The complexity of these instruments frequently made them opaque, and too often investors put their money and confidence into vehicles that they did not fully understand. The basic loan quality of U.S. subprime mortgages worsened through 2005 and 2006, although this worsening did not become broadly apparent to the investors in securitized mortgages until the first half of 2007.
As last year's events showed, systemic problems can arise from the activities of non-banking firms but, under present law, these requirements apply only to firms owning a commercial bank. Indeed, there is an incentive to shift riskier activities into unregulated firms. A second item is to strengthen the prudential rules applicable to supervised institutions. This component of a reform program has manifold elements.