by Esther Leibel
Vinokurova’s analysis of the development of the MBS market is based on a massive archival database (366 industry documents and periodicals and 13 books from 1960 to 2008), along with 21 semi-structured interviews with industry participants and regulators. Her study reveals that to make MBS more acceptable to investors, issuers pursued two parallel strategies. First, they repositioned MBS to make them look more similar to bonds (for example, by standardizing the MBS documentation and aggregating multiple mortgages to issue securities in larger amounts). Second, and more importantly, they took advantage of the malleability of the customer perceptions of the products in the bond market. This malleability was due to numerous product attributes, ambiguity on the links between attributes and products’ performance, and the limited attention span of the customers. The demand landscape re-shaping consisted of three operations. The first one was the addition of features that belonged to the MBS to the bonds demand landscape (for example, the notions of mortgage as collateral and that of prepayment risk exposure). Over time, MBS issuers also transformed the bonds’ demand landscape, by making the risk of prepayment a core feature of bonds. Finally, they removed features that had previously characterized the bonds’ demand landscape, such as the debt obligation dimension. As a result, MBS and bonds became virtually indistinguishable in the minds of the investors and MBS gained acceptance and legitimacy as fixed income instruments.
I asked Natalya, the author of this paper, a few questions to expand and contextualize her fascinating work.
How did you get interested in mortgage-backed securities (MBS) as a research topic?
I got interested in MBS through a combination of experiences in industry and academia. I worked for Capital One during a period when they were trying to enter the mortgage market in the lead-up to the bubble that eventually became the 2008 mortgage crisis. As a PhD student at NYU Stern, I went to a number of seminars, where scholars attempted to account for the events in the lead up to the financial crisis without taking into account the evolution of the mortgage market institutions. By shedding light on the changes in the structure of mortgage-backed securities over time, my work helps fill a gap in our understanding of how the evolution of the market participants’ beliefs can affect market outcomes.
I can see your paper become a classic in Strategy PhD seminars, but also a great addition to MBA and undergraduate strategy courses. Which core ideas would you suggest discussing in class with our PhD and MBA/undergraduate students, respectively?
MBA and undergraduate students appreciate seeing connections between what they learn in strategy and what they learn in their other classes. This paper builds connections between research in strategy, marketing and psychology, thus, helping our students develop a more holistic sense of their curriculum. For MBA students, this paper offers a way to combine the positioning ideas they learn in their strategy and marketing classes with ideas from cognitive psychology. For PhD students, this paper opens the door to using different methods for exploring the ideas of landscape. By taking a qualitative approach to the subject of landscapes, this paper illustrates the importance of supplementing formal models with other methods of inquiry.
One unfortunate outcome of the ability of MBS issuers to re-shape the demand landscape was the subprime mortgage crisis of 2007-2009. Do you have any policy recommendations that come from your research and findings?
The policy implications of my study point to the importance of memory in the realm of financial markets. Absence of memory mechanisms enabling market participants to remember what the world was like before the bond demand landscape was reshaped was a contributing condition to the 2008 crisis.
I am big fan of applying historic methods to the study of strategy. But we live in the era of big data and predictive analytics. How can historic case studies keep contributing to the field of strategy? What are their distinguished features?
Historical case studies are invaluable tools for understanding the richness of institutions and tracing how these institutions evolve over time. Moreover, historical method allows us to trace the nuanced patterns of causality that may elude other methods of inquiry. Finally, taking an historical perspective on a given phenomenon allows us to focus on the important principles governing the behavior of individuals and organizations as the less important details fade in the background.