Academic journal article Journal of the Association for Information Systems

Innovating Financial Information Infrastructures: The Transition of Legacy Assets to the Securitization Market

Academic journal article Journal of the Association for Information Systems

Innovating Financial Information Infrastructures: The Transition of Legacy Assets to the Securitization Market

Article excerpt

Abstract

The introduction of mortgage securitization in the UK as a new type of financial innovation to help banks raise funds took the form of transferring existing legacy mortgage assets into the emerging securitization chain. In this paper, we explore the role of financial information infrastructure (FII) innovation as a process that enabled this transition and we ask what the implications for the calculation of financial risk were. New empirical evidence from a qualitative case study research in a U.K. bank shows that instead of focusing on the re-calculation of risk of the pre-existing legacy assets, the bank's innovative efforts were centered around validating the accuracy of the data available on those assets as an independent process. Our contribution is twofold. First, we show that FII are built with specific financial functions in mind that are formulated in the context of managerial and political decisions. Second, we show that data validation, although not a direct calculation of risk, constitutes an effort to order risk calculation practices. This is important in understanding the role of FII innovation as a mechanism by which FII become an integrating and standardising force in securitization markets.

Keywords: Information Infrastructures, Mortgage Securitization, Calculation, Risk, Legacy Assets.

1. Introduction

The practice of mortgage securitization, which constitutes the main innovation in mortgage financing since the 1970s (Fligstein & Goldstein, 2010; Quinn, 2009), was heavily implicated in the emergence of the 2008 financial crisis. In the US, securitization emerged in the 1970s as a political campaign of the Federal Government to seek additional means to finance the housing needs of the American people. In other words, securitization was an invention of the U.S. Government during the Lyndon Johnson administration in order to implement their housing policy; that is, to increase the housing stock for the baby boomers' generation, to increase the rate of home ownership, and to help lower the income people need to afford housing (Quinn, 2009). For these purposes, the U.S. Government created the government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, and Ginnie Mae to buy multiple individual mortgages and re-package them into mortgage-backed securities (MBS) (Fligstein & Goldstein, 2010).

Although securitization emerged as a "social policy innovation" as part of the U.S. Government's budgetary politics (Quinn, 2009) and although it was reinforced by the deregulation of savings and loans banks (Fligstein & Goldstein, 2010), it gradually evolved beyond the arena of the U.S. federal public policy and into other national, business, and techno-organizational contexts. Indeed, soon after its invention, private actors adopted the practice and, in 1977, the first private label (non-government sponsored) U.S. MBS was issued by the Bank of America. Then, from 1985 onward, banks began securitizing other types of consumer debts, such as auto loans, credit card receivables, and so on (MacKenzie, 2011; Rosenthal & Ocampo, 1988).

By the 1990s, mortgage securitization practices spread to the UK and Europe and, as they did, they mobilized context-specific technological, economic, social, cultural, and legal forces that created the U.K. and E.U. mortgage securitization markets (Wainwright, 2009). These forces were fundamentally different from the ones in the US. For example, in contrast to the U.S. markets, the U.K. Government was not directly involved in the development of a secondary market for U.K. mortgages; the market was rather the outcome of financial institutions (Wainwright, 2009) such as mortgage lenders, investors, credit rating agencies, and so on. What is significant about this new phase in the history of securitization is that it does not spread to the UK and Europe as a social policy to assist home ownership, but rather as a "financial innovation" for banks to raise capital. …

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