ABSTRACT
This chapter describes the mortgage-securitization process, shadow banking, and credit default swap (CDSs) that constituted the fragile foundations of the financial structure. The mortgage-securitization chain originate-and-hold structure transformed into originate-and-sell, as mortgage securitization gained a foothold after the 1970s, first by the government-sponsored enterprises (GSEs) and then by the banks. Adjustable-rate mortgages (ARMs) had been available for some time as an alternative to fixed-rate mortgages. The assessment of the default risk of mortgage-backed-security (MBSs) and collateralized debt obligations (CDOs) was performed by the credit-rating agencies, such as Standard and Poor's, Moody's, and Fitch. The Securities and Exchange Commission (SEC) announced a temporary emergency ban on short selling financial stocks, and the Dow Jones Industrial Average (DJIA) fell by 3 percent. In his prepared testimony to the House of Representatives in 2002 Fed Chairman Alan Greenspan attributed the rise in mortgage borrowing to low interest rates.
