Prosecutions Due to Financial Securitization Loom Large

Friday, 23 Aug 2013 07:44 AM

By Barry Elias

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The underlying cause of the financial crisis, as described in my previous article, was the granting of mortgage loans to unqualified candidates. Many trillions of dollars worth of high-risk loans were extensively marketed through a securitization process that camouflaged the true risk, bringing the global economy to its knees in 2008.

In Senate and Congressional hearings, former Federal Deposit Insurance Corporation head Sheila Bair indicated that the securitizers of mortgaged-backed securities had an interest in foreclosures, since they were first in line to receive payments upon liquidation. This further exacerbated the financial implosion.

Morgan Stanley was a prominent securitizer. John Mack, former CEO of Morgan Stanley, suggests another financial crisis can be averted if Wall Street compensation is reined in to reflect a more realistic business environment — one that includes lower returns, greater capital requirements and increased regulation, according to The Huffington Post.

This is welcome news.

As CEO from 2005 through 2009, Mack was compensated $58 million as he increased the firm's high-risk leverage, according to a Post calculation. Following this foray into a very high-risk environment, the bank's stock price plummeted 90 percent during a 12-month period in 2007 to 2008, leading to his retirement on Jan. 1, 2010.

While advising Herman Cain during the 2012 presidential campaign, Laurence Fink, chairman and CEO of BlackRock, with more than $3 trillion under management, suggested the return on capital was too high and the financial industry grew too large over the past three decades.

The Obama administration has been "appropriately criticized for being excessively equivocal and slow to respond" to the culprits of the financial crisis, said Columbia Law Professor John Coffee, an expert in securities law, according to The Wall Street Journal.

Recent events suggest prosecutions for alleged misconduct in this area are looming large.

This week, U.S. Attorney General Eric Holder announced the Justice Department plans to issue decisions shortly regarding cases that involve high-profile institutions and will announce new probes in the coming months.

It is essential for the Obama administration to pursue justice for the perpetrators of the financial crisis. It will restore credibility in our government and reduce the likelihood of future debacles.

© 2014 Moneynews. All rights reserved.

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