Conflicts of Interest in Securitisation: Adjusting Incentives
Journal of Corporate Law Studies, Vol. 9, p. 261, 2009
34 Pages Posted: 12 Nov 2009 Last revised: 13 Nov 2009
Date Written: July 1, 2009
While many factors have contributed to the current financial turmoil, its roots can be traced back to misaligned incentives on the micro-level which resulted in numerous potential conflicts of interest. Examining the situation of investors and the various participants responsible for creating and securitising subprime mortgages, the article focuses on these conflicts of interest and provides suggestions on how to address them. While certain issues require regulatory intervention, many conflicts of interest could be solved by adjusting the incentives for market participants to induce them to voluntarily act as desired. A regulation that adjusts incentives appears to be more appropriate and more effective in the long run than heavy-handed regulatory intervention. A regulation of the financial system which is too restrictive, while hailed in times of crisis, would stifle growth and innovation, and thus ultimately damage the very institution it is meant to protect.
Keywords: conflicts of interest, financial crisis, securitzation, rating agency, incentive
JEL Classification: G21, G23, G28, K22
Suggested Citation: Suggested Citation