A Primer on the Role of Securitization in the Credit Market Crisis of 2007
John D. Martin
Baylor University - Department of Finance, Insurance & Real Estate
January 7, 2009
In this paper I review the role of securitization in the credit markets and in particular the possible contribution of securitization to the credit crisis of 2007-2008. Based on this review I make the following observations: (i) over the last three decades the originate-to-distribute via securitization model has come to dominate the U.S. credit markets; (ii) the originate-to-distribute model has many possible advantages but brings with it a potentially fatal principal agent problem in the credit screening process; (iii) the growing complexity of the securitization process has given rise to a "market for lemons" problem that may well have contributed to the collapse of the market for securitized issues; and (v) the collapse of the mortgage backed securities market resulted in the use of distress prices by financial institutions to mark-to-market their portfolios and this may well have contributed to the panic that resulted in the failure of the affected financial institutions.
Number of Pages in PDF File: 18
Keywords: Asset Backed Finance, Securitization, Credit Market Crisis
JEL Classification: G21, G23, G24, G28
Date posted: January 8, 2009 ; Last revised: February 17, 2009
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