riskier nature of the mortgages allowed the issuing and underwriting firms to charge a higher percentage fee for the more elaborate financial engineering which these non-agency-backed MBS required. The resulting MBS also paid out higher returns as riskier loans had higher interest rates attached to them. Given the continuously rising price of housing, the credit rating agencies’ models kept finding that these loans could be packaged into low-risk securities. Attaining AAA ratings for nonconventional MBS made them appear to be one of the best investments around (for a thoughtful sociological discussion of why ratings work to produce confidence in financial markets, see Carruthers and Stinchcombe, 1999). After 2003, the large banks invaded nonconventional segments aggressively, and, along with a few of the larger new mortgage firms like Countrywide, applied the vertically integrated business model, and grew these formerly marginal niche segments into a multi-trillion dollar a year business. Vertical Integration Explored The expansion of the nonconventional market inadvertently promoted the final integration of the industrial mass-production model. Investment banks that had eschewed the messy and unglamorous world of retail lending began acquiring nonconventional originators aggressively after 2003 in a bid to feed their securitization machines (McGarity 2006; Levine 2007). Investment banks were also the leaders in the new CDO products, and integrating backwards into origination assured them of additional material for these financial products. By 2005 Lehman Brothers was self-originating almost two-thirds of the mortgages contained in its $133 billion of MBS/CDO issues (Currie 2007: 24). Meanwhile, the larger commercial bank holding companies who already had nonconventional mortgage origination operations as part of
riskier nature of the mortgages allowed the issuing and underwriting firms to charge a higher percentage fee for the more elaborate financial engineering which these non-agency-backed MBS required. The resulting MBS also paid out higher returns as riskier loans had higher interest rates attached to them. Given the continuously rising price of housing, the credit rating agencies’ models kept finding that these loans could be packaged into low-risk securities. Attaining AAA ratings for nonconventional MBS made them appear to be one of the best investments around (for a thoughtful sociological discussion of why ratings work to produce confidence in financial markets, see Carruthers and Stinchcombe, 1999). After 2003, the large banks invaded nonconventional segments aggressively, and, along with a few of the larger new mortgage firms like Countrywide, applied the vertically integrated business model, and grew these formerly marginal niche segments into a multi-trillion dollar a year business. Vertical Integration Explored The expansion of the nonconventional market inadvertently promoted the final integration of the industrial mass-production model. Investment banks that had eschewed the messy and unglamorous world of retail lending began acquiring nonconventional originators aggressively after 2003 in a bid to feed their securitization machines (McGarity 2006; Levine 2007). Investment banks were also the leaders in the new CDO products, and integrating backwards into origination assured them of additional material for these financial products. By 2005 Lehman Brothers was self-originating almost two-thirds of the mortgages contained in its $133 billion of MBS/CDO issues (Currie 2007: 24). Meanwhile, the larger commercial bank holding companies who already had nonconventional mortgage origination operations as part of
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