Don't know, Michael. Enron presumably would have also involved the auditors and, possibly, the banks could have used them as a shield.
Maybe it would be interesting to elaborate a little on the element of residual risk that I mentioned. From what I've read the practice of overvaluing collateral real estate and the creditworthiness of borrowers was fairly widespread (whatever that means as a percentage of loans, I'm unsure). Anyway, after underwriting these arguably fraudulent loans, they were securitized and sold off by the investment banks much like stocks or bonds. Typically, the IBs had a "fixed Income research" department which specialized in the financial engineering and design of these mortgage-backed securities. Anyway, a key point it seems is that once these instruments were sold off, there was an assumption that neither the originator nor underwriter bore any further financial risk. From a regulatory viewpoint, these assets had been sold and were no longer on the banks' balance sheets. They no longer required any capital support. All of this is predicated on the assumption that the banks had truly performed "due diligence" and they therefore had no contingent liabilities, something that might subsequently be refuted if fraud were shown. Now, I don't know about the actual quantities, but the way the process worked causes me some concern. Consider that these institutions inherently have high rates of asset turnover: e.g., a mortgage might be originated and within weeks be incorporated into a security along with many other mortgages and sold off. As a result, an originator/underwriter might well sell several times its total assets worth of MBS in a single year. Moreover, we had sustained low interest rates and there was a flood of mortgage underwritings over several years. As a result, the ratio of total originations/underwritings over the time period to capital would be very large. Thus, it would not seem to take a large percentage of fraudulent loans in the total outstanding to wipe out the banks' capital. Peter Hollings -----Original Message----- From: Perelman, Michael [mailto:[EMAIL PROTECTED] Sent: Monday, March 24, 2008 11:20 PM To: [EMAIL PROTECTED]; Progressive Economics Subject: RE: [Pen-l] Is this true Didn't the recent case in which the University of California unsuccessfully tried to sue the banks regarding Enron put the bar for such liability pretty high? Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901 -----Original Message----- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED] On Behalf Of Peter Hollings Sent: Monday, March 24, 2008 10:06 AM To: 'Progressive Economics' Subject: RE: [Pen-l] Is this true Banks may also have a liability to mortgage holders other than themselves if it can be shown that there was fraud in the underwriting process, such as excessively high appraisals of the collateral, the creditworthiness of borrowers, etc. Peter Hollings -----Original Message----- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED] On Behalf Of Laurent GUERBY Sent: Monday, March 24, 2008 9:53 AM To: Progressive Economics Subject: Re: [Pen-l] Is this true On Mon, 2008-03-24 at 09:14 -0400, Shane Mage wrote: > Of that $11 trillion most is not "subprime." So the question is how > much equity underlies that $11 trillion, certainly not as little as > 100%! And so the potential writedown has to be much less than that > $1.375 trillion. The question for this crisis is "subprime or not" but "equity or not". Even prime borrowers don't like to pay debt which is more than the value of their house and no hope having the value go back fast enough. Some of them will keep paying, some will likely try hard not to pay which means huge legal fees for bank and big stress on the justice system given the number of households with negative equity. I read 8 millions households somewhere and the number is going up when house prices go down. Laurent http://guerby.org/blog/ _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
