Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

But once again we have to be careful. The shuffling of global demand for dollar-denominated safe assets helps to explain why the mortgage pipeline did not result in an oversupply of AAA securities. But to the extent that private label asset-backed securities were actually sold off to investors, little more was heard of them. When the market turned bad, they would sit on balance sheets as an illiquid entry. They were no longer counted as safe assets. There would be lawsuits against investment banks that had knowingly repackaged unsafe mortgages. Certainly the losses would have an impact on investment allocation and on the spending decisions of millions of pensioners. But this would not by itself create a financial crisis, with bank failures rippling out across the world. The comparison with the dot-com bubble is instructive. It created a huge surge in wealth followed by a collapse. It triggered a severe recession. But it did not lead to banking crises. The subprime mortgage boom of the early 2000s led to a financial crisis because, contrary to the professed logic of securitization, hundreds of billions of private label MBS were not spread outside the banking system, but were stockpiled on the balance sheets of the mortgage originators and securitizers themselves.44