These asset-backed financial instruments, especially those securities backed by

home mortgage loans, grew to awesome proportions all over the world, traded daily
among the largest, billion-dollar-plus banks, securities firms, pension and hedge
funds, and leading insurance companies, in what would soon became a trillion-dollar
marketplace. Unfortunately for the aggressive investors who avidly chased after
these pools of asset-backed securities the Great Recession of 2007-2009 caused the
market value of these instruments to tumble disastrously and leading traders, such
as AIG and Lehman Brothers, were threatened with ultimate collapse. Securitizing
assets requires a lending institution to set aside a group of income-earning,
relatively illiquid assets, such as home mortgages or credit card loans, and to
sell relatively liquid securities (financial claims) against those assets in the
open market. Thus, securitization is using the security markets to fund a portion
of a lender`s loan portfolio, allocate capital more efficiently, diversify funds
sources, and possibly lower the cost of fund raising. Unfortunately, this often
makes the securitization process heavily dependent upon the trustworthiness of
professional credit raters-a possible moral hazard problem especially during the
early years of the 21st century when exaggerated credit ratings (particularly for
mortgage instruments) were handed out like pieces of candy by credit raters to
entice poorly informed investors to add asset-backed securities to their
portfolios! A servicer ( who is often the loan originator) collects payments on the
securitized loans and passes those payments along to the trustee, who ultimately
makes sure investors who hold loan-backed securities receive the proper payments on
time. Pooling loans through securitization may help diversify a lender's credit
risk exposure and create liquid assets out of what are often illiquid, expensive-
to-sell assets. The process transforms these assets into new sources of funds for
lenders and attractive investments for some investors in the global capital
markets. While the lender may continue to service any assets pledged, it can remove
those assets from its balance sheet, eliminating the risk of loss if the loans are
not repaid or if interest-rate movements lower their value.