This dissertation discusses the factors behind the subprime turmoil and the credit crunch that hit capital markets in 2007-2009. This study combines current arguments on the crisis with qualitative analysis in order to investigate the ins and outs of the crisis and most significant factors behind it. This dissertation concludes that mortgage securitization processes have been the key to explain the development of the crisis over capital markets and are directly responsible for losses experienced by financial institutions as a result of the turmoil. By comparing prime mortgage with subprime mortgage lending, the problems seem not come from the pure innovation of the mortgage securitization; rather the problems arise from the general market failure and the absence of risk control capabilities. Especially, the consequences of the risks are extended and magnified by these problems which led to the carnage of the subprime mortgage market. As a result, there is a strong need to draw regulation and policy implications to practitioners within the financial and economic environment.
