The Subprime Credit Crisis of 2007

Abstract

This article examines the different factors that have contributed to the subprime mortgage credit crisis— search for yield enhancement, investment manage- ment, agency problems, lax underwriting standards, rating agency incentive problems, poor risk man- agement by financial institutions, lack of market transparency, limitation of extant valuation models, complexity of financial instruments, and failure of regulators to understand the implications of the changing environment for the financial system. The article sorts through these different issues and offers recommendations to help avoid future crises.