COMMENTARY: The Great Financial Crisis as Seen by a Long-Time Veteran and Participant

Abstract

This article reflects on the author’s experience working in the mortgage-backed securities (MBS) sector during the 1970s, 80s, and 90s on Wall Street, and the evolution of the market that eventually led to the 2007 mortgage meltdown and the 2008 financial crisis. MBS emerged as a promising type of investment, offering high returns and lower risks than products from other fixed-income sectors. However, the gradual erosion of “the mortgage gets paid first” assumption was somehow overlooked during the boom years, as demand increased, underwriting guidelines got looser, and new affordability products emerged. Meanwhile, credit managers and MBS experts combined to become deal managers, leading to a whole new sector of the markets: collateralized debt obligations (CDOs). The market for CDOs grew, and new buyers of subordinate MBS tranches contributed to a rapid expansion in the issuance of MBS backed by subprime and alt-A mortgage loans. The whole episode raises important questions about the responsibility of market participants and the role of regulations in the evolution of the MBS market.