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.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex J.
Pollock

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 25
    MON
  • 26
    TUE
  • 27
    WED
  • 28
    THU
  • 29
    FRI
Wednesday, August 27, 2014 | 3:00 p.m. – 4:15 p.m.
Teacher quality 2.0: Toward a new era in education reform

Please join AEI for a conversation among several contributors to the new volume “Teacher Quality 2.0: Toward a New Era in Education Reform” (Harvard Education Press, 2014), edited by Frederick M. Hess and Michael Q. McShane. Panelists will discuss the intersection of teacher-quality policy and innovation, exploring roadblocks and possibilities.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.