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There is a fundamental difference between a 30% subprime car loan, and the senior tranch of a portfolio of them. There is absolutely nothing wrong with building
by yummyfajitas 12y ago
There is a fundamental difference between a 30% subprime car loan, and the senior tranch of a portfolio of them. There is absolutely nothing wrong with building AAA securities from subprime loans.
You'll only get into trouble if you fundamentally misestimate the default probabilities. This is true for any debt instrument, however, prime or subprime, fancy or vanilla.
- eli_gottlieb 12y ago> There is a fundamental difference between a 30% subprime car loan, and the senior tranch of a portfolio of them. There is absolutely nothing wrong with building AAA securities from subprime loans. Then what caused the 2008 crash?
- yummyfajitas 12y agoWe made bad assumptions regarding default probability. Analysis of internal documents has been done - even the "pessimistic" estimates were far less bad than what actually happened. That would have been a problem regardless of securitization. Securitization didn't fix this risk, nor was it meant to. Regulators allowed banks to satisfy capitalization requirements with senior tranches of other banks, but not with the senior tranches of their own portfolios. This isn't necessarily a terrible idea - it reduces local mispricing risk (i.e., one bank's underwriters suck), just not global mispricing risk (everyone sucks in the same way).