• Global synthesis of the crisis
• The sub-primes crisis and the mechanisms of the crisis
• Transmission of the crisis through securitization

Transmission of the crisis through securitization:

The failures have led to a chain reaction on the markets. The first driving belt of the crisis lies in the phenomenon of claims securitization that has become a common phenomenon since the beginning of the 2000s: securitization vehicles.

Securitization, which is a sophisticated financial technique, is another major financial innovation of capitalism of post war years, it consists in cutting in categories, called bonds, the loans granted by a bank or a credit society, then to resell the sum, which means a risk, to other financial agents belonging to the world of investment fund. Thus a wide credit market is created, which is also a market of risks. It is the collapse of this market that provoked the current crisis. So, securitization is the financial operation unrecognized by the borrower thanks to which a bank sells its « claims » back on specialized markets, often grouped with other values. In other words, securitization consists in transferring « assets » or « credit risks » under a structured form to third part investors. This enables at the same time to refinance and reduce its risk (that is transferred to the investors who buy those claims).

Securitized credits are bought back by investors (classic investment fund, more speculative funds…). It gives rise to an issue of stocks on funds markets, related to subjacent assets (mortgage credits, for example) and grouped by « categories». Some of these categories included credits threatened by the failures or defaults of payment of households. Then investors withdrawn themselves from those products that they considered to be too risky.

Consequently, some funds were not able to be listed. The lack of demand for some stocks held in those funds has indeed prevented the calculation of the liquidate value resulting from the confrontation of the supply and the demand.
The « sub prime » market has been massively financed by securitization, claims being grouped in financing vehicles « ad hoc » and transformed into negotiable stocks subscribed by investors. So, securitization enabled the major actors of the credit sphere to off-load, by making them liquid, insolvency risks of their investors.

From the beginning of 2007, the « sub primes » credit crisis has created a doubt on all the vehicles of claims securitization, first mortgage claims concerning especially American real estate (Residential Mortgage Backed Security, or RMBS), but also on all the diversified claims called CDO (Collateralised Debt Obligation). They are indeed all the forms of credit securitization vehicles (ABS, RMBS, CDO and their variants) that have become suspicious in the eyes of investors, at the beginning and especially during the summer 2007, fearing that they might bear risky claims in general and «sub primes »in particular.

Operators often have fawning behaviours and the information often spreads very quickly on markets. The deviance toward products of securitization has spread to other market segments, including the one of « Commercial Paper » (negotiable claim stocks issued by firms on the monetary market so in short term), that represent huge sums. Investors who no longer trust their assets, if they have withdrawn themselves – transfer on tools they consider to be safer. Consequently, this fall of demand led to a drying out of liquidity on the markets.

Secondly, the transmission of the crisis is made by investment funds that have themselves bought claims of securitization. « Sub prime » credits, offering high yields because of the payment by the borrower of a higher interest rate than the market award, investors have practised a strong demand of this type of products in order to dope the performances of their investment funds or OPCVM.

These funds turned into difficulties because of the fall of the value of their assets. The collapse of the value of two investment funds of the American bank « Bear Stearns », on July 17th, 2007, gave the signal of the crisis of confidence. The announcement, which took place the same night of a record session at the New York Stock Exchange (14.000 points reached in session), will give the signal of the decline. It is now all the investment funds that will become suspect.

Some funds had, however, from 2006, planned that a real estate crisis was coming and they had taken opposite positions to everyone by speculating on the collapse of financial products related to risky real estate.

Finally, those investment funds belong or are financed by banks (hedge funds), it is a financing by lever effect, meaning with few funds and many loans. Therefore, banks by this mean take back the risks they had first entrusted to the markets. The financial community has then realized, around July 2007, that the entire banking system was bearing credit risks, not only in the funds financed by banks, but also in the funds they were managing. Thus, claims of securitization with high yield (and so high-risk according to the MEDAF) where present in some monetary ICVC, investments that were so far considered to be without any risk, the « dynamic monetary ICVC ». Hence a sudden fall of the monetary ICVC promotion in the first days of august 2007.