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The Subprime Crisis: Cause, Effect and Consequences


Christopher Whalen


Kroll Bond Rating Agency; Indiana State University - Networks Financial Institute; Economic Advisory Committee of FINRA; National Association of Business Economists; Villanova -- Finance Department Advisory Committee

March 1, 2008

Networks Financial Institute Policy Brief No. 2008-PB-04

Abstract:     
Despite the considerable media attention given to the collapse of the market for complex structured assets that contain subprime mortgages, there has been too little discussion of why this crisis occurred. The Subprime Crisis: Cause, Effect and Consequences argues that three basic issues are at the root of the problem, the first of which is an odious public policy partnership, spawned in Washington and comprising hundreds of companies, associations and government agencies, to enhance the availability of affordable housing via the use of creative financing techniques. Second, federal regulators have actively encouraged the rapid growth of over-the-counter (OTC) derivatives and securities by all types of financial institutions. And third, also bearing blame for the subprime crisis is the related embrace by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board of fair value accounting. After reviewing the Bush administration's proposed solutions as flawed, this article recommends a strategy for subprime crisis resolution. Job one is to rebuild market confidence in structured assets by going back to first principles on issues such as market transparency, standardization of contracts, and accounting treatment. By reducing complexity on the trade of structured assets through simple deal structures and providing investors with the information they need to analyze collateral, for example by requiring SEC registration and public pricing of assets, much of the current liquidity problem is ameliorated.

Number of Pages in PDF File: 17

Keywords: Subprime crisis, affordable housing OTC derivatives, fair value accounting, structured assets

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Date posted: April 2, 2008 ; Last revised: June 17, 2008

Suggested Citation

Whalen, Christopher, The Subprime Crisis: Cause, Effect and Consequences (March 1, 2008). Networks Financial Institute Policy Brief No. 2008-PB-04. Available at SSRN: http://ssrn.com/abstract=1113888 or http://dx.doi.org/10.2139/ssrn.1113888

Contact Information

Christopher Whalen (Contact Author)
Kroll Bond Rating Agency ( email )
845 Third Avenue
Fourth Floor
New York, NY 10022
United States
6467312366 (Phone)
HOME PAGE: http://www.kbra.com
Indiana State University - Networks Financial Institute ( email )
Terre Haute, IN 47809
United States
914 645-5304 (Phone)
HOME PAGE: http://tinyurl.com/4ckcoxo
Economic Advisory Committee of FINRA ( email )
1735 K Street NW
Washington, DC 20006
United States
914 645-5304 (Phone)
HOME PAGE: http://tinyurl.com/2bne6p
National Association of Business Economists ( email )
1920 L St. NW, Suite 300
Washington, DC 20036
United States
914-645-5304 (Phone)
HOME PAGE: http://www.nabe.com
Villanova -- Finance Department Advisory Committee ( email )
800 Lancaster Avenue
Villanova, PA 19085-1678
United States
914-645-5304 (Phone)
HOME PAGE: http://www1.villanova.edu/villanova/business/departments/finance.html
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