Michel Aglietta
"Understanding the Structured Credit Crisis "
La Lettre du CEPII N°275, February 2008, CEPII.
The financial crisis which is raging in the West is quite strange. Why is it that repayment problems in a very particular segment of the United States housing finance market (subprime mortgages) has degenerated into a generalised credit crisis which could have completely paralysed the international bank liquidity market without the repeated and massive intervention of the central banks? To understand this we have to delve into the arcane world of the financial model called the securitization of debts which has become prevalent in the United States since 2001. Recent studies have shown that this model leads to reduced risk aversion on the part of lenders and an under assessment of the risk attached to loans. The spreading of risk, which is the purpose of securitization, is accompanied by a loss of information on the risk of loans right along the chain, from the end borrower to the buyers of tranches of secured debt. This financial model has become a loss generating machine.