The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats

50 Pages Posted: 24 Jun 2009

See all articles by Gerard Caprio

Gerard Caprio

Williams College

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 23, 2008

Abstract

The intensity of the crisis 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 around the world. In concluding the paper identifies reforms that would improve incentives by increasing transparency and accountability in government and industry alike.

Keywords: financial crisis, securitization, regulation and supervision, safety nets

JEL Classification: G21, G28, G32

Suggested Citation

Caprio, Gerard and Demirgüç-Kunt, Asli and Kane, Edward J., The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats (November 23, 2008). Paolo Baffi Centre Research Paper No. 2009-49. Available at SSRN: https://ssrn.com/abstract=1424352 or http://dx.doi.org/10.2139/ssrn.1424352

Gerard Caprio (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
413-597-4045 (Fax)

Asli Demirgüç-Kunt

World Bank - Development Research Group ( email )

United States
202-473-7479 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Edward J. Kane

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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