Harvard Law and Economics, Discussion Paper No. 612
Once the true extent of the losses from the subprime mortgage crisis has been revealed, the fallout will continue in the form of litigation. This paper examines the mechanics behind the subprime mortgage crisis by clearly explaining how it all began and highlighting the legal issues that will determine who will be held fiscally accountable. One major plaintiff argument will be that investment banks intentionally overvalued mortgage-related assets. The banks will likely counter that although they may have been aware of problems in mortgage underwriting, the information they were selling against was public.
Because the market widely corroborated the inflated values of subprime instruments, plaintiffs face an uphill battle. Financial-sector companies that issued residential mortgage-backed securities to investors will be vulnerable to weaker charges involving flawed accounting or mismanagement of pension assets, but it will not be easy to hold them accountable for overvaluing assets.