We investigate the securitization of subprime residential mortgage loans into structuredproducts such as subprime residential mortgage-backed securities (RMBSs) and collateralizeddebt obligations (CDOs). Our deliberations focus on profit and risk in a discrete-time frameworkas they are related to RMBSs and RMBS CDOs. In this regard, profit is known to bean important indicator of financial health. With regard to risk, we discuss credit (includingcounterparty and default), market (including interest rate, price, and liquidity), operational (includinghouse appraisal, valuation, and compensation), tranching (including maturity mismatchand synthetic) and systemic (including maturity transformation) risks. Also, we consider certainaspects of Basel regulation when securitization is taken into account. The main hypothesis ofthis paper is that the SMC was mainly caused by the intricacy and design of subprime mortgagesecuritization that led to information (asymmetry, contagion, inefficiency, and loss) problems,valuation opaqueness and ineffective risk mitigation. The aforementioned hypothesis is verifiedin a theoretical- and numerical-quantitative context and is illustrated via several examples.
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