It was not supposed to be like this. Securitisation, the process of turning the cashflows from a pool of underlying assets (such as mortgages) into bonds, was meant to make the financial system more resilient. Instead of banks holding every loan on their balance-sheet until it reached maturity, risks would be sold on and spread among a wider group of investors. Now many see securitisation as the villain of the piece. Two charges are levelled against the technique. The first is that it failed to disperse risk effectively; when push came to shove, the risks flowed back to the banks as toxic assets were returned to their balance-sheets. Citigroup and HSBC between them consolidated assets worth $94 billion that had been sitting in structured investment vehicles (SIVS). Banks that had been acting only as distribution centres for securitised assets were still stuck with billions-worth of them. Less smart ones had taken punts on the securities themselves. There were secondary exposures as well, to borrowers such as hedge funds that had invested in asset-backed securities and whose collateral fell in value.
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