS CORPORATE DEFAULT CORPORATE GOVERNANCE CORPORATE STOCK CREDIBILITY CREDIT DEFAULT CREDIT DEFAULT SWAPS CREDIT ENHANCEMENTS CREDIT LINES CREDIT QUALITY CREDIT RATING CREDIT RATINGS CREDIT RISK CREDIT RISKS CREDIT SPREAD CREDIT SPREADS CREDIT STANDING CREDIT SYSTEMS CREDITORS CREDITWORTHINESS DEBT DEBT CRISIS DEBT OBLIGATION DEBTS DEFAULT PROBABILITIES DEFAULT RATE DEFAULT RATES DEFAULTS DEPOSIT DEPOSIT INSURANCE DEPOSIT INTEREST DEPOSITORS DEPOSITORY INSTITUTION DEPOSITS DERIVATIVE DERIVATIVE INSTRUMENTS DERIVATIVES DEVELOPING COUNTRIES DISBURSEMENT DUE DILIGENCE EARNING POWER ENFORCEMENT SYSTEMS EQUITY CAPITAL EQUITY VALUE EXCHANGE COMMISSION EXTERNAL CREDIT RATINGS FACE VALUE FEDERAL NATIONAL MORTGAGE ASSOCIATION FEDERAL RESERVE FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL FRAGILITY FINANCIAL HISTORY FINANCIAL INSTABILITY FINANCIAL INSTITUTION FINANCIAL INSTITUTIONS FINANCIAL INSTRUMENTS FINANCIAL MARKETS FINANCIAL REGULATION FINANCIAL SAFETY NETS FINANCIAL STABILITY FINANCIAL SYSTEM FINANCIAL SYSTEMS FOREIGN EXCHANGE FOREIGN EXCHANGE RISK FOREIGN MARKETS FORMS OF DEBT FUND MANAGERS GLOBAL MARKETS GLOBALIZATION HEDGE FUND HEDGE FUND MANAGERS HEDGE FUNDS HOLDINGS HOME LOAN HOME OWNERSHIP HOST COUNTRIES HOUSING HOUSING PRICES ILLIQUIDITY IMPLICIT SUBSIDIES INDIVIDUAL BOND INDIVIDUAL LOANS INFLATION INFORMATION SYSTEM INFORMATION SYSTEMS INSURANCE INSURANCE COMPANIES INSURANCE COMPANY INTANGIBLE INTEREST RATE INTEREST RATES INTEREST-RATE RISK INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTING INVESTMENT BANK INVESTMENT BANKING INVESTMENT BANKS INVESTMENT STRATEGY INVESTMENT VEHICLE INVESTOR LOSS INVESTOR RETURNS ISSUANCE LENDER LENDERS LINES OF CREDIT LIQUIDITY LIQUIDITY CRISIS LIQUIDITY PROBLEM LIQUIDITY RISK LOAN APPLICATIONS LOAN MARKETS LOAN OFFICERS LOAN PORTFOLIO LOAN QUALITY LONG-TERM INTEREST LOSS OF CONFIDENCE MARK-TO-MARKET MARK-TO-MARKET ACCOUNTING MARKET DISCIPLINE MARKET FOR CREDIT MARKET INTEREST RATES MARKET LIQUIDITY MARKET OVERSIGHT MARKET PARTICIPANTS MARKET PRACTICES MARKET RISK MARKET RISKS MARKET STRUCTURE MARKET VALUES MATURITIES MATURITY MATURITY TRANSFORMATION MINIMUM CAPITAL REQUIREMENTS MONETARY POLICY MORTGAGE MORTGAGES MUNICIPALITIES NEW ENTRANTS OIL PRICES OLIGOPOLISTIC MARKET OUTPUT LOSS PENSION PENSION FUNDS PORTFOLIO PORTFOLIOS PRIVATE PARTIES PROBABILITY OF DEFAULT PRUDENTIAL REGULATION PRUDENTIAL SUPERVISION REGULATORY FORBEARANCE REGULATORY STANDARDS REGULATORY SYSTEMS RESERVES RETURN RISK CONTROLS RISK EXPOSURE RISK EXPOSURES RISK MANAGEMENT RISK PREMIUMS RISKY LOANS SAFETY NET SAFETY NETS SECURITIES SHAREHOLDER SHAREHOLDER EQUITY SHAREHOLDERS SHORT-TERM DEBT SIMPLE BOND STOCK OPTIONS STUDENT LOANS SUBORDINATED DEBT SUPERVISORY AUTHORITIES SUPERVISORY AUTHORITY TAX TRADING TRANCHE TRANCHES TRANSACTION TRANSACTION COSTS TRANSFER RISK TRANSPARENCY UNDERLYING ASSET UNDERLYING ASSETS UNDERLYING MORTGAGES VALUATION VALUATIONS WAREHOUSE WRITEDOWNS
Online Access:	http://documents.worldbank.org/curated/en/2008/11/10053071/2007-meltdown-structured-securitization-searching-lessons-not-scapegoats http://hdl.handle.net/10986/6309

Description
Summary:	The intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame the crisis on mark-to-market accounting, an unexpected loss of liquidity, or trends in globalization and deregulation in financial markets. The analysis finds disturbing implications of the crisis for Basel II and its implementation. The paper argues that the principal source of financial instability lies in contradictory political and bureaucratic incentives that undermine the effectiveness of financial regulation and supervision in every country in the world. The paper concludes by identifying reforms that would improve incentives by increasing transparency and accountability in government and industry alike.

The 2007 Meltdown in Structured Securitization : Searching for Lessons, Not Scapegoats

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