By Enrico Perotti and Javier Suarez

Securitisation was meant to reduce risk by spreading it, but in practice it created risk via regulatory arbitrage.

Banks placed long-term assets in boxes sustained by short-term wholesale funding, but with the backup of their credit lines in case of trouble. They kept a significant amount of risk, while reducing their own capital.
When subprime mortgages were repriced, the house of cards fell apart.

By Charles W. Calomiris

Tim Geithner, US Treasury secretary, has his work cut out. Any successful plan to revive the financial system will have to raise banks’ asset and stock values, but helping banks is unpopular. Neither Republicans nor Democrats in Congress seem excited about spending money helping banks. And some in the Obama administration probably are counselling the president against taking the political risk of helping Wall Street. Many in the electorate are incensed by the idea of propping up banks and exposing taxpayers to risk of loss.