Great Article Summarizing Securitization Risks

see http://www.ipsnews.net/2019/06/financialization-promotes-dangerous-speculation/

This was originally hailed as a brilliant financial innovation as US Fed chair Alan Greenspan believed that CDOs transferred risk from banks to investors able and willing to take it on. But securitization not only increased systemic risks, but also did not reduce risk to the originating banks who had sold off the loans.

The US subprime mortgage crisis, which started in 2007, quickly spread, via related CDOs and CDSs, to much of the rest of the financial system and across national borders, with repercussions for the real economy worldwide, not least through trade and other policy responses, including protectionism.

Risks and rewards have increased as collateral is rehypothecated, i.e., used by lenders for their own purposes. Such leveraging allows lenders to become borrowers. Mark-to-market practices, shorting and rehypothecation thus increase risks for the financial system. [e.s.]

CDO losses accounted for nearly half the total losses sustained by financial institutions between 2007 and early 2009, when the collapse of Lehman Brothers triggered a run on global repo markets that triggered banking and European sovereign debt crises.

Financial regulators recognize the systemic significance of these financial developments. Although the Financial Stability Board, created in the wake of the 2008 crisis, identified securitization and repo markets as critical priorities for shadow banking reform, securitization is back on financial development agendas, especially for developing countries.

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