Self-Identity Recognition Not Segmentation: Relationship between Mortgage Backed Securities Market and Segmented Assimilation Theory (My Response)

The United States of America was founded upon the principles of individual freedoms and collective interests to escape historical oppressions. On census data and most other documentation, citizens and fellow countrymen (and women) self-identify for purposes of monitoring equality, fairness, and non-discriminatory practices guaranteed in the Constitution with Amendments and the evolved, supportive constitutional laws. Given such, it is important to gather the information not for separation but for inclusion.

Segmented Assimilation Theory, in my opinion, assumes that generational success can be achieved through a self-identified community pooled interest outside the collective US society. Aside from the contradiction of terms (segmented and assimilation), my position is that humanity and citizenship are not successfully segmental. Differences such as opinions, generational origins, race, and religion at this level can coexist. It is the original vision of the United States of America and its continued progress toward collective individual constitutional freedoms. History has shown that increased integration reduces discrimination, society trends toward greater equality, and provides a check on fairness provided that constitutional freedoms are upheld. Additionally, most successful socioeconomic development requires investment and capital levels which exceed the resources of a segmented community to provide benefits for the entire country.

Pooled risk and prosperity have been essential to the development of the U.S. economy and society. Inclusion has always increased overall prosperity. This concept is found in the insurance industry, mutual fund investing, and social security. The mortgage backed securities (MBS) market initially operated on this basis and the separation-dilution of pooled risk and return created the financial crisis. Mortgages from properties across America were pooled into large securities (bonds) sold by banks onto the global market. To increase the value of the securities, the collateralized mortgages were separated into tranches (risk and return segments) thereby increasing the sales price of the MBS and providing more income to the banks. The increased return expectation (higher mortgage interest rates) attracted more buyers from around the world which increased the supply of funds available for mortgages. More mortgage backed securities (MBS) were created as more banks offered the products. The tranches increased bank financial performance without an adequate impact assessment of the proportional separation of the risk profile.

Banks and investors with the ability to properly assess the riskier securities and market conditions bought insurance (credit default swaps) with an improperly, low priced premium. When mortgages began defaulting, holders of the MBS began losing value as default rates exceeded projections. As the value of the securities fell due to excessive defaults, there were no additional buyers for securities of assured risk of loss (out of the money call option of a deflating asset). Banks with purchased insurance began calling in claims that exceeded the “assessed risk pool value” and total premiums paid. This collective call on the credit default insurance policies caused liquidity issues for the insurer(s) along with the potential reputation damage to the U.S. financial industry for investment losses of workers' savings from around the world.

Essentially, banks around the world purchased American mortgages (using, in some cases, retirement funds from their country's workers) fueling the accelerated growth and excessive investment of the housing market. The securities were segmented which diluted “risk sharing” to increase value (bank income and cash flow). This financial strategy can be effectively executed provided that necessary control evaluations and diligence are in place to properly identify the risks. The bailout of banks and insurance provider was essential due to the source of some funds used to purchase the mortgage backed securities.

The separation of pooled risk and return evidenced in the MBS segmentation crisis is similar to the issues I associate with the social science Segmented Assimilation Theory referenced in a previous post: Gatekeepers and Modes of Incorporation. Following a social philosophy of Segmented Assimilation Theory, in my opinion, will lead back to the failed separate but equal policy of the past. The common issues between the social theory and financial segmentation include:

• Equal access to development resources (capital allocation problem);
• Improper assessment of risk due to the lack of pooled interest;
• Imbalance in capital accumulation to certain investments creating market "bubbles";
• Improper capital investment decisions due to underestimated risk and return.


An economic agenda for Shared prosperity is essential for healthy societal development.