"The bundling of consumer loans and home mortgages into packages of securities -- a process known as securitization -- was the biggest U.S. export business of the 21st century. More than $27 trillion of these securities have been sold since 2001, according to the Securities Industry Financial Markets Association, an industry trade group. That's almost twice last year's U.S. gross domestic product of $13.8 trillion.How did this come about? Christopher Peterson (in particular pages 2191-2213) gives an interesting look at of securitization it in a Cardozo Law Review article available through SSRN. Just a small taste:
The growth over the past decade was made possible by overseas banks, which saw the profits U.S. financial institutions were making and coveted the made-in-America technology, much as consumers around the world craved other emblems of American ingenuity from Coca-Cola to Hollywood movies. Wall Street obliged, with disastrous results: two-thirds of a trillion dollars in bank losses, about 40 percent of them outside the U.S."
"This process, usually referred to as securitization, can lower the cost of funds for lenders, allowing them to offer better prices. But, it can also capitalize fly-by-night companies that specialize in fraud, deceptive practices, abusive collections, and other predatory behavior...."Given that this was written last year, I will predict that Peterson might well be called as a witness in some upcoming trial against rating agencies:
Which worked out pretty well, huh? lol..
"By pooling mortgages together and relying on a rating agency to assess the securities funded by the pool, investors can have a relatively reliable prediction of expected returns without investigating each individual originator and each individual loan.
BTW the Bloomberg article begins with a short story of how one trader decided to get out before the Bear collapse last May. WOu