National Journal: Black Holes in the Securitization System

R&R’s Ann Rutledge discusses how flawed securitization set off the economic crisis in the cover story of the current issue of National Journal Magazine:

“Until the early part of this decade, Rutledge says, most of the blueprints for building structured securities were imperfect but honest. Sometime around 2002, however, fraudulent crews invaded the market by using the magical securitization machine to apparently erase some of the risk in the underlying loan pools. But that’s impossible, as it turns out. Securitization redistributes risk, it never eliminates it. The fraudulent crews simply hid the excess risk within the various tranches…

“[Structured Investment Vehicles] ‘were the black hole of the system,’ Rutledge said. By allowing banks to conceal the true scope of their risk and leverage from regulators and from the markets, and sometimes even from themselves, the conduits encouraged the collapse of the house of cards.”

Read the full article: Corine Hegland, “Why the Financial System Collapsed,” National Journal Magazine, April 11, 2009.