Any examination of the causes of the financial crisis is exceedingly complex, with a variety of causes that include bad lending, monetary policy mistakes, a bubble in real estate prices, bank capitalization, etc. In this light, the recent congressional hearings on Goldman Sachs should not be dismissed as mere theatrics, as they highlighted the industry's willingness and ability to unload defective transactions into the market. A candid assessment of the causes of the crisis and the future of securitized lending forces us to address why the "market forces" that had protected investors in prior years failed to prevent the market from being flooded with flawed securities. It is imperative that we understand and identify market functions, determine why they broke down and devise both market- and regulation-based remedies.

The business of securitizing financial assets is different from other forms of bond issuance, since the performance of the resulting securities is dependent on both the quality of the collateral and the distribution of cash flows within the transaction. While the process has worked well for decades, the market forces that traditionally protected investors gradually failed between 2004 and 2007.

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