The second lesson of the past few weeks is that securitisation has warped financiers' incentives.
The upper layers of a well-designed securitisation vehicle should be all but impervious to loss.
It was a straight old housing bubble helped along by an expansion of securitisation.
Then again, banks have become adept at passing on risk through derivatives and the securitisation of loans.
Yet securitisation has made it harder to reschedule loans and nobody knows how far house prices will fall.
Understanding the underlying assets is, or should be, at the core of securitisation.
These failures illustrate how difficult securitisation can be even with relatively straightforward assets.
What is not in doubt is that the subprime crisis has exposed four deep flaws in the practice of securitisation.
Securitisation is really an arbitrage: with surplus collateral, assets can be bundled into an entity with a supercharged credit rating.
Keen to restore securitisation's credibility, Wall Street's main trade groups, too, want the TALF opened up to smaller rating agencies.
Securitisation - swapping hoped-for future cashflow for large amounts of cash now - was spearheaded and championed by Alan Greenspan himself.
If Brazil develops as expected, the derivatives, mortgage-securitisation and corporate-bond markets may become bigger, making investment banking a more balance-sheet-intensive affair.
This is not to say that securitisation is about to be uninvented.
If securitisation takes off, banks will find it easier to unload old property loans, enabling them to clean up their ravaged books.
Jersey used to be a hub for debt securitisation, but the demand for bundling loans has fallen off, leaving lawyers with less work.
We have yet to complete the reforms needed to raise capital standards, improve liquidity, reform the securitisation process and regulate the OTC derivatives market.
Separately, international regulators and the President's Working Group (comprising America's Treasury, the Federal Reserve and others) are looking into securitisation's part in the crisis.
With private-label securitisation markets moribund, and capital-strapped banks pulling in their horns, Fannie and Freddie are close to being the only game in town.
That is, that Dodd-Frank and the European Parliament have just made the next securitisation disaster both more likely and more damaging when it does happen?
Dodd-Frank, and the European Parliament has voted through a very similar provision, insists that a bank must hold onto 5% of any securitisation it makes.
Reviving important non-bank funding sources, such as securitisation, is essential, even if its huge expansion in the credit boom led to the mispricing of risk.
Take the financial alchemy that goes by the name of securitisation.
At the same time, ever more layers of securitisation have separated the original lender or broker of a loan from the ultimate bearer of credit risk.
Early-warning antennae should twitch when they detect the word smart, signifying a return to old ways but with lessons learnt: bankers are already talking about smart securitisation.
Bankers will tell you that the subprime meltdown was just that: the product of irresponsible lending to, and borrowing by, flaky consumers, not a broader crisis of securitisation.
New regulations and accounting rules have made securitisation less appealing.
The first is that by severing the link between those who scrutinise borrowers and those who take the hit when they default, securitisation has fostered a lack of accountability.
The finding is that the banks held on to the highly rated (ie, the AAA) tranches of the mortgage securitisation deals because they wanted to hold on to them.
The Federal Reserve is widely expected to help by making commercial mortgage-backed securities eligible for its programme (known as the TALF) to support the securitisation market with subsidised loans.
ECONOMIST: The American economy: Better than it looks? | The
Fannie Mae and Freddie Mac were in simple mortgage securitisation and insuring: the only odd one out is AIG and that was an insurance company, not a bank at all.
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