Federal Reserve Vice Chairman Donald Kohn today put some of the blame for the structured debt crisis on institutional investors who failed to properly assess the risk inherent to the complex mortgage-related issues.
“The growth of securitization is in large part a response to the growing demands of institutional investors for fixed-income securities. These investors clearly had a financial incentive to do better due diligence on the subprime risks they were taking on, but they largely failed to do so,” Mr. Kohn said in prepared remarks before the Federal Reserve Bank of Richmond’s Credit Market Symposium in Charlotte, N.C.
Institutional investors may have underestimated the risk of a sharp decline in home prices, solely relied on credit-rating agencies’ analyses “that have proven to be inadequate or simply misunderstood the risk of these often very complex securities,” Mr. Kohn said.
He added the Fed favors raising capital requirements on complex investments such as collateralized debt obligations and off-balance exposure.
Mr. Kohn’s comments echoed those of William Poole, president of the Federal Reserve Bank of St. Louis, who told a meeting of financial planners Jan. 9 that institutional investors were among those who bought subprime-related CDOs “without conducting an adequate analysis of the underlying investments. … I have a hard time understanding how so many investment professionals could have been so wrong.”
