Lessons from the Financial Crisis

ROBERT W. KOLB is the Frank W. Considine Chair of Applied Ethics and Professor of Finance at Loyola University, Chicago. Before this, he was the assistant dean, Business and Society, and director, Center for Business and Society, at the University of Colorado at Boulder and department chairman at the University of Miami. Kolb has authored over twenty books on finance, derivatives, and futures, as well as numerous articles in leading finance journals.

Acknowledgments xv Editor's Note xvii Introduction xix PART I Overview of the Crisis 1 1 Leverage and Liberal Democracy 3 George Bragues 2 A Property Economics Explanation of the Global Financial Crisis 9 Gunnar Heinsohn and Frank Decker 3 Of Subprimes and Sundry Symptoms: The Political Economy of the Financial Crisis 17 Ashok Bardhan 4 The Political Economy of the Financial Crisis of 2008 23 Roger D. Congleton 5 The Global Financial Crisis of 2008: WhatWent Wrong? 31 Hershey H. Friedman and Linda Weiser Friedman 6 The Roots of the Crisis and How to Bring It to a Close 37 James K. Galbraith 7 Enron Rerun: The Credit Crisis in Three Easy Pieces 43 Jonathan C. Lipson 8 The Global Crisis and Its Origins 51 Peter L. Swan 9 Four Paradoxes of the 2008-2009 Economic and Financial Crisis 59 John E. Marthinsen 10 Understanding the Subprime Financial Crisis 69 Steven L. Schwarcz PART II Causes and Consequences of the Financial Crisis 77 11 The Origins of the Financial Crisis 79 Martin N. Baily, Robert E. Litan, and Matthew S. Johnson 12 Ten Myths about SubprimeMortgages 87 Yuliya Demyanyk 13 The Financial Crisis: How Did We Get Here and Where Do We Go Next? New Evidence on How the Crisis Spread Among Financial Institutions 95 James R. Barth, Tong Li, Lu Wenling, and Glenn H. Yago 14 A Decade of Living Dangerously: The Causes and Consequences of theMortgage, Financial, and Economic Crises 103 Jon A. Garfinkel and Jarjisu Sa-Aadu 15 Making Sense of the Subprime Crisis 109 Kristopher S. Gerardi, Andreas Lehnert, Shane M. Sherlund, and Paul Willen 16 Miraculous Financial Engineering or Legacy Assets? 119 Ivo Pezzuto 17 TheMaking and Ending of the Financial Crisis of 2007-2009 125 Austin Murphy 18 The SubprimeMortgage Problem: Causes and Likely Cure 133 Ronald D. Utt 19 Sequence of Asset Bubbles and the Global Financial Crisis 139 Abol Jalilvand and A. G. (Tassos) Malliaris PART III Borrowers 147 20 The Past, Present, and Future of Subprime Mortgages 149 Shane M. Sherlund 21 FHA Loans and Policy Responses to Credit Availability 155 Dr. Marsha Courchane, Rajeev Darolia, and Dr. Peter Zorn 22 The Single-Family Mortgage Industry in the Internet Era: Technology Developments and Market Structure 163 Forrest Pafenberg 23 Speed Kills? Mortgage Credit Boom and the Crisis 175 Giovanni Dell'Ariccia, Deniz Igan, and Luc Laeven 24 SubprimeMortgages:What We Have Learned From a New Class of Homeowners 181 Todd J. Zywicki and Satya Thallam 25 Rating Agencies: Facilitators of Predatory Lending in the SubprimeMarket 191 David J. Reiss PART IV The Process of Securitization 197 26 A Primer on the Role of Securitization in the Credit Market Crisis of 2007 199 John D. Martin 27 Incentives in the Originate-to-DistributeModel of Mortgage Production 209 Robert W. Kolb 28 Did Securitization Lead to Lax Screening? Evidence from Subprime Loans 217 Benjamin J. Keys, Tanmoy Mukherjee, Amit Seru, and Vikrant Vig 29 Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis 225 Bruce I. Jacobs 30 The Incentives of Mortgage Servicers and Designing Loan Modifications to Address the Mortgage Crisis 231 Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf 31 The Contribution of Structured Finance to the Financial Crisis: An Introductory Overview 239 Adrian A.R.J.M. van Rixtel and Sarai Criado 32 Problematic Practices of Credit Rating Agencies: The Neglected Risks ofMortgage-Backed Securities 247 Phil Hosp 33 Did Asset Complexity Trigger Ratings Bias? 259 Vasiliki Skreta and Laura Veldkamp 34 The Pitfalls of Originate-to-Distribute in Bank Lending 267 Antje Berndt and Anurag Gupta PART V RiskManagement and Mismanagement 275 35 Behavioral Basis of the Financial Crisis 277 J. V. Rizzi 36 Risk Management Failures During the Financial Crisis 283 Dr. Michel Crouhy 37 The Outsourcing of Financial Regulation to Risk Models 293 Erik F. Gerding 38 The Future o