The Role of Law and the Failure of Northern Rock
Elgar Financial Law series
Edited by Joanna Gray and Orkun Akseli
Chapter 1: Was Securitisation the Culprit? Explanation of Legal Processes Behind Creation of Mortgage-backed Sub-prime Securities
1. Was securitisation the culprit? Explanation of legal processes behind creation of mortgagebacked sub-prime securities Orkun Akseli INTRODUCTION The recent global credit crisis, the collapse of large investment and high street banks as well as the nationalisation of Northern Rock have established that misuse of innovative financing techniques such as securitisation might pose an unacceptable level of risk for the global economy. The question is whether securitisation is the underlying causal element of the global credit crisis. Securitisation as a financing technique has had a bad press of late.1 It has been seen as the culprit in the 2007/2008 financial crisis. The complex nature of securitisation and other structured finance transactions needs to be understood, along with the fact that that their failure may lead to the Risk Originator’s failure.2 Thus, securitisation should be used extensively to finance businesses but with caution by people who are aware of the consequences and complexities inherent in this type of financing. The aim of this chapter is to assess whether securitisation is in fact the reason for the financial crisis. The chapter analyses the significance of securitisation as a financing technique which is critical for raising capital. The recurrent theme is that there is a need for greater transparency and predictability in securitisation. It was the lack of transparency and ambiguous pricing of the sub-prime element of securitised credit risk that caused the crisis in interbank markets. International harmonisation activities on secured transactions may provide assistance for what would have been needed for...
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