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The Rise and Fall of the Nonconventional Mortgage Industry

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  • Goldstein, Adam
  • Fligstein, Neil
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    Abstract

    The 2007-2009 financial crisis was centered on the nonconventional mortgage industry. Scholars have just begun to carefully consider what really caused the crisis. This paper pushes the debate forward in several ways. First, we elucidate four different theoretical approaches, "financialization", "actor-network/performativity", "perverse incentives", and ""markets as politics"" to understanding how the mortgage securitization industry evolved. We generate hypotheses and relevant data and show that the “markets as politics†approach accounts for the social structuring of the market from 1990-2008. Second, we use archival and secondary sources to show that the industry became dominated by an “industrial†conception of control whereby financial firms vertically integrated in order to capture profits at all points in the value chain. In 2004, the conventional mortgage market turned down. Financial firms entered the nonconventional market in order to keep their “industrial†conception going. The nonconventional market thrived for three years but when it turned down, the firms that went bankrupt were those who were the most committed to the “industrial†conception of control.

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    Bibliographic Info

    Paper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt1dm808j6.

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    Date of creation: 02 Apr 2010
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    Handle: RePEc:cdl:indrel:qt1dm808j6

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    1. Skreta, Vasiliki & Veldkamp, Laura, 2009. "Ratings shopping and asset complexity: A theory of ratings inflation," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 678-695, July.
    2. Christopher James & Joel Houston, 1996. "Evolution Or Extinction: Where Are Banks Headed?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 8-23.
    3. Efraim Benmelech & Jennifer Dlugosz, 2009. "The Credit Rating Crisis," NBER Working Papers 15045, National Bureau of Economic Research, Inc.
      • Efraim Benmelech & Jennifer Dlugosz, 2010. "The Credit Rating Crisis," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 161-207 National Bureau of Economic Research, Inc.
    4. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    5. Alex Preda, 2007. "The Sociological Approach To Financial Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 21(3), pages 506-533, 07.
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