Danny Schechter - ColdType

79
It is hard not to feel that her next paragraph is more important
in finally acknowledging a key, but long missing, connection
(although it is still not being taken far enough):
And what of the giant institutions that helped finance these
monumentally toxic loans, or arranged the securitizations
that bundled the loans and sold them to investors? So far,
they have argued, fairly successfully, that they operated
independently of the original lenders. Therefore, they are not
responsible for any questionable loans that were made. But
this argument is growing tougher to defend.
Maybe so, but this approach still views the problem in
terms of “litigation risks,” not outright criminality. Since these
so-called “toxic products” were also designed to fail and pedaled
fraudulently, in violation of the law, and basic rights that
guard against deliberate misrepresentation, then, obviously,
this is no longer just a civil matter.
It is criminal, yet the laws were inadequate and also inadequately
enforced,
Writing in the Fordham Law Review in 2007, Kathleen C.
Engel and Patricia A McCoy accused Wall Street of turning
a “blind eye” to the way securitization promoted predatory
lending. This is from an academic summary:
As subprime securitization has grown, so have charges that
securitization turns a blind eye to financing abusive loans …
When investors buy securities backed by predatory loans,
they face a classic lemons problem in the form of credit risk,
prepayment risk, and litigation risk. Securitization exacerbates
all three risks by unbundling the mortgage process,
giving rise to adverse selection. In theory, the lemons problem
should cause investors to flee the market for subprime
mortgage-backed securities or demand a risk premium commensurate
with the worst quality loans.
Instead, securitization allays adverse selection concerns by
structuring transactions so that risk-averse investors receive