While this survey focuses on the securitization of subprime mortgages, many of the basic issues - intermediation and the frictions it introduces - are generic to the securitization process, regardless of the underlying pool of assets. The credit rating agencies play an important role in resolving or at least mitigating several of these frictions.rnOur view is that the rating of securities secured by subprime mortgage loans by credit rating agencies has been flawed. There is no question that there will be some painful consequences, but we think that the rating process can be fixed along the lines suggested in the text above.rnHowever, it is important to understand that repairing the securitization process does not end with the rating agencies. The incentives of investors and investment managers need to be aligned. The structured investments of investment managers should be evaluated relative to an index of structured products in order to give the manager appropriate incentives to conduct his own due diligence. Either the originator or the arranger needs to retain unhedged equity tranche exposure to every securitization deal. And finally, originators should have adequate capital so that warranties and representations can be taken seriously.
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