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Are Mortgage-backed Securities “Angels” or “Devils”?

How did the MBS-related crisis sweep the world like a plague and what were the original merits of the MBS?

When the financial crisis swept the world in 2008, the securities industry’s regular diet of mortgage-backed securities (MBS) abruptly became everybody’s target – blamed for being a powerful tool in the financial industry, and for risking heavy damage to the system. The giants in the business, Lehman Brothers, Bear Stearns, Merrill Lynch, AIG, either went bankrupt or were acquired or were “nationalized.” For MBS, as the first asset-backed securitization financial product on the market, the assessment has been mixed, as MBS did indeed bring the market with unprecedented liquidity and vitality. How was the MBS born and what were its original merits? How did the MBS-related crisis sweep the world like a plague? What roles did government agencies, the private sector and the US have in the history of the MBS? At a time when China’s financial reform is shaping up, what lessons can China draw from the history of the MBS?

Case advisor: 
Ouyang Hui and Erica Li
Case writer: 
Yang Yan
Keywords: 
securities, finance, financial crisis, financial reform