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The flaws of securitisation

Published Online:pp 400-417https://doi.org/10.1504/IJCG.2009.032727

The recent financial crisis highlights the problems that could arise when risk is mispriced and conflicts of interest are not managed properly. Regulators and public opinion blame modern capital markets for what happened, but there is actually nothing new or mysterious about this crisis. The problem lied in the packaging and transferring of risk through securitisation, where embedded conflicts of interest helped spread the mispricing of risk throughout the world. This paper describes key aspects of the securitisation process, provides real-world examples of typical transactions, highlights the main areas of conflicts of interest and outlines lessons for the future.

Keywords

subprime crisis, securitisation, risk transfer, conflicts of interest, financial crisis