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tranching were used to distribute losses involved in these pools of loans backed by mortgages and sold to investors. Kaptan and Telang (2002) Asset securitization is the process of converting illiquid assets in to cash flows. Both financial intermediates such as banks and investors benefited from this process. Banks benefited with extra liquidity to lend more loans to able borrowers where as investors got opportunity to invest in capital market for more returns.

In the process of asset securitization, rating agencies rating securities is crucial because rating influence the marketability of the securities. There are many rating agencies which rate Residential Mortgage Backed Securities, of these three largest credit rating agencies with overseas market that are based in United States are Moody's, Standard and Poor (“S&P”) and Fitch. These rating agencies use statistical models to analyze risk involved. Rating agencies constantly review performance of these securities and according to performance they upgrade or downgrade rating.

To lessen the effects of a mild recession in 2000, the Federal Reserve cut interest rates. This interest rate cut along with increasing housing price made people to invest in housing this helped to drive growing demand for nontraditional mortgages products. Banks have extra liquidity to lend more loans to borrowers and started to lend more and more loans to non prime borrowers, which led to poor performance of loans and in turn effected whole asset securitization.

This report will explore what is the role of asset securitization in financial crisis. In order to research what is the role of asset securitization in financial crisis the following have done

1. Analysis of asset securitization process

2. Analysis of Evolution of financial crisis

3. Analysis of Rating agencies methodologies and procedures in rating process.

The details of analysis techniques are explained in methodology chapter. And extensive literature review is done to get hold of the subject. Finally in depth analysis has been done to reach the goal of the report.

CHAPTER-2

Professional And Academic Context

2.1 Asset Securitization

Kaptan and Telang (2002) defined Asset securitization as an innovative process which channelizes flow of funds from investors to issuers in efficient manner. In simple words, the process of asset securitization starts with financial institutions like banks which pools up individual loans and create securities against them. These securities are rated and sold to investors. In words of these authors, asset securitization is the process of converting assets in to securities and in turn in to liquid cash.

Origins of securitizations can be traced back to 1870`s where Government National Mortgage Association (GINNIE MAC) started selling securities that are backed by pool of mortgage loans. These securities were named as mortgage pass through securities.

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