[lbo-talk] How the SEC Could Have Regulated Subprime Mortgages

Michael Pollak mpollak at panix.com
Thu Dec 4 22:43:18 PST 2008


http://baselinescenario.com/2008/12/04/subprime-mortgage-sec-regulation/

The Baseline Scenario [econ blog] December 4, 2008 at 10:00 am

How the SEC Could Have Regulated Subprime Mortgages

From a new paper (link below):

Kafka would have loved this story: According to our current

understanding of U.S. law there is far better consumer protection for

people who play the stock market than for people who are duped into

buying a house with an exotically structured subprime mortgage, even

when the mortgage instrument is immediately packaged and sold as part

of a security.

The crux of the matter is that securities transactions - notably, the

sale of a security to a customer by a broker - are governed by SEC

regulations, which impose a fiduciary relationship on the broker,

meaning, among other things, that the broker can only sell financial

products that are suitable for that customer. However, no such rule

governs the relationship of a homebuyer to a mortgage broker or

company, meaning that behavior by the latter must be actually

fraudulent before it can be sanctioned.

Jonathan Macey, Maureen O'Hara, and Gabe Rosenberg (two of whom are at

my very own Yale Law School) have a new paper (abstract and download

available) arguing not only that mortgage brokers should have a

fiduciary responsibility to their customers, but that they already do

under two reasonable interpretations of existing SEC regulations. (It

has to do with whether a complex subprime mortgage is already a

security or, failing that, whether it is related to a security

transaction.) This means that the SEC could have been regulating these

things all along.

Written by James Kwak



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