Lack of Transparency
Trade in risky securities can only function if the risks are transparent. Those who sell loans in the form of securitization can better estimate the default risks connected with them than the risk buyers; this leads to the danger that lemons will be traded. Rating agencies can only partially eliminate this problem.
Products like CDO-squared, which emerge from multiple securitizations, are completely lacking in transparency. Transparency about a company's yield situation should be ensured by financial reporting. Despite extensive risk reports, corporate management continues to cover up risks, not least by transferring risks to special-purpose entities off the balance sheet. If a company needs outside capital, losing investors' trust will quickly come back to haunt it.