The basic idea is that loan “production” can be decoupled from holding assets and/or risks. In principle, this is a valid division of labour within the financial industry, if it is handled with a high degree of risk-awareness and sophistication. However, it has now become clear that these requirements have often been disregarded.
In many cases, the credit quality of underlying assets was low, not least as a result of doubtful practices in the US subprime market. Many of the loan originators were not regulated. Shortcomings in banks’ risk management, also as regards off-balance-sheet exposures, and investors’ due diligence practices have become apparent.