Initially, there was little basis for re pricing them rationally, because the event (a peacetime decline in US house prices) was unprecedented.

In 2007 2008, this was the case for a class of securities based on residential mortgages in the United States (RMBS, or residential mortgage backed securities).

Consider the following. The financial crisis erupted in 2008 when mortgage backed securities were revalued at much less than what they had been thought to be worth.

Its banks and financial institutions were not tempted to buy the mortgage supported securities and credit default swaps that ruined several Western financial institutions.

India s banks and financial institutions were not tempted to buy mortgage backed securities and engage in the fancy derivatives trading that ruined several Western financial institutions.

Moreover, holdings of RMBS migrated to institutions that were able to support and manage the remaining risk. Today, RMBS are no longer considered toxic, allowing the market to function normally again.

The main problem is that the flow of foreign credit has been impaired because US mortgage backed securities and the derivatives based on them have become nearly unsellable everywhere.

It may make sense for central banks (or Fannie Mae, America s major government sponsored mortgage company) to buy mortgage backed securities in order to help provide market liquidity.

Some distressed banks clearly possess large quantities of mortgage backed securities, and are holding onto them in the hope that their prices will rise in the future, saving them from failure.

When the Fed buys Treasury bonds or other assets like mortgage backed securities, it creates reserves for the commercial banks, which the banks deposit at the Fed itself.

While a big US rating agency gave European companies, on average, only a triple B rating in recent years, CDOs based on MBSs easily obtained triple A ratings. According to the IMF, 80 of CDOs were in this category.

Delinquencies, defaults, and foreclosures are now spreading from sub prime to near prime and prime mortgages. Thus, total losses on mortgage related instruments include exotic credit derivatives such as collateralized debt obligations (CDOs) will add up to more than 400 billion.

We would have heard about a long list of mortgage related instruments, which supposedly made financing available to home buyers who would not have been able to purchase homes otherwise.

But some US banks, including Bank of America and Citi, are still vulnerable, with considerable toxic assets (mainly related to home mortgages) on their balance sheets.

The prices of traded mortgage backed securities have followed house prices down.

For years, hundreds of billions of new mortgage backed securities (MBSs) and collateralized debt obligations (CDOs) generated from them were sold to the world to compensate for the lack of savings in the United States and to finance American housing investment.

And, if the downward spiral in house prices continues, the value of mortgage backed securities held by financial institutions around the world will continue to decline, affecting the supply of credit far beyond the US.

As with RMBS, this view that public debt was totally safe was underpinned by the fact that no advanced country, at least in the post 1945 era, had ever defaulted.

That left the financial institutions that held mortgage backed securities in much weaker condition, and several failed.

Banks naturally avoided traditional business loans (which would have to be backed by more capital), and instead loaded up on the highest yielding and thus riskiest AA or AAA mortgage backed securities that they could find.

Indeed, with its recent decision to pursue QE3, the Fed is focusing once again on the mortgage backed securities market but, given that the market is much healthier now, it is unclear how much good this will do.

Finally, the investors who bought MBS s and CDO s were greedy and believed the misleading ratings.

Even mortgage backed securities, which were at the center of the financial crisis that erupted in 2008, have important uses in spreading home and auto ownership.

But leading banks are also accused of illegal behavior inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage backed securities to investors.

This synthetic collateralized debt obligation (CDO) did not finance the ownership of any additional homes or allocate capital more efficiently it merely swelled the volume of mortgage backed securities that lost value when the housing bubble burst.

While most Asian countries have had relatively limited direct exposure to mortgage related assets, deleveraging by foreign investors and slowing external demand have simultaneously created tighter credit conditions and lower expectations for growth.

The main problem with US mortgage based securities is that they are non recourse. A CDO is a claim against a chain of claims that ends at US homeowners.

The Fed is buying Treasury bonds and long term mortgage backed securities at a rate of 85 billion a month, equivalent to an annual rate of 1,020 billion.

Asymmetric information between sellers and buyers of financial products can easily leave buyers vulnerable to abuse, as we saw with mortgage backed securities.

(b) The split between domestic and overseas investments and the regional allocation within the overseas portfolio and the associated currency decisions

However, the holder of a CDO or MBS would be unable to take these homeowners to court. And even if he succeeded, homeowners could simply return their house keys, as they, too, enjoy the protection of non recourse.

America s financial industry polluted the world with toxic mortgages, and, in line with the well established polluter pays principle, taxes should be imposed on it.

As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage backed securities (MBS s).

True, major commercial banks, like Citibank and Bank of America, tottered, but they were not at risk because of their securities underwriting for corporate clients or their securities trading divisions, but because of how they (mis)handled mortgage securities.

The stock market dropped sharply. Home prices fell 40 , completely wiping out the equity of one third of all homeowners with mortgages.

The Fed bought more than 2 trillion of Treasury bonds and mortgage backed securities, nearly ten times the annual rate of bond purchases during the previous decade.

Insecure Securities

Securing Synthetic Securities

Portfolio management

(ii) Securities Act

Ordinary securities must be registered with the SEC before they can be traded.

But it is the economic slowdown that renders all developed countries less resistant to the financial shocks resulting from the sub prime problem and from the mixed loan packages that are then used to dilute the risks attached to sub prime debt.

Of course, there is no glee in seeing stock prices tumble as a result of soaring mortgage defaults.

The hearings also led to passage of the Securities Act of 1933 and the Securities Exchange Act of 1934.

From 2000 through 2007, millions of American homeowners entered into mortgage contracts to finance their homes. Securities based on those contracts ended up, in part, in the hands of financial institutions.