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Shocking News February 19, 2008

Posted by davidzweig in economics, financial crisis.

A study of 2 million US subprime mortgage loans, compiled by academics at London Business School, the University of Chicago and other institutions, finds that the repackaged loans had a default rate 20% higher than those that the banks held on their books.

The study goes only through 2006. By late 2007, having exhausted the pool of viable subprime mortgagees, many banks approached the business with the ardor and sober discrimination of a sailor on his first shore leave after six months at sea.

The academics posit that these findings suggest that “securitisation destroys screening incentives of banks.”

As they say, “Who knew???”

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