ECON 319 Lecture Notes - Lecture 5: Global Saving Glut, United States Treasury Security, Credit Crunch
9 Feb 2017
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Home mortgages: bank accepts deposits lends money to purchaser down payments and collateral bank holds the mortgage asset. Asse(cid:373)(cid:271)le a la(cid:396)ge po(cid:396)tfolio of (cid:396)isky assets a(cid:374)d (cid:862)(cid:373)a(cid:374)age it(cid:863) or. Assemble a large portfolio and then create lower risk securities, each backed by the small piece of the large portfolio securitization. Securitization: each mortgage is a risky asset but the diversified pool of all of these mortgages reduces risk, each mortgage-backed security (mbs) is a small piece of the overall mortgage pool, this process keeps the cash flowing. Financial institutions assembles pools of mortgages and creates and creates mbss. Huge increase in securitization of residential mortgages in the 10-15 years. Regulatory arbitrage leading up to the crisis: these securities were leveraged. Leading to huge losses when they ultimately fell: different rules for commercial banks versus investment banks, these two combined lead to regulatory arbitrage. Banks were finding loopholes in the us system.
