On “too big to fail” financial markets

Yves Smith is confused by the fact that the securitization industry wasn’t carefully following legal procedure as it sold mortgages from one bank to another and then into the securitization trust.

But it isn’t surprising that judges are plenty unsympathetic, and in cases, outraged. The law is all about sanctity of process, both the underlying law and court proceedings. Cases typically revolve around disputes of fact or grey areas of the law. This isn’t grey (whether a party has standing to file a suit is fundamental) and the law in this area is well established. Basically, the securitization industry tried creating rules outside any established legal framework and judges are having none of it.

She and anybody else who’s confused about the financial industry’s modus operandi when it comes to the law over the past few decades needs to read Kenneth Kettering’s Securitization and its Discontents.

Kettering makes a simple point:  Whether you’re talking about repos or standby letters of credit or any of a number of financial practices of questionable legality, the financial industry has found that the best way to get the law rewritten in their favor to create a “too big to fail” market in the contract.  Once the market is so big that enforcing the law will create large scale disruption in financial markets, each judge is left with a choice — made explicit in “friend of the court” briefs written by financial players — enforce existing law and risk causing a financial collapse or create some pretext for claiming that what the financial industry says is the law is in fact the law.

According to Kettering the huge securitization industry, built on dubious legal foundations, is just the continuation of a long standing process used by the financial industry to overturn centuries of legal precedents and generate precedents and laws that favor the financial industry.


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