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Credit Default Swaps and Mortgage Backed Securities - Essay Example

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The research emerged from the author’s interest and fascination in what Mortgage-Backed Securities (MBS) and Credit Default Swaps (CDS) are. This research is also being carried out to evaluate and present the summary of articles on MBS and CDS…
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Credit Default Swaps and Mortgage Backed Securities
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Download file to see previous pages This paper illustrates that Bondi brought attention to the fact that during the development of the subprime mortgage, a substantial increase in the number of legal claims against brokers is expected to be filed by customers. The claims shall allege that brokers recommended to these investors unsuitable investments in MBSs, which caused them to realize an unconscionable loss. Lambert proposes the creation of a safe harbor for brokers who provide recommendations to certain institutional investors and sophisticated individuals. The safe harbor consists of immunity against subsequent scrutiny in arbitration, if the broker has not provided any materially false or misleading information, or otherwise omitted material information, in recommending a product that later translates to huge losses for the client. The author adds that there must be “complete and truthful disclosure of all the risks”. Amoss, in an article written a good twelve months before the subprime crisis, called attention to the likelihood of human error and the existence of moral hazard in the operation of mortgage-backed securities. In order to maintain the illusion among the public that an “asset-based” economy is sustainable in the long run, he wrote, house prices must stay elevated and should continue to appreciate faster than the CPI inflation rate. This is obviously highly unlikely, as scenarios created by supercomputers could not fully input raw human emotion into the formulas, and human error and the chances that default risk would have been underpricing could not be fully anticipated. Mason & Rosner sought to measure the efficacy of rating agencies in assessing in assessing market and credit risks. They note that the greatest obstacle to effective risk assessment is due to lack of transparency. They found that even investment grade MBSs will experience significant losses if home prices depreciated, resulting in broader imbalances in the economy. ...Download file to see next pagesRead More
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