Securitization, shadow banking & financial fragility

Daedalus

Volumn 139, Issue 4, 2010, Pages 41-51

  Stein, Jeremy C ^a  

^a NONE

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EID: 78049405463     PISSN: 00115266     EISSN: 15486192     Source Type: Journal    
DOI: 10.1162/DAED_a_00041     Document Type: Article

References (11)

1. More precisely, the riskier lower-rated tranches of subprime securitizations were them- selves used as the raw material (in place of the original mortgage loans) to create second- and third-generation resecuritizations. Many of the biggest problems in the crisis arose from the fact that large fractions of these resecuritized vehicles were also rated aaa, in spite of the dubious collateral supporting them. This is where the most extreme alchemy can be said to have taken place.
2. Joshua Coval, Jakub Jurek, and Erik Stafford, The Economics of Structured Finance,Journal of Economic Perspectives 23 (2009): 3-25.
3. The data in the figure come from Thompson sdc. While the "nontraditional" category includes securitizations based on subprime mortgage loans, it does not include securitizations based on prime mortgage loans, such as mortgage-backed securities guaranteed by the government-sponsored enterprises Fannie Mae and Freddie Mac. I am grateful to Sam Hanson, who put together the data and shared it with me.
4. Gary Gorton and Andrew Metrick, Securitized Banking and the Run on Repo,NBER working paper 15223 (National Bureau of Economic Research, 2009).
5. For a detailed study of this phenomenon, See Viral Acharya, Phillip Schnabl, and Gustavo Suarez, Securitization without Risk Transfer, NBER working paper 15730 (National Bureau of Economic Research, 2010).
6. The bank-run hypothesis is articulated in Gorton and Metrick, "Securitized Banking and the Run on Repo," as well as in Daniel Covitz, Nellie Liang, and Gustavo Suarez, "The Anatomy of a Financial Crisis: The Evolution of Panic-Driven Runs in the Asset-Backed Commercial Paper Market," working paper (Board of Governors of the Federal Reserve, 2009).
7. For more detail on the evolution of repo-market haircuts during the crisis period, Gorton and Metrick, Securitized Banking and the Run on Repo.
8. Nicola Gennaioli, Andrei Shleifer, and Robert Vishny, Financial Innovation and Financial Fragility,working paper (Harvard University, 2010).
9. John Geanakoplos, The Leverage Cycle,discus- sion paper 1715R (Cowles Foundation, 2010); and in Jeremy Stein, "Monetary Policy as Financial-Stability Regulation," working paper (Harvard University, 2010).
10. Gennaioli, Shleifer, and Vishny, Financial Innovation and Financial Fragility,for elaboration on this argument.
11. This scale is used by both Standard and Poor's and Fitch. The other major rating agency, Moody's, has a somewhat different alphanumeric convention, albeit with similarly finegrained categories: Aaa, Aa1, Aa2, Aa3, A1, A2, etc.