Asset-Backed securities and the financial crisis or 2008 and 2008: a leverage cycle theory
Asset-Backed securities (ABSs) have dominated the U.S. financial markets between the period of the late 90s and 2007; the start of the financial crisis. This was due to the rise of subprime mortgage lending within the U.S. banking sector. ABSs are blamed as ‘the cause’ for the financial crisis of 2007 and 2008. This research describes the relationship between ABSs and the financial crisis by a leverage cycle theory. This theory supports the claim in this research; the period before the financial crisis, between the late 90s and 2007, was characterized by an excessive build-up of leverage in the financial system’s banking sector and by optimistic behavior of investors and banks in the trade and supply of ABSs. When the subprime mortgage market collapsed, bad news about the rolled over effects of this market to ABSs, led to a fall in the prices of ABSs. After this bad news, panic among investors and distrust within the financial system triggered the financial crisis of 2007 and 2008. This research confirms the leverage cycle theory by analyzing the relationship between ABSs and the financial crisis through its mediators, excessive risk taking, asymmetric information and failed corporate governance.
Faculteit der Managementwetenschappen