<P> Moreover, a conflict of interest between professional investment managers and their institutional clients, combined with a global glut in investment capital, led to bad investments by asset managers in over-priced credit assets . Professional investment managers generally are compensated based on the volume of client assets under management . There is, therefore, an incentive for asset managers to expand their assets under management in order to maximize their compensation . As the glut in global investment capital caused the yields on credit assets to decline, asset managers were faced with the choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients . Many asset managers continued to invest client funds in over-priced (under - yielding) investments, to the detriment of their clients, so they could maintain their assets under management . They supported this choice with a "plausible deniability" of the risks associated with subprime - based credit assets because the loss experience with early "vintages" of subprime loans was so low . </P> <P> Despite the dominance of the above formula, there are documented attempts of the financial industry, occurring before the crisis, to address the formula limitations, specifically the lack of dependence dynamics and the poor representation of extreme events . The volume "Credit Correlation: Life After Copulas", published in 2007 by World Scientific, summarizes a 2006 conference held by Merrill Lynch in London where several practitioners attempted to propose models rectifying some of the copula limitations . See also the article by Donnelly and Embrechts and the book by Brigo, Pallavicini and Torresetti, that reports relevant warnings and research on CDOs appeared in 2006 . </P> <P> Mortgage risks were underestimated by every institution in the chain from originator to investor by underweighting the possibility of falling housing prices based on historical trends of the past 50 years . Limitations of default and prepayment models, the heart of pricing models, led to overvaluation of mortgage and asset - backed products and their derivatives by originators, securitizers, broker - dealers, rating - agencies, insurance underwriters and investors . </P> <P> There is strong evidence that the riskiest, worst performing mortgages were funded through the "shadow banking system" and that competition from the shadow banking system may have pressured more traditional institutions to lower their own underwriting standards and originate riskier loans . </P>

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