Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Compared with the model of the savings and loan, securitization thus did its job in spreading risk. But did it by the same token reduce the incentive to carefully monitor the underlying loans? By splitting origination from funding, had the new system eliminated the incentive to monitor loans carefully? Whereas a local lender that held a mortgage for its entire thirty-year duration had every reason to monitor its customer very carefully, by the 1990s American mortgages were passing through at least five different institutions—originators, wholesalers of packages of mortgages, underwriters who assessed risk, government-sponsored enterprises and servicers who managed the flow of interest income—before being sold to an investor. Along that chain, what confidence could an investor have that the job was being done correctly? At each step of the way the main concerns were volume and fees. Who had an interest in maintaining quality? Perhaps it was not the government subsidy but these perverse incentives that led to the huge boom in bad lending and the crisis of 2007–2008.24