Legal and Economic Issues in Litigation Arising from the 2007-2008 Credit Crisis
Harvard Law School; European Corporate Governance Institute (ECGI)
Jennifer E. Bethel
Babson College, Finance Division
November 17, 2008
PRUDENT LENDING RESTORED: SECURITIZATION AFTER THE MORTGAGE MELTDOWN, Chapter 5, pp. 163-235, Yasuyuki Fuchita, Richard Herring, and Robert Litan, eds., Brookings Institution Press, Washington DC, 2009
Harvard Law and Economics Discussion Paper No. 612
Harvard Law School Program on Risk Regulation Research Paper No. 08-5
This paper explores the economic and legal causes and consequences of the 2007-2008 credit crisis. We provide basic descriptive statistics and institutional details on the mortgage origination process, mortgage-backed securities (MBS), and collateralized debt obligations (CDOs). We examine a number of aspects of these markets, including the identity of MBS and CDO sponsors, CDO trustees, CDO liquidations, MBS insured and registered amounts, the evolution of MBS tranche structure over time, mortgage originations, underwriting quality of mortgage originations, and writedowns of the commercial and investment banks. We discuss the financial difficulties faced by investment and commercial banks. In light of this discussion, the paper then addresses questions as to whether these difficulties might have been foreseen, and some of the main legal issues that will play an important role in the extensive litigation (summarized in the paper) that is underway, including the Rule 10b-5 class-action lawsuits that have already been filed against the banks, pending ERISA litigation, the causes-of-action available to MBS and CDO purchasers, and litigation against the rating agencies. In the course of this discussion, the paper discusses three principles that will likely prove central in the resolution of the securities class-action litigation: (1) "no fraud by hindsight"; (2) "truth on the market"; and (3) "loss causation."
Number of Pages in PDF File: 94
Keywords: Subprime, Litigation, Economic
JEL Classification: G18, G21, G28, E53, K22, K41working papers series
Date posted: March 3, 2008 ; Last revised: November 23, 2010
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