The Rise of a Giant: Securitization and the Global Financial Crisis

The rapid growth of the securitization market was a primary factor in the 2008 global financial crisis. This article explores the emergence and explosive growth of asset securitization in the period leading up to the recent crisis. Understanding this basic and pressing issue is vital for future policy recommendations on the legal framework of securitization. The article thus offers both a pragmatic look at the rise of securitization as well as a theoretical analysis of its effects on third parties. It provides unique insight into the driving forces behind this financial tool, showing how the legal structure of securitization facilitates the shifting of the default risk to nonadjusting creditors. Finally, the article demonstrates how the potential gain from externalizing default risk creates distorted incentives for asset securitization, leading in turn to its excessive use, even when economically inefficient.