Electronic copy available at: http://ssrn.com/abstract=1424352
The 2007 Meltdown in Structured
Securitization: Searching for Lessons not
Gerard Caprio, Jr.
Edward J. Kane
(Boston College and NBER)
November 23, 2008
The intensity of the crisis in financial markets has surprised nearly everyone.
This paper searches out the root causes of the crisis, distinguishing them from
scapegoating explanations that have been used in policy circles to divert attention from
the underlying breakdown of incentives.
Incentive conflicts explain how securitization
went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame
the crisis on mark-to-market accounting, an unexpected loss of liquidity or trends in
globalization and deregulation in financial markets. The analysis finds disturbing
implications of the crisis for Basel II and its implementation. The paper argues that the
principal source of financial instability lies in contradictory political and bureaucratic
incentives that undermine the effectiveness of financial regulation and supervision around
In concluding the paper identifies reforms that would improve incentives by
increasing transparency and accountability in government and industry alike.
Financial crisis, Securitization, Regulation and Supervision, Safety Nets
JEL Classification Codes:
G21, G28, G32
* Caprio: Williams College, (
); Demirguc-Kunt: World Bank (
); Kane: Boston College and NBER (
). We are grateful to Stijn
Claessens, Enrica Detragiache, Ramon DeGennaro, Robert Eisenbeis, Alain Ize, Philip Keefer, Joseph
Mason, James Moser, Roberto Rocha, Luis Serven, Tressel Thierry, James Thomson and Dimitri Vittas for
valuable comments. This paper’s findings, interpretations, and conclusions are entirely those of the authors
and do not represent the views of the World Bank, their Executive Directors, or the countries they