Asymmetric Information, Financial Fragility And The U.s. Subprime Mortgage Crisis

The Sub-prime Crisis which broke out in the early 2007 brought fierce turmoil in global financial markets, and hit the real economy of America seriously. Therefore, it is necessary for us to review the process of sub-prime crisis and research its contagion path and micro mechanism. Obviously, it has real significance for the optimization of the American real estate financial system. Meanwhile, it will provide a lot of meaningful value for Chinese Housing financial system development.There are five sections in this paper. Section One is introduction. This part mainly introduces the research background and framework of this paper, including the literature survey and the main views of this paper. Section Two explains the participants in the Sub-prime Mortgage Securitization and the securitization operation mechanism, so that it can provide some basis for the coming analysis in the next part. Section Three is the core part in the whole paper. It analyzes the interest conflicts of the three crucial participants such as Sub-prime Mortgage Originator, Sub-prime Mortgage Securities Issuer and Credit Rating Agency, by using Game Theory and Information Asymmetry Theory. Section Four combines the financial frangibility with securitization chain, sketching the Sub-prime Crisis breaking out process, mechanism and contagion path. Section Five is the final part; it comes to the conclusion, and gives some revelation and advice of the Sub-prime Crisis.The financial innovation of mortgage backed securitization makes the credit chain longer, so that the problem of information asymmetry is more serious. Moreover, the information asymmetry can not be solved effectively because of the absence of signal sending mechanism. This makes the securitization chain frangible, which is the root of the sub-prime crisis.