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How Mortgage-Backed Securities Became Bonds: The Emergence, Evolution, and Acceptance of Mortgage-Backed Securities in the United States, 1960–1987

Published online by Cambridge University Press:  01 August 2018

NATALYA VINOKUROVA*
Affiliation:
Natalya Vinokurova is an assistant professor of Management at the Wharton School, University of Pennsylvania. Her research focuses on decision making in fragmented systems with a particular interest in the antecedents of the 2008 mortgage crisis. Her recent publications include: “Failure to Learn from Failure: The 2008 Mortgage Crisis as a Déjà Vu of the Mortgage Meltdown of 1994,” in Business History, and “State Terror as a Management Practice,” forthcoming, in Enterprise and Society. Management Department, the Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104. E-mail: natalyav@wharton.upenn.edu.

Abstract

This article documents the emergence, evolution, and acceptance of mortgage-backed securities (MBS) by bond investors in the United States between 1968 and 1987. Drawing on an analysis of trade publications, securities prospectuses, and business press, I argue that MBS issuers’ eventual success at convincing bond investors to accept their products is especially remarkable given that bond investors had rejected most types of MBS issued between 1970 and 1983. My analysis suggests that the acceptance of MBS as bonds was an outcome of two approaches employed by the MBS issuers: (1) changing the attributes of their products to make them more bond-like, and (2) changing the meaning of the bond category by opening its boundaries to products that incorporated mortgage features. These two approaches to changing investors’ beliefs to promote innovation acceptance may undergird the diffusion processes for other financial innovations. Understanding the process of innovation acceptance may be especially important because market participants have short memories. Forgetting the assumptions made during innovation–acceptance processes can bring unanticipated consequences of innovation adoption, such as financial crises.

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Article
Copyright
Copyright © The Author 2018. Published by Cambridge University Press on behalf of the Business History Conference. All rights reserved. 

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Footnotes

I thank Adam Brandenburger, John Paul MacDuffie, Ashish Arora, Beth Bechky, Matthew Bidwell, Felipe Csaszar, Per Hansen, Dan Levinthal, Christopher McKenna, Ethan Mollick, Rowena Olegario, Lori Rosenkopf, Wesley Sine, Metin Sengul, Kenneth Snowden, Richard Sylla, Lawrence White, Tyler Wry, participants at the 2015 Wharton Technology and Innovation Conference, the 11th Smith Entrepreneurship Research Conference, and the 2016 Business History Conference for their helpful comments. I also thank Lynn Selhat for editorial assistance and Thomas Splettstoesser for assistance with the figures.

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