Accounting

Securitization involves transforming illiquid assets into securities. Distribution of securities through securitization has dominated the U.S market for over the last three decades with the most recent mortgage backed securities which formed a basis for the global economic crisis (Shin, 2009). Securitization of the securities concentrated the risks in that it induced banks and financial institutions to buy each other securities with borrowed money.

 The securitization is to many in the accounting profession an issue with balance sheet management by banks. Initially, securitization was meant to disperse risks associated with bank lending, to some stable investors who were in a capacity to absorb the risk instead, the risks were directed to the banking sector and the financial intermediaries. The reason was that banks wanted to increase their leverage in a way that they would increase their profit in the short run. Investors had believed that through securitization, credit risk would be dispersed.

Another role played by the securitization was that the mortgage backed securities were dominated by unscrupulous traders who had the sole intention of reaping from the misery of others who had little or no knowledge regarding the securities.  Also, economists had relied on the wrong data while rating the securities at A. This influenced the public to believe that the securities were not risky at all (Fagan, Frankel, 2008)
Securitization played a role in the crisis in that it opened up new source of funds and tapped new creditors. This led to doubtful loans on the balance sheet at a time when the economy was on the downturn. Financial intermediaries had almost all their wiped out while the financial investors suffered losses.