Subprime Mortgage Scandals and Lawsuits Are a Certainty
Letter to the Editor

Resident Fellow Alex J. Pollock
Resident Fellow
Alex J. Pollock
As is evident from several articles in your March 14 edition, everyone now realises that the U.S. mortgage-lending bubble is deflating. In fact, it will be a very painful bust, both financially and politically.

The issues run far beyond the failure of specialist subprime mortgage lenders because the boom was financed with tranched, senior-subordinated structured bonds, based on the models of the rating agencies and sold to yield-hungry investors. The junior tranches of subprime mortgage-backed securities and collateralised debt obligations are highly leveraged to credit losses being worse than the models expected.

Where this risk has migrated, just who is holding these risky tranches, how will they mark them to market when there are few or no bids, and who will buy any more such tranches as the bust proceeds, are questions traders and analysts must now scramble to answer.

Moreover, since "the implosion of an asset price bubble always leads to the discovery of fraud and swindles," as economic historian Charles Kindleberger so rightly observed, subprime mortgage scandals and lawsuits are forthcoming. This will, as it always does, stoke the already heated feeling of the politicians that they have to Do Something. As an old banking colleague once told me: "There is nothing new in finance, only cyclical recurrence."

Alex J. Pollock is a resident fellow at AEI.

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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