The Wall Street Journal recently reported that federal prosecutors are pursuing criminal cases against bank executives for allegedly selling flawed mortgage securities. The crux of the cases? That the bankers ignored warnings they were packaging too many shaky mortgages into investment securities and failed to disclose the risks to others. The result, they claim, was fraud.
In a recent paper, The Nonprime Mortgage Crisis and Positive Feedback Lending, we collected evidence that the risk of a nonprime housing bubble (not the certainty, but a meaningful risk) should have been obvious to the originators, securitizers, rating agencies, money managers, and … Read more