AUDIO

The originate-to-distribute mortgage securitization system that is in use in the United States has been blamed, in part, for the current financial crisis. The conventional analysis is that it does not require mortgage originators or distributors to share any of the underwriting risk, and thus creates moral hazard as bad mortgages are passed along to subsequent purchasers in the distribution chain. In seeking alternatives to the current system, the Treasury Department and the FDIC have both praised a covered bond system--in which banks continue to hold mortgages in a segregated account on their own balance sheets--that has been used widely in Europe. Although that system has not fared well in the financial crisis, a somewhat different covered bond system used in Denmark over several centuries has not been significantly impaired, despite the fact that the housing bubble in Denmark--which was proportionately larger than the one in the United States--also deflated. In this conference, we will review the characteristics of the Danish system that have helped Denmark survive financial crises for over two hundred years, and consider whether any of the elements of the Danish system can be useful in the United States.