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Policymakers are interested in the potential for securitising small-business loans, bundling the debt of lots of borrowers up into a single security that thereby diversifies credit risk.
The securitisation of loans – bundling them together and selling them as investment packages – looked like a great way to finance his dream.
Last year Northern Rock, which relied heavily on wholesale markets for money rather than on depositors, ran into trouble when credit dried up around the world; it proved unable to raise money from the banks that used to lend to it and from securitising its loans (bundling them up and floating bonds on the back of them).
Much of the lenders' income comes from fees charged for everything they do: originating loans, bundling them into bonds and collecting payments from borrowers.
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Critics say the banks did not properly portray the full risks of the loans bundled into bonds.
This sets up the potential for conflicts of interest among loan servicers that are often supposed to represent investors owning mortgage loans bundled into securities.
Analysts polled by Thomson Financial had expected 40 cents a share on that basis, which excludes the impact of student loans bundled together as securities.
The reason A.I.G. entered into the second contract was that banks feared they were also exposed to interest rate risks on the loans bundled into debt pools.
The banks that made these loans bundled them up and sold them in the credit markets to investors, eager for high yields.
Cambridge also contends it relied on the banks' claims of having conducted due diligence to verify the quality of the loans bundled into the securities.
Banks spent billions of dollars in the good times to build vast mortgage machines that made new loans, bundled them into securities and sold those investments worldwide.
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