March 18, 2007

Jeff Sovern at the Public Citizen blog notes a New York Times story that Democratic leaders will be pushing a bill "would give borrowers and others the ability to sue the Wall Street firms that package those mortgages and then sell them as mortgage-backed securities, as well as the purchasers of those securities in the secondary market."

This sort of deep-pocket/innocent-bystander legislation is dumbfounding. These mortgage-backed securities consist of hundreds or thousands of mortgages, and the banks receive only a transaction fee for their services. If the process of repackaging means that one is liable for alleged wrongdoing in each and every of the mortgages, it just means that repackaging won't happen any more as due diligence requirements and the risk of litigation for the entire value of the mortgage (plus punitive damages?) make transactions costs skyrocket, which means the mortgage market will become less liquid, which means a tremendous shock to the economy.

Most upsetting is to see that one of the senators behind this is Chuck Schumer. It seems to have taken him less than two months to pull back from his observation that the litigation risks Wall Street faces are unduly damaging the economy, and that what is really needed is to expose them to more parasitic wealth transfers. (And welcome Dealbreaker readers.)