This paper analyzes the role of three investment vehicles in particular—Asset Backed Commercial Paper (ABCP), Collateralized Debt Obligations (CDOs) and Credit Default Swaps (CDSs)—in transforming the. somewhat stodgy, heavily regulated RMBS market into the financial equivalent of the lawless wild west of “buy first, ask questions later.” Though different in their structure and investment horizon, all of these derivative products have the similarity of promoting investing severed from understanding the underlying risk. Real estate risk was masked by painting over a layer of fixed income structured finance. However, just as a top layer of paint does not cover without primer, the layer of structured finance was applied without the primer of mutual understanding between the real estate market and the bond market. As the real estate risk bubbled through, the derivative structures peeled off and the market spiraled into disarray. The essential question is: Should something as fundamental as home finance be the financial playground for esoteric investments? To state the problem another way: Is housing policy so important as to cordon off this financial market to all but the safest investment vehicles?
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