Subprime Debt Imbroglio: Risks–Rewards of Financial Sophistication

Abstract

Money, banking, and credit are in a constant evolutionary process. From coins and currency notes to digital money, from branch banking to universal banking, and later to Internet banking and now mobile phone banking, it is evolving fast with technology and innovation. The result is great convenience, lower cost, and instant service. Low-cost and high-speed digital money has been a great boon to the banking system and economy. While banking has taken great strides in technology, there has also been ongoing innovation on the credit side of banking. The subprime mortgage lending and its securitization were one such innovation intended to enlarge home ownership by directing credit toward tangible asset creation. Through the process of subprime lending and its securitization, a record amount of credit was channeled through the US and global banking, investment banking, and financial services industry to the housing and real estate sector from 2001 until the breakout of the crisis in 2008. Despite several safeguards, the system collapsed due to excessive exposure and a confluence of adverse economic trends.