The Financial Crisis on Trial: What Went Wrong

Americans demanded retribution from the mortgage lenders whose subprime loans defaulted and from investment bankers whose mortgage-backed securities sharply declined in value in 2007, leading to financial panic and the Great Recession. From 2008 to 2019, the federal government extracted hundreds of billions in fines from dozens of corporations, but few individual business executives were held accountable, and no senior banker was convicted of a crime. I use the trial court record of five government enforcement cases against individuals to explain this apparently anomalous result. I conclude that, in addition to a lack of funding, the prosecution effort was hindered by the government’s erroneous selection of cases to pursue. Further, the diffused nature of decision making in the mortgage finance market made it difficult to prove that any one senior-level participant had the criminal intent necessary for a conviction or a Securities and Exchange Commission civil fine or injunction. The trial results also support the argument that the growth and consolidation of investment banks from 1990 to 2008 created incentives for misconduct within the firms.

Ten Years of Evidence: Was Fraud a Force in the Financial Crisis?

This article synthesizes the large literature regarding the role of various players in residential mortgage-backed securities (RMBS) securitization at the center of the 2008–09 US housing and financial crisis. Underwriting banks facilitated wide-scale mortgage fraud by knowingly misreporting key loan characteristics underlying mortgage-backed securities (MBS). Under the cover of complexity, credit rating agencies catered to investment banks by issuing increasingly inflated ratings on both RMBS and collateralized debt obligations (CDOs). Originators who engaged in mortgage fraud gained market share, as did CDO managers who catered to underwriters by accepting the lowest-quality MBS collateral. Appraisal targeting and inflated appraisals were the norm. RMBS and CDO prices indicate that the marginal AAA investor was unaware of pervasive mortgage fraud and ratings inflation, but these factors were strongly related to future deal performance. The supply of fraudulent credit was not uniform, but clustered in certain geographic regions and zip codes. As these dubious originators extended credit to those who could not afford the loans, the credit expansion led to house price booms and subsequent crashes in these zip codes. Overall, a consistent narrative based on substantial research indicates that conflicts of interest, misreporting, and fraud were focal features of the financial crisis. (JEL G01, G21, G28, K42, R30)

How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic

We study the evolution of USmortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of lowrates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on “plainvanilla” conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.

Policy will cut the risk of booming house prices

Significance The government in New Zealand, where the market is particularly buoyant, was the first to react in February. It now requires the Reserve Bank to consider house prices when setting monetary policy. Other governments and central banks have shown little sign of following suit. Impacts Calls are rising for the US Federal Reserve to taper its purchases of mortgage-backed securities, but it will remain cautious. Rising financial stability risks and house price booms increase the risk of insolvency for borrowers and non-performing-loans for banks. Higher house prices add indirectly to consumer price inflation if they push up rents, but this link takes time to materialise.

Capturing Finance

Arbitrage—the trading practice that involves buying assets in one market at a cheap price and immediately selling them in another market for a profit—is fundamental to the practice of financial trading and economic understandings of how financial markets function. Because traders complete transactions quickly and use other people's money, arbitrage is considered to be riskless. Yet, despite the rhetoric of riskless trading, the arbitrage in mortgage-backed securities led to the 2008 financial crisis. In Capturing Finance Carolyn Hardin offers a new way of understanding arbitrage as a means for capturing value in financial capitalism. She shows how arbitrage relies on a system of abstract domination built around risk. The commonsense beliefs that taking on debt is necessary for affording everyday life and that investing is necessary to secure retirement income compel individuals to assume risk while financial institutions amass profits. Hardin insists that mitigating financial capitalism's worst consequences, such as perpetuating class and racial inequities, requires challenging the narratives that naturalize risk as a necessary element of financial capitalism as well as social life writ large.

Do investors value frequent issuers in securitization?

We assess the value of frequent issuers to investors in securitization markets by examining the initial yield spread of 6132 European mortgage-backed securities (MBS), covering a 20-year period between 1999 and 2018. We find that frequent issuers have certification value, and it increases as the credit cycle approaches its peak, as lending standards loosen, and information asymmetries in securitization markets increase. Investors value frequent issuers more favourably on riskier, difficult to evaluate MBS. We find that after the great financial crisis (GFC), investors began to attribute more value to frequent issuers, regardless of MBS credit quality. We also find that in the pre-crisis period, investors required higher yields to compensate for perceived rating shopping, which is not observed after the GFC. Finally, we show that investors expect higher yields on deals closed by subsidiaries of foreign banks.

The Global Finical Crisis from an Islamic Point Of View

When the world economy suffered a new financial economic crisis, it uncovered to the world that there were major failures within the Industrial financial system and it was caused by a number of issues including the practice of interest and the terrible effect it has on the financial crisis events. Issues that will be discussed in this paper are Riba, Gambling, Uncertainty, Derivatives, Saucerization, Sell of debt, Creation of Money, and the Private “Personal” interests. However, the paper will focus on the Islamic financial system and the financial instruments which are based and designed in compliance with Shariah Rules and Regulations, whether if practicing Islamic banking would cause such a crisis to accrue. The Sukuk, of the Islamic mortgage-Backed securities (MBS), and Islamic future contract will be discussed in order to prove why using the Islamic Financial system is better to assure that this kind of global crisis doesn’t come to pass again.