Financial Market Instruments and 2008 global crisis

In 1970 securitisation instrument started with objective to transform illiquid

assets into tradable securities. Thus the mortgage backed NPA was financed by
selling securities in investment market. The credit rating agencies was involved to
classify securitization instrument as per their risk profile .Loan was given to the
defaulter. Ironically borrowers who defaulted on lower interest rate (say 8%) got
in contract of repaying loan on higher rate (say 14%) and his (borrower) loan was
financed by generating money from securitization market .In 2005 Mr. Raghuram
Rajan (Ex RBI Governor)published a research paper titled “Has Financial
Development Made the World Riskier?”. In his research paper Mr. Raghuram
Rajan concluded that :-

 Developments in the financial sector have led to an expansion in its ability

to spread risks.
 The increase in the risk bearing capacity of economies, as well as in actual
risk taking, has led to a range of financial transactions that hitherto were
not possible, and has created much greater access to finance for firms and
households. On net, this has made the world much better off.
 Concurrently, however, we have also seen the emergence of a whole
range of intermediaries, whose size and appetite for risk may expand over
the cycle. Not only can these intermediaries accentuate real fluctuations,
they can also leave themselves exposed to certain small probability risks
that their own collective behavior makes more likely.
 As a result, under some conditions, economies may be more exposed to
financial-sector-induced turmoil than in the past.

Since his paper got published Mr. Raghuram Rajan was a main target of critics. In
2008 because of correction in house price the crisis of 2008 started. It was
realized that somehow financial market behavior was not normal as excess
liquidity was more after getting higher return and risk associated with the
investment was ignored. Thus there was mismatch in risk and return.
In the light of above incidence please answer the following questions:-

(a) What was the securitization product?

(b) Which were the institution involved in securitization market?
(c) What was the exact role of credit rating agency in securitization market and
what was failure of credit rating agency’s assessment of risk?
(d) How did sub-prime loan market had induced excess liquidity in the system?
(e) What were impacts of excess liquidity on asset price particularly house
price?
(f) How did sub-prime loan market bubble has burst?