Prudent Lending Restored: Securitization After the Mortgage Meltdown » (New Edition)

Yasuyuki Fuchita is senior managing director at the Nomura Institute of Capital Markets Research in Tokyo. He is coeditor, with Robert Litan, of Pooling Money (Brookings, 2008) and New Financial Instruments and Institutions (Brookings, 2007). Richard J.Herring is the Jacob Safra Professor of International Banking and professor of Finance at the Wharton School, University of Pennsylvania where he is also codirector of theWharton Financial Institutions Center. He has published widely on various topics in financial regulation and international finance. Robert E. Litan is a senior fellow in Economic Studies at the Brookings Institution and vice president for research and policy at the Kauffman Foundation. Among his many books is Good Capitalism, Bad Capitalism, and the Economics of Growth Prosperity (Yale University Press, 2007), written withWilliam J. Baumol and Carl J. Schramm.

Once heralded as a financial innovation to diversify risk and enable Wall Street to finance Main Street, securitization helped create the subprime mortgage meltdown of 2006. In this implosion, debt was absorbed by a concentrated group of financial entities, and in 2008 credit markets consequently froze. So why were securities backed by subprime debt deemed so desirable? And what is the future of securitization? In Prudent Lending Restored, noted economists Yasuyuki Fuchita, Richard Herring, and Robert Litan bring together a top-flight group of financial experts to answer these all-too-timely questions.

Examining the growth of complex securitized structures in the United States and other markets, the authors provide a timeline of key events and offer an explanation for the resulting financial crisis. They argue that flawed financial engineering and a lack of transparency incentivized risky lending, while credit rating agencies failed to analyze securities. They also examine the reactions of the central banks and provide a survey of crisis-generated litigation through October 2008.

From this analysis, Prudent Lending Restored offers suggestions on how we can reform securitization, including a solution to insure the mortgage market against default risk. The book provides strategies to increase transparency and encourage more prudent lending. Thus through reform the securitization process might have a brighter future, where borrowers and lenders reap the benefits of inexpensive, accessible loans, without causing systemic damage to the economy.

1 The Future of Securitization: An Introduction Yasuyuki Fuchita Fuchita, Yasuyuki Richard J. Herring Herring, Richard J. Robert E. Litan Litan, Robert E. 1

2 Financial Turmoil and Central Bank Responses in the United States, United Kingdom, European Union, and Japan Robert A. Eisenbeis Eisenbeis, Robert A. 11

3 Structuring for Leverage: CPDOs, SIVs, and ARSs Joseph R. Mason Mason, Joseph R. 79

4 The Future of Securitization Gunter Franke Franke, Gunter Jan P. Krahnen Krahnen, Jan P. 105

5 Legal and Economic Issues in Litigation Arising from the 2007-08 Credit Crisis Jennifer E. Bethel Bethel, Jennifer E. Allen Ferrell Ferrell, Allen Gang Hu Gang, Hu 163

6 Mortgage Payment Insurance and the Future of the Housing Finance System Jack Guttentag Guttentag, Jack Igor Roitburg Roitburg, Igor 237

7 The Development and Future of Securitization in Asia Eiichi Sekine Sekine, Eiichi Kei Kodachi Kodachi, Kei Tetsuya Kamiyama Kamiyama, Tetsuya 251

Contributors 305

Index 307