Lessons of subprime loan crisis

It would be rather early to make any concluding remarks about the possible lessons that stems from the recent subprime loan crisis, but I would like to indicate the followings as possible arguments:

Securitisation makes it possible for the fund raising at capital markets and that has been the case at subprime loan as well. However, once the investors such as hedge funds and other institutional investors find it difficult to carry the portfolio by borrowing from financial institutions, such direct finance also depends on indirect finance, namely financing via banks, which is quite ironical.

In East Asia, currently there has been achievements in the area of bond market development as it would solve what is called a double mismatch, one of currency and the other of maturity. However, securitisation could lead more serious crisis than we saw in US as the infrastructure of capital market in some countries in East Asia is still not well developed.

Also the roles and the responsibilities of credit rating agencies are currently under discussion, as there are cases where rating agencies kept the evalutation for relatively long time and that they downgraded the papers significantly after the crisis came up. Are they just following the market trend or are they just waiting for some evidences such as the fall of indicative price of papers before they downgrade?

Again, in case of the under-developed country as far as the infrastructure of the securitization is concerned, the role of credit rating agencies is quite important in the sense that they could give some of the papers quite high grades even though the legal infrastructure is not satisfactory. Do they rely on the credit rating of the issuer?

In addition, it should be quite difficult to get current trading prices for all securitized papers while the market is in turmoil. If you take a concervative approach, your unrealized loss would grow up further and the banks that finance your portfolio would request you to lighten the portfolio in some cases. Once the portfolio is created with leverages, the result would be catastrophe. Could this be solves by strengthening the risk management techniques such as VaR and stress testing? Perhaps they do not suffice. We may have to consider puttiing some maximum to the leverage that these funds take. Or at least the regulators should monitor the activities of major institutional investors incouding hedge funds? Is it difficult if they are incorporated in offshore tax-haven countries? I would like to hope that a kind of minimum regulations should be introduced to all funds even though not all of them are established in developed economies. I would like to see how the officials would continue their studies and discussions.

These are my preliminary thoughts. I would like to continue to think about these quite important issues.