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									54 L AW SOCIETY JOURNAL   October 2007
                                              ■ FI NAN C E & LAW

                                              A legal perspective

                                              What legal factors                                        HE RECENT SUBPRIME mort-
                                                                                                        gage crisis has shaken
                                              have contributed to                                       international debt and equi-
                                                                                                        ty markets. At the time of
                                              the subprime crisis                                       writing,1 it had claimed its
                                                                                                        first major Australian vic-
                                              and what litigation has                    tim, with hedge fund manager Basis Capi-
                                              arisen as a result?                        tal placing one of its funds into provisional
                                                                                         liquidation.2 Although the full extent of the
                                              ROSS FOREMAN looks at                      subprime mortgage crisis is not yet clear,
                                                                                         many economic commentators believe
                                              recent US experience                       that more victims are likely.
                                                                                            The purpose of this article is to provide
                                              and its implications for                   a general introduction to the subprime
                                                                                         mortgage crisis and some related legal
                                              Australia.                                 issues.

                                                                                         What is a ‘subprime’ mortgage?
                                                           Ross Foreman is a barrister      Residential loans in the US are some-
                                                           at Sixth Floor Selborne/      times classified into three categories:3

                                                           Wentworth Chambers.           prime, near prime, and subprime.
                                                                                            Subprime borrowers have the following
                                                                                         ❑ they typically have a credit score of
                                                                                         620 or below on the FICO scale (a wide-
                                                                                         ly used credit test developed by the Fair
                                                                                         Isaac Corporation5), indicating (among
                                                                                         other things) that they have a poor cred-
                                                                                         it history;6

October 2007                                                                                               L AW SOCIETY JOURNAL 55
      PAGE 56




■ SUBPRIME MORTGAGE CRISIS                     About 25 per cent of the securitised loans       diately, without having to wait 30 years
                                               were subprime.19                                 to be repaid, and then to use the funds
❑ they cannot qualify for traditional loans;                                                    received to make their next loan.26
and                                            What is securitisation?
❑ they are often first-time borrowers/            Securitisation is a process by which illiq-   A brief history of securitisation
first-home buyers.                             uid income-producing assets are convert-            1977 is generally regarded as the year in
   Subprime mortgages have the follow-         ed into tradeable securities.20 The illiquid     which securitisation in its modern, private
ing characteristics:7                          assets are pooled, and securities backed         form began. Bank of America and Salomon
❑ they have high loan-to-value ratios.8        by the pool of assets are sold to investors.     Brothers created a trust that pooled mort-
Sometimes a single mortgage is given           Hence the expression “asset-backed secu-         gages, the income from which was passed
for 100 per cent of the property purchase      rities” (ABS).21                                 on to investors who acquired interests in
price, or first and second mortgages              Mortgage securitisation has been              the trust.27 According to evidence before
are given simultaneously (called ‘piggy-       described as a process “of packaging and         a US Senate Committee hearing, the US
back loans’), to eliminate the need for a      bundling [the] monthly principal and inter-      securitisation market “experienced explo-
deposit;                                       est payments of home mortgage loans and          sive growth” after a variety of pricing, tax
❑ they usually require payments that are       using these payments to back ... securi-         and liquidity issues were resolved during
a significant percentage of borrowers’         ties, which are sold to ... investors”.22        the 1980s and early 1990s.28
incomes;                                          Where the pooled asset is mortgages,             In Australia, in the mid-1980s the
❑ they are often approved on a ‘low doc’       the securities are referred to as mort-          NSW, Victorian and WA governments
or ‘no doc’ basis (that is, without the bor-   gage-backed securities (MBS). MBS can            created entities that used securitisation
rower having to state, or substantiate, his    be residential mortgage-backed securities        to fund home loans for borrowers who
or her assets, liabilities, or income);        (RMBS) or commercial mortgage-backed             could not get traditional loans.29 Later in
❑ they often have a ‘teaser’ period of two     securities (CMBS).23                             the 1980s, Australia saw its first private
or three years during which a low interest        The focus of the current crisis is RMBS       securitisation.30
rate is charged (typically much lower than     backed by US subprime mortgages. The               How is a US subprime mortgage
a honeymoon rate in Australia9). After the     mechanics and consequences of securiti-            securitised?
teaser period, the loan reverts to the usual   sation in the US subprime mortgage mar-            The manner in which a residential mort-
(subprime) interest rate. The teaser loans     ket are discussed in further detail below.       gage can be securitised is limited only by
are referred to as ‘2/28’ or ‘3/27’ loans                                                             the ingenuity of the lawyers and
(because the total term is 30 years);                                                                 investment bankers involved. How-
❑ they are more likely to be refinanced                                                               ever, according to evidence before
after the teaser period to maintain afford-                                                           a US Senate committee hearing by
able repayments but, at the same time,                                                                Professor Kurt Eggert – one of the
often have substantial early payment pen-                                                             foremost US lawyers in this area –
alties;10 and                                                                                         a typical US securitisation of a resi-
❑ they are riskier than prime or near-                                                                dential mortgage looks something
prime loans, and, as a result, usually                                                                like the arrangement described in
involve a higher interest rate.11                                                                     the box on the next page,31 which
                                                                                                      includes a modified version of a
Scope of the subprime problem                                                                         diagram produced by leading inter-
   It is estimated that about 20 per cent                                                             national economic consultants
of residential mortgages in the US are                                                                NERA.32
subprime,12 up from about 9 per cent in                                                                  Investors in RMBS are meant
2003.13                                                                                               to receive a return based on the
   In December 2006, the US Center for                                                                risks associated with the mort-
Responsible Lending projected that, as                                                                gages themselves (together with
a result of subprime mortgages entered
into between 1998 and 2006, 2.2 million
US households will lose their homes to
foreclosure, costing these households as
                                                       “Securitisation has ... encouraged some US mortgage
much as US$164 billion.14 The Center also
predicted that just under 20 per cent of all             brokers (and originators) to engage in careless and,
subprime loans made in 2005/06 will fail:15
its predicted foreclosure rate “exceeds                  in some cases, improper conduct in their dealings
the worst ever seen in the modern mort-
gage market”.16
  Where has the money for subprime                       with borrowers.”
  mortgages come from?
   Some lenders are banks that obtain
money to lend to subprime borrowers in
the traditional way (that is, from depos-        Why securitise?                                any credit enhancements), not the risks
its made by savers). However, most sub-           An entity might choose to securitise its      associated with the mortgage origina-
prime loans are not funded this way.           assets for various reasons, including to         tor or investment bank involved.33 Hence
   Typically, a lender funds its subprime      remove the assets from its balance sheet         the structure adopted attempts to remove
mortgages by securitising the loans or         and/or to diversify its funding and lower        from the RMBS the risk of insolvency of
by selling the loans to another entity that    its cost of funds.24                             the mortgage originator or the invest-
will securitise the loans in due course.17        For some mortgage originators in the          ment bank.34 In addition, the mortgage
According to the American Mortgage             US, securitisation is the only means by          originator will generally want to remove
Bankers Association, of the nearly US$2.5      which they can obtain funds to lend to           the mortgages from its balance sheet, and
trillion in US mortgage originations in        subprime borrowers.25 It allows them to          so the structure (and, in particular, the
2006, US$1.9 trillion was securitised.18       receive payment for loans virtually imme-        transfer from the originator) must satisfy

October 2007                                                                                                      L AW SOCIETY JOURNAL 57
      PAGE 58




         Common securitisation structure                                                           of underwriting standards. Depending on
                                                                                                   the terms of the sale, when an originator
                                                                                                   sells a loan and its servicing rights, the
                       P&I                                                                         risks (including, of course, any risks asso-
                                                                                                   ciated with poor underwriting) are large-
                                                                            Mortgage Broker
                                                                                                   ly passed on to the investors rather than
                                   Mortgage         $                                              being borne primarily by the company that
                                                                                                   originated the loan. In addition, incentive
                                                                                                   structures that tied originator revenue to
                                   Mortgage Originator/Lender                                      the number of loans closed made increas-
                                                                                                   ing loan volume, rather than ensuring
                                                                                                   quality, the objective of some lenders.”37
                                   Mortgage         $                                                 Securitisation has also encouraged
                                                                                                   some US mortgage brokers (and origina-
                                       Financial Institution                                       tors) to engage in careless and, in some
                                      (eg Investment Bank)                                         cases, improper conduct in their dealings
                                                                                                   with borrowers.
                                   Mortgage         $                                                 In a joint statement by several US agen-
                                                                                                   cies38 released in July this year, the agen-
                                                                                                   cies expressed concern about institutions
                                     Special Purpose Vehicle                                       “engaging in fraud or deception to conceal
                                                                                                   the true nature of the mortgage loan obli-
                                      RMBS                                                         gation ... from an unsuspecting or unso-
                                                    $                          Underwriter
                                       P&I                                                         phisticated borrower”. Chairman Bernan-
       Rating Agency                                                                               ke has noted that “some borrowers may
                                              Investor                                             have been misled about the feasibility of
                                   (eg super fund, insurance co,                                   paying back their mortgages ...”.39
                                    managed fund, hedge fund)                                         In announcing his recent package to
                                                                                                   assist subprime borrowers,40 President
                                                                                                   Bush stated: “One of the most troubling
                                                                                                   developments has been the increase in
   The homeowner/borrower obtains a loan           depending on their risk profile. The risk       adjustable rate mortgages that start out
with the help of a mortgage broker. The            profile can be altered in various ways. For     with a very low interest rate and then
loan is provided by a mortgage originator          example, a particular tranche of securities     reset to a higher rate after a few years.
(that may be associated with the mortgage          might be given the right to be repaid first.    This has led some homeowners to take
broker). From the borrower’s perspective,          Alternatively, a third party might provide a    out loans larger than they could afford
the mortgage originator is the lender.             guarantee (in return for a fee).                based on overly-optimistic assumptions
   The mortgage originator either                     A rating agency will examine and rate the    about the future performance of the hous-
pools the loan with its other loans and            different tranches of the RMBS. The rating      ing market. Others may have been con-
securitises them itself, or sells the              agency will often work with an underwriter.     fused by the terms of their loan, or mis-
loan to another financial institution (for            Investors buy securities according to        led by irresponsible lenders. Whatever
example, an investment bank), which will           their particular needs. For example, an         the reason they chose this kind of mort-
securitise the loan. For the purpose of            insurance company, bank or local council        gage, some borrowers are now unable to
discussion, it will be assumed that the            might invest in highly-rated RMBS with a        make their monthly payments, or facing
mortgage originator has sold the loan              lower risk profile (and commensurate lower      foreclosure.”41
to an investment bank. The mortgage                return), whereas a hedge fund might invest         One of the reasons that the crisis has
originator will typically use the proceeds         in a lower-rated, but higher risk/higher        come to a head in 2007 is that many of the
of the sale to fund its next loan.                 return, RMBS. In an effort to maximise          subprime loans originated in 2005 were
   The investment bank aggregates the              returns, many hedge funds have borrowed         2/28 loans, the teaser periods for which
loans with many others and then sells              to invest in high return (but also high risk)   have expired, or will expire, this year.42
them to a new entity, the only purpose of          RMBS.                                           At the same time, the housing market in
which is to hold the loans. This special              The SPV will typically retain a servicer,    the US has experienced a downturn, with
purpose vehicle (SPV) issues securities            which is a company that specialises in          many properties now worth less than the
backed by the loans it has acquired from           the collection and distribution of income       loans they are meant to secure.43
the investment bank.                               and principal from pools of loans,                 The rating agencies are also thought
   The RMBS issued by the SPV are divided          including dealing with defaults and (where      to have had a role in the current crisis.
into different categories or tranches              necessary) foreclosures.                        They have been criticised for being too
                                                                                                   generous in the ratings they have given to
                                                                                                      Given the complexity of the products
the accounting standards that determine            bear the risk of default. And these entities    involved, many investors relied on the
when this can occur.35                             typically make their profit on the volume       ratings provided by the rating agencies.
  Consequences of securitisation                   of loans they transact (rather than the         Indeed, some professional investors (such
   One consequence of securitisation               quality).                                       as insurance companies and banks) can
is that the diverse functions previously             As a result, some US mortgage origina-        only invest in securities that have a suffi-
performed by one entity (the traditional           tors have approved loans they would not         ciently high investment rating.45
bank) are now performed by several enti-           have approved if the loans were to remain
ties.36 The commercial interests of the dif-       on their books. As US Federal Reserve           The US litigation merry-go-round
ferent entities are not always aligned.            Chairman Bernanke has explained: “the             In the US, many lawsuits have already
   In particular, the entities that organise       practice of selling mortgages to investors      been commenced as a result of the sub-
and/or approve the loans do not directly           may have contributed to the weakening           prime mortgage crisis. A few have already

October 2007                                                                                                         L AW SOCIETY JOURNAL 59
■ SUBPRIME MORTGAGE CRISIS                      (obviously) the terms of the particular                New York breached fiduciary duties;61
                                                contracts will be critical,51 evidence before          and
been decided. Examples include the              the US Senate Committee hearing sug-                   ❑ CSFB, CSFB Mortgage, DLJ, the Bank
following:                                      gests that repurchase obligations are not              of New York and the servicer engaged in
   Borrowers have sued mortgage bro-            uncommon.52                                            a civil conspiracy.62
kers and originators alleging misleading           Investors in RMBS have sued various                    Part of the case is that relevant informa-
conduct and/or fraud in connection with         entities involved in the securitisation proc-          tion was withheld from the rating agency
their loans.46 Borrowers have even suc-         ess. For example, in April this year, Bank-            Moody’s, as a result of which the RMBS
cessfully sued an investment bank that          ers Life Insurance Company (Bankers                    received a higher rating than they should
provided interim lending facilities to a        Life), which had invested in RMBS, com-                have.63 Bankers Life alleges that, without
mortgage originator and then securitised        menced proceedings against:                            the higher rating, it would not have pur-
its loans. In In re: First Alliance Mort-       ❑ Credit Suisse First Boston Corporation               chased the RMBS. The case is still in pre-
gage,47 First Alliance, a subprime lender,      (CSFB), which is alleged to have been the              liminary stages.
pledged its loans to investment banks in        underwriter of the relevant RMBS;53                       Investors are likely to sue the rating
return for a revolving line of credit. When     ❑ Credit Suisse First Boston Mortgage                  agencies directly.64 In addition, auditors,
the loans reached about US$100 million,         Securities Corporation (CSFB Mortgage),                lawyers, valuers, and others with profes-
First Alliance securitised the loans with       which is alleged to have assigned the rel-             sional indemnity insurance policies who
the assistance of the investment banks.         evant mortgages to the SPV (a trust);54                acted for various entities involved in the
First Alliance engaged in fraudulent lend-      ❑ DLJ Mortgage Capital (DLJ), which                    subprime mortgage market are likely to
ing practices. For example, First Alliance      is alleged to have sold the mortgages to               find themselves as defendants in some
prepared a script for its salespeople the       CSFB Mortgage;55                                       lawsuits.65
effect of which was to lead borrowers to        ❑ an insurer that is alleged to have pro-
believe that the interest rate they had to      vided cover in relation to the mortgages;56            Only in America?
pay was 11 per cent lower than the true         ❑ the alleged servicer of the mortgages;57                 The extent to which litigation of this
rate. After First Alliance went bankrupt,       and                                                    kind will occur in Australia is not yet
borrowers sued Lehman Brothers –                ❑ the Bank of New York, which is alleged               clear,66 although it is unlikely to be on the
which, at the material time, was the only       to have been a trustee of the SPV trust                same scale as in the US.
investment bank still dealing with First        that issued the RMBS.58                                    Some of the possible areas in which
Alliance – alleging that it had aided and          Bankers Life makes various allegations              litigation might arise include the
abetted the fraudulent scheme engaged           against these entities, including that:                following:67
in by First Alliance. The US Court of           ❑ CSFB and CSFB mortgage made negli-                       Australian mortgage originators that
Appeals for the Ninth Circuit upheld the        gent representations and engaged in com-               securitise their loans into the US may
jury’s verdict that Lehman Brothers was         mon law fraud;59                                       be sued by US entities further down the
liable under Californian tort law for aid-      ❑ DLJ failed to remedy breaches of con-                securitisation chain if, for example, their
ing and abetting the fraud.                     tractual warranties given about the mort-              Australian borrowers default and their
   Regulators have investigated and/or          gages that it sold to CSFB Mortgage;60                 agreements contain a repurchase obli-
sued mortgage brokers and originators           ❑ CSFB, the servicer, and the Bank of                  gation. One international rating agency
in connection with their lending practic-
es. For example, in January 2006, mort-
gage originator Ameriquest agreed to            ENDNOTES
pay US$295 million in compensation and          1. 31 August 2007.                                     July 10, 2007, vol 72, no 131, pp.37569-37575 at
US$30 million in costs following an inves-      2. See, for example, G. Newman, “Basis gives up,       37572.
tigation by various regulators into its lend-   yields to liquidator”, The Australian, 31 August       11. Sabry and Schopflocher, op cit, at 2.
ing practices.48                                2007 (www.theaustralian.news.com.au/story/0,251        12. Nelson op cit; CRA International, op cit.
                                                97,22336214-643,00.html).                              13. CRA International, op cit.
   Shareholders have sued companies in          3. CRA International, “Subprime Mortgages: A           14. E. Schloemer et al, op cit at 11.
which they hold shares, alleging that the       Primer on Economic Issues in Litigation”, Finan-       15. Ibid.
companies failed to disclose material mat-      cial Market Insights (www.crai.com/pubs/pub_           16. Ibid.
ters associated with the crisis. For exam-      7540.pdf). There are also other classifications.        17. Compare R. Friedman and E. Wilson, “The
                                                4. See, for example, T. Nelson, “The Current Sub-      Legal Fallout from the Subprime Crisis”, (2007)
ple, a class action has been commenced          prime Mortgage Environment: Trends and Implica-        The Banking Law Journal 124(5) 420 at 421 (www.
against the American Home Mortgage              tions”, ABA Banking Law Committee Journal, July        kelleydrye.com/news/articles_publications/0197/_
Investment Company. The plaintiffs allege       2007 at 1 (www.abanet.org/buslaw/commit tees/          res/id=sa_File1/banking_law_journal_reprint.pdf).
that the company made misleading repre-         CL130000pub/newsletter/200708/nelson.pdf); A.          18. As reported in Sabry and Schopflocher, op cit
                                                Filter, “Subprime Slump: will the economy follow?”     at 4.
sentations to the market, failed to disclose    The Journal of Business Law Society, 4 April 2007      19. Ibid.
that an increased number of the compa-          (iblsjournal.typepad.com/illinois_business_law_        20. See, for example, K. Eggert, “Held Up In Due
ny’s loans were defaulting, and failed to       soc/2007/04/subprime_slump_.html); F. Sabry and        Course: Predatory Lending, Securitisation, and
disclose that it was having difficulty sell-    T. Schopflocher, “The Subprime Meltdown: A Prim-        the Holder in Due Course Doctrine”, (2002) 35
                                                er”, NERA Insight Series, 21 June 2007 (www.nera.      Creighton L Rev 503 at 535; Blake Dawson Wal-
ing its loans.49                                com/image/SEC_SubprimeSeries_Par t1_                   dron, Securitisation Law and Practice in Australia,
   Investment banks or others that pur-         June2007_FINAL.pdf).                                   (2nd ed, 2006) at 4 (available via www.bdw.com).
chased loans from mortgage originators          5. See generally www.fico.org.                          21. P. Wood, Project Finance, Securitisations, Sub-
have sued the mortgage originators for          6. The FICO test considers five matters: (a) pay-       ordinated Debt, (2nd ed, 2007) at 6-004.
                                                ment history; (b) amounts owed; (c) length of          22. Statement of H.F. Mulligan, partner, McDermott
breach of warranties made in respect of         credit history; (d) new credit (for example, wheth-    Will & Emery, before the US House of Representa-
the loans and/or seeking to enforce claus-      er several new accounts have been opened in a          tives Committee on Financial Services, 8 May 2007
es in their agreements requiring the mort-      short period); and (e) types of credit in use. See     (www.house.gov/apps/list/hearing/financialsvcs_
gage originators to buy-back the loans on       www.fico.org/WhatsInYourScore.aspx.                     dem/mulligan_testimony.pdf).
                                                7. See, for example, Nelson op cit; Filter op cit;     23. P. Wood, op cit.
default. For example, DLJ Mortgage Cap-         Sabry and Schopflocher op cit.                          24. Mallesons Stephen Jaques, Australian Finance
ital has commenced proceedings against          8. See, for example, CRA International op cit.         Law (5th ed, 2003) at 176. See also Blake Dawson
various mortgage originators from whom          9. See, for example, E. Schloemer et al, Losing        Waldron, op cit at 9.
it had purchased mortgages, alleging            Ground: Foreclosures in the Subprime Market and        25. K. Eggert, written statement before the US
                                                Their Cost to Homeowners, Center for Responsible       Senate’s Banking, Housing, and Urban Affairs
breach of an express term in its contracts      Lending, December 2006 at 26-27 (www.responsible       Committee’s Subcommittee on Securities, Insur-
requiring the mortgage originators to           lending.org/pdfs/foreclosure-paper-report-2-17.pdf).   ance and Investments, at a hearing regarding
repurchase defaulting loans.50 Although         10. Joint Agencies Statement, US Federal Register,     “Subprime Mortgage Market Turmoil: Examining

60 L AW SOCIETY JOURNAL                                                                                                                  October 2007
                                                                   remains to be seen.                        Rating agencies that gave the fund a
                                                                      Australian investors who pur-           positive rating are also possible defend-
                                                                   chased RMBS may commence                   ants.71 In addition, the many investment
                                                                   proceedings against US enti-               banks that lent money to the Basis Capi-
                                                                   ties involved in the mortgage              tal fund are reported as having issued
                                                                   securitisation process (as in the          default notices after the fund failed to
                                                                   Bankers Life litigation referred           meet margin calls.72 Litigation is likely to
                                                                   to above). Australian RMBS                 be required to determine who gets what
                                                                   investors who received financial           of the assets that remain.
                                                                   advice before investing in RMBS               There may be litigation arising out
                                                                   may also commence proceedings              of the general credit tightening that has
                                                                   against their financial advisers if        occurred due to the subprime mortgage
                                                                   the advice they received was not           crisis, with less finance available gener-
                                                                   of an appropriate standard.                ally and banks more willing to step in on
                                                                      Litigation may also arise               default.
                                                                   from the losses suffered by
                                                                   some Australian hedge funds.               Conclusion
                                                                                                                 The legal structure used to fund many
                                                                                                              subprime mortgages has encouraged
                                                                                                              some US mortgage brokers and origina-
                                                                                                              tors to engage in careless and/or improp-
         “ ... problems are likely to arise if borrowers cannot                                               er conduct. As a result, loans have been
                                                                                                              given to borrowers who cannot repay
            repay their loans, irrespective of how sophisticated                                              them.
                                                                                                                 If an investment is secured by residen-
            the process creating the investment is.”                                                          tial mortgage repayments, problems are
                                                                                                              likely to arise if borrowers cannot repay
                                                                                                              their loans, irrespective of how sophis-
                                                                                                              ticated the process creating the invest-
has indicated that defaults in the Aus-                                                                       ment is. The problems will be compound-
tralian non-conforming home loan sec-                    As noted above, a fund of an Austral-                ed when a credit crisis (and other factors)
tor are at record highs, but that they are               ian hedge fund manager, Basis Capital,               reduce the value of the properties provid-
much lower than the US subprime sec-                     has been placed into provisional liquida-            ed as security to less than the value of the
tor.68 Australian borrowers are said not to              tion. According to press reports at the              loans.
be experiencing the same stress as their                 time of writing, Slater & Gordon is con-                At least in the US, the courts will be
US counterparts.69 How this position                     sidering a class action against financial            occupied for some time cleaning up the
develops if interest rates continue to rise              planners who recommended the fund.70                 subprime mortgage mess.                    ❑

the Role of Securitization”, 17 April 2007, at 11        72, no 131, pp.37569-37575.                          on 27 August 2007.
(banking.senate.gov/indexcfm?Fuseaction=Hearing          39. See Bernanke op cit.                             54. Ibid, see para 8.
s.Detail&HearingID=256).                                 40. See www.whitehouse.gov/news/releases/2007/       55. Ibid, see paras 8 and 9.
26. Ibid.                                                08/20070831-4.html.                                  56. Ibid, see para 10.
27. C. Peterson, written statement before the US         41. See www.whitehouse.gov/news/releases/2007/       57. Ibid, see para 11.
Senate’s Banking, Housing, and Urban Affairs             08/20070831-5.html.                                  58. Ibid, see para 12.
Committee’s Subcommittee on Securities, Insur-           42. Sabry and Schopflocher op cit at 9.               59. Ibid, see paras 37-46, 57-65, 75-83, and 93-100.
ance and Investments, as a hearing regard “Sub-          43. Ibid.                                            60. Ibid, see paras 23 and 109-113.
prime Mortgage Market Turmoil: Examining the             44. See, for example, A. Lucchetti and S. Ng,        61. Ibid, see paras 66-74, 114-122, and 148-161
Role of Securitization”, 17 April 2007, at 3 (banking.   “Credit and Blame: How Rating Firms’ Calls           62. Ibid, see paras 162-166.
senate.gov/index.cfm?Fuseaction=Hearings.                Fuelled Subprime Mess”, The Wall Street Journal      63. Ibid, see paras 30-32.
Detail&HearingID=256); Wood op cit at 6-003.             Online, 15 August 2007 (online.wsj.com/article/      64. See, for example, Berenstain op cit.
28. Peterson, op cit.                                    SB118714461352698015.html).                          65. Ibid.
29. Blake Dawson Waldron, op cit at 4.                   45. Ibid; Sabry and Schopflocher op cit at 7.         66. See, for example, K. Gibbs, “Bated breath as
30. Ibid.                                                46. See, for example, R. Berenstain et al, “Sub-     firms await surge in credit crisis litigation”, Law-
31. Eggert, hearing op cit at 4--7. Compare Sabry        prime Lending Trouble Spawn Widespread Litiga-       yers Weekly, 27 August 2007 (www.lawyersweekly.
and Schopflocher, op cit at 5ff.                          tion”, Perkins Coie Update, 6 August 2007 (www.      com.au/ar ticles/A0/0C04F7A0.asp?Type=53&
32. Sabry and Schopflocher, op cit.                       perkinscoie.com/news/pubs_detail.aspx?op=            Category=853).
33. See, for example, Mallesons Stephen Jaques,          updates&publication=1372).                           67. The material in this section is intended to be a
op cit at 188.                                           47. (2006) 471 F.3d 977.                             general description of some areas of possible liti-
34. Ibid.                                                48. See, for example, www.ameriquestmulti state-     gation. By providing this general description, I am
35. See, for example, Mallesons Stephen Jaques,          settlement.com; www.ct.gov/dob/cwp/view.asp?a=       not suggesting that any of the potential defendants
op cit at 178; Wood op cit at 6-005; 6-0010.             2245&q=309018.                                       listed have broken the law, engaged in improper or
36. Eggert, hearing op cit at 7-8. Cf Sabry and          49. The complaint is available at www.rosenlegal.    imprudent conduct, or would be liable if sued to
Schopflocher, op cit.                                     com. See also B. Bar, “Legal Claims Proliferate      compensate the potential plaintiffs listed. Each
37. See B. Bernanke, “The Subprime Mortgage              From Mortgage Meltdown”, New York Law Jour-          case will depend on its own facts.
Market”, speech at the Federal Reserve Bank of           nal, 16 August 2007 (www.law.com/jsp/nylj/Pub        68. See, for example, “Delinquencies from low docs
Chicago’s 43rd Annual Conference on Bank Struc-          ArticleNY.jsp?id=1187168525141).                     hit record”, The Age, 27 August 2007 (www.theage.
ture and Competition, Chicago, May 17, 2007 www.         50. See, for example, R Friedman and E Wilson,       com.au/news/Business/Delinquencies-from-low-
federalreserve.gov/boarddocs/speeches/2007/              “The Legal Fallout from the Subprime Crisis”,        docs-hit-record/2007/08/27/1188067000549.html).
20070517/default.htm. See also Eggert, hearing           (2007) The Banking Law Journal 124(5) 420 at 423     69. Ibid.
op cit.                                                  (www.kelleydr ye.com/news/ar ticles_publica          70. Newman, op cit; S. Washington, “Subprime tur-
38. The Board of Governors of the Federal Reserve        tions/0197/_res/id=sa_File1/banking_law_jour         moil claims Australia’s Basis fund”, Sydney Morn-
System, the Federal Deposit Insurance Corpora-           nal_reprint.pdf).                                    ing Herald, 30 August 2007 (www.smh.com.au/
tion, the National Credit Union Administration, the      51. Ibid; Berenstain op cit.                         news/business/subprime-turmoil-claims-australias-
Office of Comptroller of the Currency, and the            52. Eggert, hearing op cit at 6.                     basis-fund/2007/08/30/1188067234101.html).
Office of Thrift Supervision. See Joint Agencies          53. See para 7 of the amended complaint filed in      71. Newman; Washington, op cit.
Statement, US Federal Register, July 10, 2007, vol.      the US District Court, Middle District of Florida,   72. Washington, op cit.                           ❑

October 2007                                                                                                                       L AW SOCIETY JOURNAL 61

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