WASHINGTON, D.C.—Stephen Hall, Legal Director and Securities Specialist, issued the following statement upon the vote by the Securities and Exchange Commission (SEC) to propose a rule to implement Section 621 of the Dodd-Frank Act:
“Better Markets welcomes this long-overdue proposal that will target some of the most outrageous abuses we saw leading up to the 2008 financial crisis. Wall Street investment banks bundled low-grade residential mortgages into investment packages, hyped them to unsuspecting investors, and then secretly bet against them in the derivative markets.
“The banks stood to gain by shorting those investments, but investors, the financial system, and the entire economy suffered terribly when those worthless mortgage-backed securities went belly up and the crisis spiraled out of control. The proliferation of these asset-backed securities, driven largely by the banks’ conflicts of interest, were the fuel for the crisis. The proposed rule will help flesh out the core prohibition that Congress set forth in the Dodd-Frank Act.
“We’ll study the proposed rule to see how effectively it will address the conflicts of interest in these complex and risky securitization markets. The core provision would prohibit a securitization participant from engaging in any transaction that would result in a major conflict of interest between the securitization participant and an investor. But the details matter, and as always, we’ll want to examine the scope of the rule and in particular the exceptions, including those for hedging, market-making, and liquidity commitments.
“This rulemaking illustrates yet again how pervasive, powerful, and potentially damaging conflicts of interest can be in the financial markets. Whether it’s incentives influencing financial advisers to line their pockets at the expense of their clients, the promise of revenues that cause credit rating agencies to inflate their ratings, or as here, the profits that can be derived from betting against investors in securitizations, the stakes are high and include not only investor losses but also market instability and even financial crisis.”
Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.