The supreme subprime myth: the role of bad loans in the 2007-2009 financial crisis


  • Alberto Niccoli
  • Francesco Marchionne



subprime mortgages, interest rates, probability of default, loss given default.


Using simulations, we show that the probability of default and losses given default of subprime mortgage loans are small in comparison to their interest rates. The implication is that these loans are profitable for risk neutral efficient banks. As subprime mortgages remain a good investment even for higher values of probability of default and losses given default, our conclusion is that they did not trigger the 2007-2009 financial crisis. In contrast with other papers, this finding does not derive from analyses relating to the subprime market size, but from the positive ex-ante net present value of their discounted cash flows.




JEL Codes: G01, G11, G21, G32.


ACKERMANN J. (2008), “The Subprime Crisis and its Consequences”, Journal of Financial Stability, vol. 4 n. 4, pp. 329-337.

ARCAND J.L., BERKES E. and PANIZZA U. (2011), “Too Much Finance?”, SSRN Working Paper.

ARESTIS P. and KARAKITSOS E. (2010), “Subprime Mortgage Market and Current Financial Crisis”, in Arestis P., Mooslechner P. and Wagner K. (eds.), Housing Market Challenges in Europe and the United States, Basingstoke: Palgrave Macmillan, pp. 40-59.

ASHCRAFT A.B. and SCHUERMANN T. (2008), “Understanding the Securitization of Subprime Mortgage Credit”,IMF Staff Report, no. 318, Federal Reserve Bank of New York, New York.

BERNDT A. and GUPTA A. (2009), “Moral Hazard and Adverse Selection in the Originateto-Distribute Model of Bank Credit”, Journal of Monetary Economics, vol. 56 n. 5, pp. 725-743.

CALOMIRIS C.W. (2007), “Not (yet) a ‘Minsky’ Moment”,, November 23, 2007.

CALOMIRIS C.W. (2009), “The Subprime Turmoil: What’s Old, What’s New, and What’s Next”, Journal of Structured Finance, vol. 15 n. 1, pp. 6-52.

COLEMAN M., LACOUR-LITTLE M. and VANDELL K.D. (2008), “Subprime Lending and the Housing Bubble: Tail Wags Dog?”, Journal of Housing Economics, vol. 17 n. 4, pp. 272-290.

DELL’ARICCIA G., EGAN D. and LAEVEN L. (2008), “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market”, IMF Working Paper, n. WP/08/106, International Monetary Fund, Washington (DC).

DEMYANYK Y.S. and VAN HEMERT O. (2011), “Understanding the Subprime Mortgage Crisis”, Review of Financial Studies, vol. 24 n. 6, 1848-1880.

FBI (2007), Mortgage Fraud Report, May.

FBI (2008), Mortgage Fraud Report, April.

FISHER I. (1933), “The Debt Deflation Theory of Great Depressions”, Econometrica, vol. 1 n. 4, pp. 337-357.

FRAME S., LEHNERT A. and PRESCOTT N. (2008), “A Snapshot of Mortgage Conditions with an Emphasis on Subprime Mortgage Performance”, Federal Reserve’s Home Mortgage Initiatives, Federal Reserve Bank of Richmond, Richmond.

FRATIANNI M. and MARCHIONNE F. (2009), “The Role of Banks in the Subprime Financial Crisis”, Review of Economic Conditions in Italy, vol. 2009 n. 1, pp. 11-47.

FRATIANNI M. and MARCHIONNE F. (2010a), “The Banking Bailout of the Subprime Crisis: Size and Effects”,PSL Quarterly Review, vol. 63 n. 254, pp. 187-233.

FRATIANNI M. and MARCHIONNE F. (2010b), “Banks’ Great Bailout of 2008-2009”, Banks and Bank Systems, vol. 5 n. 2, pp. 4-19.

GORTON G. (2009), “The Subprime Panic”, European Financial Management, vol. 15 n. 1, pp. 10-46.

GRAMLICH E.M. (2007), “Booms and Busts: The Case of Subprime Mortgages”, Housing, Housing Finance, and Monetary Policy Symposium, 30 August-1 September, Federal Reserve Bank of Kansas City, Jackson Hole (WY).

IMF (2007), Global Financial Stability Report, October.

KEYS B.J., MUKHERJEE T.K., SERU A. and VIG V. (2010), “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans”, Quarterly Journal of Economics, vol. 125 n. 1, pp. 307-362.

KIFF J. and MILLS P. (2007), “Money for Nothing and Check for Free: Recent Developments in U.S. Subprime Mortgage Markets”, IMF Working Paper, n. WP/07/188, International Monetary Fund, Washington (DC).

KINDLEBERGER C.P. ([1978] 2000), Manias, Panics, and Crashes: A History of Financial Crises, 4th edition, New York: Wiley.

LONGSTAFF F.A. (2010), “The Subprime Credit Crisis and Contagion in Financial Markets”, Journal of Financial Economics, vol. 97 n. 3, pp. 436-450.

MARCHIONNE F. (2007), “Microsimulation Models. An Integrated Approach with Real Data”, Università Politecnica delle Marche Working Paper, n. 296, Ancona.

MARCHIONNE F. and NICCOLI A. (2011), “Financial Deepening and Social Capital”, SSRN Working Paper.

MARTINS J.O., SCARPETTA S. and PILAT D. (1996), “Mark-Up Ratios in Manufacturing Industries”, OECD Economic Department Working Paper, n. 162, Paris.

MAYER C., PENCE K. and SHERLUND S.M. (2009), “The Rise in Mortgage Defaults”, Journal of Economic Perspectives, vol. 23 n. 1, pp. 27-50.

MINSKY H. (1977), “A Theory of Systemic Fragility”, in Altman E.J. and Sametz A.W. (eds.), Financial Crises: Institutions and Markets in a Fragile Environment, New York: Wiley, pp. 138-152.

MITCHELL W.C. (1913), Business Cycles, Berkeley: University of California Press.

NICCOLI A. (1979), Razionamento del credito e allocazione delle risorse, Bologna: Il Mulino.

NICCOLI A. (2011), “La politica degli sportelli in Sicilia ed effetti sul mercato del credito; razionamento, tassi e rischiosità dei prestiti”, in Busetta P. (ed.), Il mercato del credito dal locale al globale, Naples: Liguori Editore, pp. 133-160.

POVEL P., SINGH R. and WINTON A. (2007), “Booms, Bust and Fraud”, The Review of Financial Studies, vol. 20 n. 4, pp. 1219-1254.

PURNANANDAM A.K. (2010), “Originate-to-Distribute Model and the Subprime Mortgage Crisis”, The Review of Financial Studies, vol. 24 n. 6, pp. 1881-1915.

SANDERS A. (2008), “The Subprime Crisis and its Role in the Financial crisis”, Journal of Housing Economics, vol. 17 n. 4, pp. 254-261.

SHERLUND S.M. (2008), “The Past, Present, and Future of Subprime Mortgages”, Finance and Economics Discussion Series, n. 2008-63, Federal Reserve Board, Washington(DC).

WALLISON P.J. (2009), “The True Origins of This Financial Crisis”, On the Issues, n. 23894, Washington (DC): American Enterprise Institute for Public Policy Research.

WHALEN C. (2008), “Understanding the Credit Crunch as a Minsky Moment”, Challenge, vol. 51 n. 1, pp. 91-109.

WHITE L.J. (2010a), “The Credit Rating Agencies and the Subprime Debacle”, Critical Review, vol. 21 n. 2-3, pp. 389-399.

WHITE L.J. (2010b), “Markets: The Credit Rating Agencies”, Journal of Economic Perspectives, vol. 24 n. 2, pp. 211-226.

WRAY R.L. (2008), “Lessons from the Subprime Meltdown”, Challenge, vol. 51 n. 2, pp. 40-68.

ZUCKOFF M. (2005), Ponzi’s Scheme: The True Story of a Financial Legend, New York: Random House.


How to Cite

Niccoli, A., & Marchionne, F. (2012). The supreme subprime myth: the role of bad loans in the 2007-2009 financial crisis. PSL Quarterly Review, 65(260).




Most read articles by the same author(s)