Legal and Economic Issues in Litigation Arising from the 2007-2008 Credit Crisis

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

94 Pages Posted: 3 Mar 2008 Last revised: 23 Nov 2010

See all articles by Allen Ferrell

Allen Ferrell

Harvard Law School; European Corporate Governance Institute (ECGI)

Jennifer E. Bethel

Babson College

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: November 17, 2008

Abstract

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."

Keywords: Subprime, Litigation, Economic

JEL Classification: G18, G21, G28, E53, K22, K41

Suggested Citation

Ferrell, Allen and Bethel, Jennifer and Hu, Gang, Legal and Economic Issues in Litigation Arising from the 2007-2008 Credit Crisis (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, Available at SSRN: https://ssrn.com/abstract=1096582 or http://dx.doi.org/10.2139/ssrn.1096582

Allen Ferrell (Contact Author)

Harvard Law School ( email )

Griswold 303 1525 Massachusetts Avenue
Cambridge, MA 02138
United States
(617) 495-8961 (Phone)
(617) 495-1110 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Jennifer Bethel

Babson College ( email )

Babson Park, MA 02457-0310
United States
781-239-5797 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/bethel/

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://ganghu.org

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