The Securitization Flash Flood

What caused the flood of securitized products in the years immediately preceding the crisis? This paper presents evidence that demand for safe collateral in repo markets made it attractive for financial institutions to issue securitized products. Using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) as a natural experiment that shocked the demand for collateral, this paper establishes collateralized borrowing in short-term debt markets as a contributing factor to the rise of mortgage securitization. Hand-collected data on underlying collateral of over 900 repurchase contracts reveals underwriters of securitized products increased use of mortgage-based repos in the months following the law change. Highlighting an important connection between repo markets and securitization activity, this paper draws attention to an unintended consequence of bankruptcy law which has important policy implications. ∗Olin Business School, Washington University in St.Louis. Author can be reached at [email protected]. I thank my advisor Radhakrishnan Gopalan, members of my dissertation committee Anjan Thakor, Mark Leary, Jennifer Dlugosz, Xiumin Martin, seminar participants at the Midwest Finance PhD Symposium, Phil Dybvig, Taylor Begley, Janis Skrastins, Todd Gormley, Walter Theus Senior Chapter 11 Attorney Office of the General Counsel, PhD students in Finance and Accounting at Olin business school for helpful comments and suggestions. All errors are my own.