Ten Years of Evidence: Was Fraud a Force in the Financial Crisis?

47 Pages Posted: 5 Feb 2019

See all articles by John M. Griffin

John M. Griffin

University of Texas at Austin - Department of Finance

Date Written: January 23, 2019

Abstract

This article takes stock of ten years of academic research by synthesizing the large literature regarding the various players in RMBS securitization at the center of the U.S. housing and financial crisis. Underwriting banks facilitated wide-scale mortgage fraud by knowingly misreporting key loan characteristics underlying mortgage-backed securities. Under the cover of complexity, credit rating agencies catered to investment banks by issuing increasingly inflated ratings on both RMBS and CDOs. Originators who engaged in mortgage fraud gained market share as did CDO managers who catered to underwriters by accepting the lowest-quality MBS collateral. Appraisal targeting and inflated appraisals were the norm. RMBS and CDO prices indicate that the marginal AAA investor was unaware of pervasive mortgage fraud and rating inflation, but these factors were strongly related to future deal performance. The supply of fraudulent credit was not uniform, but clustered in certain geographic regions and zip codes. As these dubious originators extended credit to those who could not afford the loans, the credit expansion led to house price booms and subsequent crashes in zip codes in proportion to their dubious and subprime credit exposure. Overall, there is substantial evidence that conflicts of interest, misreporting, and fraud were focal features of the financial crisis.

Keywords: Fraud, Financial Crisis, Conflicts of Interest

JEL Classification: G01, G21, G24, G18

Suggested Citation

Griffin, John M., Ten Years of Evidence: Was Fraud a Force in the Financial Crisis? (January 23, 2019). Available at SSRN: https://ssrn.com/abstract=3320979 or http://dx.doi.org/10.2139/ssrn.3320979

John M. Griffin (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6621 (Phone)

HOME PAGE: http://www.jgriffin.info

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