Law on Rice

The New York Times has an interesting article about an issue that I’ve been hearing about from bankruptcy judges for a little while: mortgage lenders are having trouble proving that they have standing to assert their claims because of their securitization agreements.

The article has a few technical inaccuracies, but it’s worth reading here.

I think that people who believe that securitization caused the financial crisis (even just in part) just haven’t thought the problem through.

Playing the financial crisis blame game is getting a little old, I know. But I’m taking a class that explores the crisis in great depth, so I feel like I need to talk about it to you.

Securitization is just a way to spread risk. They are simply securities, just like an investment in an oil and gas exploration project, or a share of Google. Critics disagree. They say, generally, that investors didn’t know the risks of the underlying mortgages.

That may be true. But I submit the following argument for your consideration: an investment in a pool of mortgages is far less complex than an investment in, say, Google. For example, do you really know how Google will continue to make money in the future? Do you know if their technology will stay competitive for the next ten years? I don’t. What is that fancy search algorithm anyway?

By contrast, I know that a pool of mortgages really consists of just a few types of risks: the mortgage won’t perform, the value of the collateral will drop, or interest rates will increase. Those risks are a whole lot simpler to understand than trying to gauge whether the latest patent infringement suit will bring Google to its knees.

Because securitized debt should be simple, the problem has more to do with the buyers of the debt. They should have known the risks.

And if they did their due diligence and didn’t know the risks, then I believe the problems with securitization have more to do with failure by the issuers to disclose, outright fraud, and blind greed. Those things have nothing to do with the rightness or wrongness of a financial instrument.