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Securitization, Deregulation, Economic Stability, And Financial Crisis, Part I: The Evolution Of Securitization

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Executive Summary

The past 30 years were a classical example of the transition from hedge to Ponzi financing that Minsky analyzed in detail (Minsky 1986; Tymoigne 2009): from cash-flow cash CDO to market-value unfunded CDO; from MBS to CMO to CDO-cubed and LSS; from fixed-rate mortgages to adjustable-rate mortgages, interest-only mortgages and, finally, payment-options mortgages; from transaction-determined price to model-determined prices; from reliable credit rating to sloppy rating procedures; from credit protection to market-value protection. All these changes in financial products and structures represent a progressive shift away from an income-related activity with low/moderate leverage requiring little refinancing to a capital-related activity requiring large leveraging and constant refinancing at low interest rates.

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