Summary of Ambiguity in Securitization Markets

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Ambiguity in Securitization Markets summary

Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • Background

Recommendation

As economies develop, debt plays an ever-greater role in supporting consumption and growth. Banks now rely heavily on selling the loans they extend, so hiccups in the securitization markets can lead to abrupt slowdowns in lending. Securitization was once an esoteric part of Wall Street, of interest only to financial types, but it’s now critical for the economy’s health. getAbstract recommends this innovative analysis by economist Alyssa G. Anderson on why securitization markets failed in 2008 and how to reduce the risk of a recurrence.

About the Author

Alyssa G. Anderson is an economist with the Board of Governors of the Federal Reserve System.

Summary

In October 2008, markets for asset-backed securities (ABS) and collateralized debt obligations (CDOs) came to a halt. Unable to sell the loans in their portfolios, banks sharply cut lending, thereby transmitting the crisis to markets throughout the financial sector and to the greater economy.

Risk typically explains market activity, with rising perceived risk resulting in lower securities prices. In October 2008, investors were unwilling to purchase securities at any price. At that point, ambiguity – the inability of buyers to determine risk – took over. As uncertainty grows...


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