This, combined with a business model in which the loans were packaged, turned into securities and sold on the market, meant that the incentive for lenders to correctly assess and subsequently monitor the risks was very low, since they did not retain the risks of the loan. Not only were the advantages associated with a model of this kind – which allows the risk assumed by the institutions to be managed with greater flexibility – not correctly harnessed, but the model eventually gave rise to transactions in which institutions had no incentive to select borrowers correctly. They became mere intermediaries for the credit granted by the system, mere commission earners, interested solely in the volume of operations. Many institutions also made mistakes in their management systems, such as their staff remuneration arrangements. The remuneration of the managers of many institutions was linked to short-term profits, without any consideration of the levels of risk being assumed to obtain them. Other banks, especially in central and northern Europe, made mistakes not so much in their lending as in their securities investments, using very unrealistic, or unjustifiably optimistic, risk assessments. In a context of abundant liquidity at the international level, many financial institutions sought higher profits by investing in this type of complex instrument associated with the subprime segment as a mechanism to compensate for the fact that lending margins were narrower than in the past, relying excessively on the assessment of their credit quality by rating agencies.
In these circumstances, both money market investment funds and non-financial corporations withdrew from the market. The investment vehicles created to transfer the risk and keep it off bank balance sheets then saw their liquidity dry up and had to turn to the lines of credit committed by their sponsoring banks. This increased the amounts which banks had to borrow and forced them to turn to the central banks for financing from 9 August 2007. The tensions which characterised thereafter the functioning of the interbank and credit markets, despite attempts by the monetary authorities to restore normality, were symptomatic of a growing lack of confidence about the situation of financial institutions in the main developed economies. These misgivings were confirmed by the considerable losses of banks caused by these complex products linked to US subprime loans, which in many cases gave rise to the need to raise large amounts of capital. Nonetheless, although some credit institutions went bankrupt as a result of those investments and others were rescued, no systemic institution went under. Indeed, the rescue of Bear Stearns in March, with the US authorities supporting its acquisition by JP Morgan, sent a message that such failures would not be permitted. In that long year, the credit and interbank markets functioned with difficulty and liquidity disappeared from the primary and secondary securitisation market, against a background of growing lack of confidence and aversion to risk. This enormously hindered the wholesale funding of credit institutions.