This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Securitization's Role in the Financial Crisis: Part 1

Editor's note: This is Part 1 of a special series. Here are Part 2 and Part 3

NEW YORK ( TheStreet) -- Today I want to get into the weeds a bit on the securitization market. All through the crisis we kept hearing how we needed to "get the securitization engine humming again" in order to get credit flowing, but I am not sure if people fully understood the role of securitization in the crisis.

I think we need to understand how this market evolved over the years -- because if we don't understand how we got here, we will run the risk of jumping to conclusions based on faulty assumptions. In a way, a market based on assumptions that proved to be vastly incorrect eerily foreshadows the dangers of our policy response.

I will warn up front that while I will try to simplify, this may be a little dense. This is not something that can be easily encapsulated into a sound bite or "Tweet," but only through understanding can we properly evaluate the situation. You will not need a PhD in calculus to get through this; simple multiplication is fine, but I will make a few options market allusions.

Part of the reason people have trouble explaining the root of the financial crisis is that this took the last couple of decades to develop. We kept building on what we took for gospel. And as I mentioned in one of my previous articles which encompassed the Hayek quote, sometimes we need to look at the very bedrock of our assumptions -- those views which we took for granted, that couldn't possibly be wrong. When you are in the weeds, often you forget to look at how you got there. So sometimes it is difficult for a market-maker to describe his or her role because the market-maker is on the battlefield. This is why I think some of the traders at the Senate hearing couldn't say, "No my role isn't as fiduciary, I serve my clients by making markets for my clients so that they can best execute their role as fiduciary."

The last systemic financial crisis we had was with the saving and loans in the late '80s. Of course this is subject to debate, because we have had the peso crisis, the Asian flu, the Russia crisis and the tech bubble since then. But the S&L crisis was the last real systemic crisis we had. If you think about the parallels, it seems like our recent crisis was a replay of the S&L crisis: Lax regulatory oversight led to excessive risk taking, we had real estate slumps both residential and commercial, certain key industries were in secular decline (then it was defense, now it is real estate tangential), large U.S. financial institutions failed and the financial plumbing underwent restructuring. Of course there are some differences (rapidity of response, interest rates, global coordination), but I am sticking to the similarities because they are so striking.

1 of 6

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $129.09 0.49%
FB $79.75 0.99%
GOOG $571.34 2.32%
TSLA $197.32 -2.96%
YHOO $44.11 -0.38%

Markets

DOW 18,288.63 +155.93 0.86%
S&P 500 2,117.39 +12.89 0.61%
NASDAQ 5,008.0960 +44.5690 0.90%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs