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SECURITIZATION AND DERIVATIVES 

Asset-Backed Securities Outstanding

In the 1990s, many kinds of loans were packaged into asset-backed securities.
IN BILLIONS OF DOLLARS
$1,000
Other
800
Student
loans
600
Manufactured
housing
400 Home equity
Equipment and other
residential
200
Credit card
Automobile
0
’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99
NOTE: Residential loans do not include loans securitized by government-sponsored enterprises.
SOURCE: Securities Industry and Financial Markets Association

Figure .

these instruments became increasingly complex, regulators increasingly relied on the
banks to police their own risks. “It was all tied up in the hubris of financial engineers,

but the greater hubris let markets take care of themselves,” Volcker said. Vincent
Reinhart, a former director of the Fed’s Division of Monetary Affairs, told the Com-
mission that he and other regulators failed to appreciate the complexity of the new fi-
nancial instruments and the difficulties that complexity posed in assessing risk. 
Securitization “was diversifying the risk,” said Lindsey, the former Fed governor.
“But it wasn’t reducing the risk. . . . You as an individual can diversify your risk. The sys-
tem as a whole, though, cannot reduce the risk. And that’s where the confusion lies.” 

THE GROWTH OF DERIVATIVES: “BY FAR THE MOST
SIGNIFICANT EVENT IN FINANCE DURING THE PAST DECADE”

During the financial crisis, leverage and complexity became closely identified with
one element of the story: derivatives. Derivatives are financial contracts whose prices
are determined by, or “derived” from, the value of some underlying asset, rate, index,