Can Securitizers be held responsible for the bad deeds of the mortgage lenders they worked with?
That is the not-so-subtle question journalist Gretchen Morgenson looks at in the Sunday NYT. The legal theory behind the claim is that these firms were far less independent than originally claimed. They worked with each other on a less than at arm’s length distance. The Wall Street firms provided the cash, but also the business practices of the lend-to-securitize non-bank mortgage originators, actually shaping the practices of the lenders.
In some cases, the Wall Street securitizers had already written prospectuses for pools of loans before the loan was closed.
That is rather astounding, and reveals that these firms were working in a much closer, more coordinated fashion than the legal defense claims of independence implies.
“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. Some legal experts point to a number of cases in which plaintiffs contend that firms involved in the securitization process, like trustees hired to oversee the pools of loans backing securities, worked so closely with the lenders that they should face liability as members of a joint venture. And these experts see a rising receptiveness to this argument by some courts.
This is a development worth watching.
Looking for the Lenders’ Little Helpers
NYT, July 11, 2009