The subprime fiasco: Derivatives and ratings

Abstract

The easy-money policies of the Federal Reserve Board (the Fed) in the early part of the decade did fuel the mortgage bubble. More important in structural terms, however, was the advocacy by the Fed and other US bank regulators of over-the-counter derivatives dealing by the major US banks. Without the wonders of structured finance, there would have been no ‘demand pull’ surge for mortgage paper starting in the 2003 period, when buy-side investors began to clamour — no, scream — for higher risk-adjusted returns.