Law and Economic Issues in Subprime Litigation

This post is from Allen Ferrell of Harvard Law School.

I have recently finished a paper, with two co-authors, Jennifer Bethel and Gang Hu, titled “Law and Economic Issues in Subprime Litigation”.

The losses suffered by mortgaged-backed security (MBS) holders, collateralized debt obligations (CDOs) holders and security holders in investment banks, mortgage originators, bond insurers and credit rating agencies is generating, and will continue to generate, an enormous wave of litigation. In the paper we provide some basic descriptive statistics and institutional details on the mortgage origination process, MBS and CDOs, including the evolution of MBS tranche structure over time, the underwriting quality of mortgage originations, CDO trustees and liquidations, and the identity of MBS and CDO sponsors. In addition the paper also discusses some of the main issues that will likely be critical in much of this subprime litigation; issues such as whether the subprime crisis was foreseeable; the distinction between ex ante expectations and ex post losses; the distinction between the transparency of the quality of the underlying assets being securitized and the transparency as to which market participants are exposed to subprime losses; and the distinction between what investors and the market generally knew and what individual entities in the structured finance process knew.

The paper can be found here.

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