Using simulations, we show that the probability of default and losses given default of subprime mortgage loans are small in comparison to their interest rates. The implication is that these loans are profitable for risk neutral efficient banks. As subprime mortgages remain a good investment even...

This paper provides an alternative interpretation to the financial crisis of 2007-2009 that relies upon “toxic” financial deepening defined as proliferation of financial derivatives. This reduces social capital and trust. The final outcome is that distrust makes financial markets fragile...

Using simulations, we show that the probability of default and losses given default of subprime mortgage loans are small in comparison to their interest rates. The implication is that these loans are profitable for risk neutral efficient banks. As subprime mortgages remain a good investment even...