Electronic copy available at: http://ssrn.com/abstract=1096582
Jennifer E. Bethel*Allen Ferrell**Gang Hu***
This paper explores the economic and legal causes and consequences of the 2007-2008 creditcrisis. We provide basic descriptive statistics and institutional details on the mortgage originationprocess, mortgage-backed securities (MBS), and collateralized debt obligations (CDOs). Weexamine 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 MBStranche structure over time, mortgage originations, underwriting quality of mortgageoriginations, and writedowns of the commercial and investment banks. We discuss the financialdifficulties faced by investment and commercial banks. In light of this discussion, the paper thenaddresses questions as to whether these difficulties might have been foreseen, and some of themain legal issues that will play an important role in the extensive litigation (summarized in thepaper) that is underway, including the Rule 10b-5 class-action lawsuits that have already beenfiled against the banks, pending ERISA litigation, the causes-of-action available to MBS andCDO purchasers, and litigation against the rating agencies. In the course of this discussion, thepaper discusses three principles that will likely prove central in the resolution of the securitiesclass-action litigation: (1) “no fraud by hindsight”; (2) “truth on the market”; and (3) “losscausation.”
* Babson College, (781) 239-5797, email@example.com** Greenfield Professor of Securities Law, Harvard Law School, (617) 495-8961,firstname.lastname@example.org.*** Babson College, (781) 239-4946, email@example.com. The authors have benefited from discussionswith Ralph Ferrara, Paul Ferrillo, Tamar Frankel, Hal Scott, Steve Shavell, Erik Sirri, Laura Stiglin,David Sugarman, and the participants at many seminars and presentations of the paper, including theHarvard Law School Law & Economics Workshop and the Brookings – Tokyo Club – WhartonConference on Prudent Lending Restored: Securitization after the 2007 Mortgage Securities Meltdown.We appreciate research assistance from AK, Eric Chan, Wallace de Witt, and Johnson Elugbadebo.Professor Ferrell is grateful to the John M. Olin Center in Law, Economics, and Business at Harvard LawSchool for financial support.