The Jumbled Alphabet Soup of the Collapsed Home Mortgage Market: ABCP, CDO, CDS and RMBS
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It all started so simply. Consumers needed access to loans to purchase a home and weave themselves into the American Dream. Lenders were constrained when capital was tied up in long term mortgages. The Government saw the opportunity to alleviate both problems by buying and bundling the home mortgages and using them as collateral (along with an implicit guarantee) for publicly traded investments on the secondary market. But, it became so complex. The market whirled out of control as investments and derivatives became more and more distant from the ultimate source of repayment-the underlying mortgages. The policy of imposing the government into capital markets has a profound effect because it not only prompts consumer behavior, but also, controls access to capital in the housing finance arena. Add lax regulation, mismatched incentives and outright greed into the brew and the result is total market failure as we have recently endured.