Tuesday, October 7, 2008


Mortgage-backed Securities

Via Marginal Revolution, I found Gary Gorton's The Panic of 2007, a long paper on the institutional details of the financial crisis. It gives particular examples of subprime mortgage bonds, tells how subprime mortgages work in detail, talks about the collateralized debt obligations that buy the bonds and issue their own securities, and so forth. It also talks about why there is a liquidity crisis. Prof. Gorton assigns blame entirely to subprime mortgages, because they are especially sensitive to housing prices (as opposed to interest rates). I only read a little of the article, and it makes difficult reading. The main impression I get is that these mortgage-backed assets are far more complicated than I had thought, and it is no wonder that they are hard to value. I'm also amazed anyone would buy them, for that very reason. It seems that they must just have trusted the rating agencies, which should not have assigned ratings to such complicated securities.



To view the post on a separate page, click: at (the permalink).


Blogger michael webster said...

Eric, I think that not only are these difficult to model correctly, but with splitting up of the legal rights in mortgages into the right to receive payment and the obligation to oversee and enforce, you introduced more and not less risk.

October 8, 2008 11:12 AM  

Post a Comment

Links to this post:

Create a Link

<< Home