Risk Research On Asset Securitization Products In The 2008 US Financial Crisis

It was the collapse of the U.S.housing bubble that ignited the 2008 Financial Crisis.However,housing price of the U.S.only dropped 33% in average during crisis.Such a decline was considered moderate comparing to a 70% housing price plunge both in Japan when the Japanese Asset Price Bubble burst in early 1990 s,as well as in Hong Kong during 1997 Asian Financial Crisis.In the beginning,many economists believed that the crisis would only cause a mild depression.At the end,the 2008 Financial Crisisis considered to have been the worst financial crisis since the Great Depression of the 1930 s.Many observers have argued that securitization and complex financial derivative caused the 2008 Financial Crisis: Trillions of dollars in risky securitized products had been embedded throughout the financial system as subprime mortgages were securitized and re-securitized into Asset Backed Securities(ABS)as well as Collateralized Debt Obligation(CDO)respectively,and then sold to investors all around the world.When the bubble burst,hundreds of billions of dollars in losses of mortgage-related securitized products shocked the financial market.The losses were also magnified by so-called innovative financial derivative such as Credit Default Swap(CDS)and Synthetic CDO.Through quantitative analysis in this study,I conclude that not all securitized products should be responsible for the 2008 Financial Crisis though some of them contributed significantly.Single-layer securitization itself would not magnify the risk significantly during risk transfer process.A well-diversified collateral portfolio-even though some individual collateral's quality may not be up-to-standard-would ensure a single-layer securitized product's AAA-grade tranche's quality thatit possessessame level of default risk as a AAA-grade corporate bond.Moreover,single-layer securitization's characteristic offinancial disintermediationcould enhance overall efficiency of financial market and,as a result,be beneficial to the real economy.On the other hand,complexmultiple-layer securitizationshould be responsible for the 2008 Financial Crisis.Collaterals of multiple-layer securitized products are not comprised of mortgages,but of other securitized products.Risks and volatility of multiple-layer securitized products would be amplified exponentially based on levels of re-securitization.At last,collaterals of financial derivative-such as Credit Default Swap(CDS)and Synthetic CDO-are comprised of simply pieces of paper-contracts-instead of real financial assets.Financial derivative is simply a gambling game based on securitization.Its risks and leverage level could be out of limitation.Securitization looks likely to be next driving force for the financial industry in China.The recent government policy also points to a promising development opportunity for securitization.However,some investment bankersmay think of the financial market as a kind of glorified casino with little relevance to the real economy-where the factories and shops are.But that's wrong.Finance is more like the circulatory system of the economic body;a fast-growing securitization market without proper supervision and stringent regulatory framework would pose a significant macro risk to the stability of the economic system.The 2008 financial crisis provides a valuable lesson for China to avoid excessive and non-transparent risk embedded in the financial system.In conclusion,given the rather nascent risk culture and infrastructure today in China's financial market,China should not only strictly avoid over-complicated multiple-layer securitization as well as financial derivative,but also focus on embracing single-layer securitization who could support the real economydirectly.