Subprime Mortgages and Theories of Liability - Deja Vu? - Part Four

Michael Clark
September 26, 2008 — 1,317 views  

Part One of this series (click here) covered some features of the subprime mortgages now defaulting in huge numbers and how these features had been seen in many improper transactions that led to the Savings and Loan Crisis of the early 1990s, and in the more recent corporate governance scandals associated with enormous investor losses typified by Enron and WorldCom.

Part Two (click here) examined some statistics and problems with liability theories plaintiffs are asserting to establish the liability of defendants in various securities class actions seeking damages claimed to have been caused by the implosion of the subprime mortgage market.

Part Three (click here) addressed the heightened pleading requirements for falsity and scienter imposed by the Private Securities Litigation Reform Act of 1995 (PLSRA) and how the caselaw interpreting these provisions makes it very hard for class action plaintiffs to successfully establish secondary liability of defendants. 

This part (Part Four) of the series provides links to and summarizes some of the more interesting observations made by made by leading commenators about various aspects of the subprime market collapse and related issues.

Although a considerable amount of scholarly work is being conducted about various aspects leading to the collapse of the subprime mortgage markets, a lot of it seems to be educated guesswork—and should be critically analyzed. In addition to some of the suggested readings that I previously noted in Part One (click here), readers may find the following articles and reports particularly interesting:

1. Donald Nordberg, Waste makes Haste: SarbanesOxley, Competitiveness and the Subprime Crisis, Working Paper (May 10, 2008), available at (commenting, in part, on some similarities between the subprime lending markets and the problems underlying Enron and similar companies: “Despite the differences, there are some eerie similarities. Both involved hyperactive financial intermediaries. Both involved use of new instruments of finance to offload risk, and in particular the use of offbalance sheet entities to disguise (in the case of Enron) or just ‘distribute’ (in the case of subprime CDOs) the risk.”). ©Donald Nordberg,Waste makes haste, at 21;

2. Christopher L. Foote, et al., Fed. Reserve BankBoston, Public Policy Discussion Papers No. 082, Subprime Facts: What (We Think) We Know about the Subprime Crisis, and What We Don’t (May 30, 2008), available at (Rejecting the popular argument that subprime mortgage “resets” were a major problem: “Proponents of the centrality of resets in the current crisis based their view on the following logic. Subprime hybrid ARMs offer borrowers extremely low ‘teaser’ rates for some initial period . . . but then these mortgages ‘explode’ to high rates thereafter. Lenders find such loans attractive because of the high postreset interest rates. Borrowers find them attractive because of the teaser, but then regret their decisions when they find themselves paying high interest rates. Is this an accurate description of the subprime lending model? No.”);

3. Adam B. Ashcraft and Til Schuermann, Federal Reserve Bank of New York, Understanding the Securitization of Subprime Mortgage Credit, Staff Report No. 318 (March 2008), available at (describing the key players involved in the securitization process and noting there are seven key frictions among them based on the asymmetry of information available—i.e., that some players lacked sufficient information to properly evaluate the degree of risk involved);

4. John Kiff and Paul Mills, Money for Nothing and Checks for Free, Working Paper WP/07/188, International Monetary Fund (July 2007), available at (noting that the impact of the market’s implosion has been limited to certain sectors as a result of securitization: “[W]hile some structured credit hedge funds have suffered large losses, mortgage securitization appears to have helped disperse the impact throughout the financial system, in contrast to the Savings & Loan crisis of the early 1990s. The credit cycle is thus largely playing out in the securities and derivatives markets, rather than on bank balance sheets.”); history of the federal initiatives for affordable housing, such as mortgage insurance by the Federal Housing Administration (FHA) and mortgage guarantees by the Veterans Administration (VA) and questioning about whether the current subprime mortgage crisis will once again place affordable housing high on the national agenda);

5. Ronald D. Utt, Comment on Robert E. Lang, Katrin B. Anacker, and Steven Hornburg’s “The New Politics of Affordable Housing,” Housing Policy Debate, Vol. 19, Issue 2 (2008), available at (the author, from the Heritage Foundation, believes that the regulatory costs from federal housing programs may have some connection to the subprime mortgage problems: “There is also reason to believe that some portion of what is now seen as the subprime crisis will be found to be the market ’s response to the growing mismatch between incomes and home prices that land regulations have caused.”); and

6. Steven L. Schwarcz, Protecting Financial Markets: Lessons from the Subprime Mortgage Meltdown, Duke Research Paper No. 175 (Nov. 2007), available at (exploring why the subprime financial crisis occurred despite the number of different protections to regulate the financial markets, along with the “the market discipline approach undertaken by the second Bush administration, and what this crisis can teach us about protecting financial markets”).

More to Come...

Michael Clark


Michael E. Clark, a former federal prosecutor, has extensive trial experience in business and professional matters. He serves as an Adjunct Professor of Law, as a faculty instructor for NITA, is widely published, and speaks regularly on issues of importance to businesses and professionals. Within the ABA, he serves on the Standing Committee on Publishing Oversight; is the outgoing chair of the Business Law Section's White Collar Crimes Committee (and an Editorial Board member of The Business Lawyer); serves on the Governing Council for the Health Law Section and is the outgoing chair of its Publications Committee; and serves on the Planning Committee for the National Institute on Securities Fraud. Mr. Clark is a Fellow of the American Bar Foundation and he developed and serves as the Editor-in-Chief of a treatise published in 2007 by BNA and the ABA Health Law Section about pharmaceutical law. Mr. Clark has been Board Certified in Criminal Law by the Texas Board of Legal Specialization and the National Board of Trial Advocacy since the late 1980's.