In 2008, one of the largest financial crises due to the stock market crash along and...

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In 2008, one of the largest financial crises due to the stock market crash along and the resulting failures of several large banks was met with a huge intervention in the financial markets by the Federal Reserve and the federal government. The problem was associated with a financial innovation in which large numbers of mortgages were "bundled" into a security and sold in the financial markets to banks, investors, foreigners, and investment banks. The problem of excessive risk and moral hazard by homebuyers was said to be solved because each of these "securities" represented large numbers of mortgages so that the default on a few of them would have little effect on the underlying value of the "security." How could such a system lead to a problem of moral hazard on the part of lenders? Please explain it. In 2008, one of the largest financial crises due to the stock market crash along and the resulting failures of several large banks was met with a huge intervention in the financial markets by the Federal Reserve and the federal government. The problem was associated with a financial innovation in which large numbers of mortgages were "bundled" into a security and sold in the financial markets to banks, investors, foreigners, and investment banks. The problem of excessive risk and moral hazard by homebuyers was said to be solved because each of these "securities" represented large numbers of mortgages so that the default on a few of them would have little effect on the underlying value of the "security." How could such a system lead to a problem of moral hazard on the part of lenders? Please explain it.

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