explained the need for backward integration because the industrial model was viable only so long as a firm could secure a ready supply of inputs: "Wall Street firms require a major investment to maintain a successful securitization platform in the areas of research, sales and trading. To optimize this investment requires a steady source of raw materials--mortgages--which can be packaged into securities to support the capital-markets activities" (quoted in McGarity 2006). Anthony Tufariello, head of the Morgan voiced a Stanley’s Securitized Products Group, similar logic in announcing Morgan of mortgage originator Saxon Capital: Stanley’s purchase addition of Saxon to Morgan global mortgage franchise will help us to capture “The Stanley’s the full economic value inherent in this business. This acquisition facilitates our goal of achieving vertical integration in the residential mortgage business, with ownership and control of the entire value chain, from origination to capital markets execution to active risk management” (Morgan Stanley, 2006) According to Jeff Verschleiser, then co-head of mortgage trading at Bear Stearns: point to remember is that not just the buying that the integration. “The key it’s counts. It’s Simply buying a mortgage originator and having it operate in a stand-alone capacity without leveraging the infrastructure of your institution is not something I would consider vertical (quoted in Currie 2007). integration.” Of course, this integration was never entirely complete throughout the industry. Some medium-sized mortgage originators remained independent and continued to sell mortgages to issuers in an originate-to-distribute model. Many others integrated forward into nonconventional MBS issuance, but hired investment banks to underwrite the deals. A few underwriters like Goldman Sachs never integrated backwards into origination. Nonetheless, integration was the dominant logic. By 2006, three quarters of all subprime mortgage originations were conducted by firms who also issued MBS from Inside Mortgage Data). (authors’ calculation CDO and the Completion of Vertical Integration
explained the need for backward integration because the industrial model was viable only so long as a firm could secure a ready supply of inputs: "Wall Street firms require a major investment to maintain a successful securitization platform in the areas of research, sales and trading. To optimize this investment requires a steady source of raw materials--mortgages--which can be packaged into securities to support the capital-markets activities" (quoted in McGarity 2006). Anthony Tufariello, head of the Morgan Stanley’s Securitized Products Group, voiced a similar logic in announcing Morgan Stanley’s purchase of mortgage originator Saxon Capital: “The addition of Saxon to Morgan Stanley’s global mortgage franchise will help us to capture the full economic value inherent in this business. This acquisition facilitates our goal of achieving vertical integration in the residential mortgage business, with ownership and control of the entire value chain, from origination to capital markets execution to active risk management” (Morgan Stanley, 2006) According to Jeff Verschleiser, then co-head of mortgage trading at Bear Stearns: “The key point to remember is that it’s not just the buying that counts. It’s the integration. Simply buying a mortgage originator and having it operate in a stand-alone capacity without leveraging the infrastructure of your institution is not something I would consider vertical integration.” (quoted in Currie 2007). Of course, this integration was never entirely complete throughout the industry. Some medium-sized mortgage originators remained independent and continued to sell mortgages to issuers in an originate-to-distribute model. Many others integrated forward into nonconventional MBS issuance, but hired investment banks to underwrite the deals. A few underwriters like Goldman Sachs never integrated backwards into origination. Nonetheless, integration was the dominant logic. By 2006, three quarters of all subprime mortgage originations were conducted by firms who also issued MBS (authors’ calculation from Inside Mortgage Data). CDO and the Completion of Vertical Integration
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