Transparency through Financial Claims with 'Fingerprints': A Mechanism for Preventing Financial Crises
14 Pages Posted: 13 Mar 2009 Last revised: 12 Oct 2009
Date Written: October 7, 2009
Lack of transparency in securitization transactions contributed significantly to the severe financial crisis of 2007-2009. In this paper, based on a recent idea by Markowitz (2009), we propose an incentive-compatible mechanism for future securitization transactions that will increase transparency: financial claims with fingerprints. This mechanism allows market participants at each stage of the securitization process to easily obtain full information about the underlying original risks and the superior claims that need to be satisfied before receiving their own payoffs. The fingerprint mechanism would considerably enhance transparency in securitization transactions at the expense of some transaction costs.
Keywords: Financial Crisis, Securitization, Mortgage-Backed Securities, Transparency, Opaqueness
JEL Classification: D53, E44, F34, G14, G18, G21, G24, G28
Suggested Citation: Suggested Citation