The SEC’s Credit Risk Retention Rule Is Far Too Weak and Puts the U.S. Financial System at Risk

 

“Financial reform is supposed to protect Main Street from Wall Street by reducing Wall Street’s high risk activities that increase bankers’ bonuses but make taxpayer funded bailouts more likely. By those standards, the SEC’s proposed risk retention rule fails and puts the financial system at risk of another financial catastrophe,” said Dennis Kelleher, President of Better Markets, Inc., an independent nonprofit organization that promotes the public interest in the financial markets.

 

“The 2008 financial crisis was caused by banks buying millions of bad mortgage loans, bundling them together and fraudulently selling them to unsuspecting investors. The banks immediately pocketed gigantic fees, but offloaded all the risk. Because they were paid upfront and kept no risk, banks were incentivized to churn out as many worthless loans and securities as they could produce, which inflated the housing bubble. When it burst, those securities were revealed to be worthless, the financial markets crashed, the economy tanked, and Wall Street required massive taxpayer-funded bailouts,” Mr. Kelleher said.

 

“To prevent this from happening again, the financial reform law required banks to keep a portion of each mortgage they sold. This ‘risk retention’ or ‘skin in the game’ was designed to make banks more careful and prudent in their mortgage lending activities. However, the SEC has now gutted the law and again incentivized the very behavior that inflated the bubble and contribute to the crash,” Mr. Kelleher said.

 

“Proponents of the watered down rule say that it is necessary to make it easier for Americans to afford home loans. That is simply not true, as we detailed in our comment letter. The important issue of housing policy should be addressed in other ways that don’t cause systemic risk. If we face another financial crisis, the consequences for every homeowner will be far worse than the theoretical risk of having a mortgage application denied. As currently written, the rule encourages greater risk-taking on Wall Street and increases the chances of more economic ruin on Main Street,” concluded Mr. Kelleher.

 

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Better Markets is an independent, nonprofit, nonpartisan organization that promotes the public interest in financial reform in the domestic and global capital and commodity markets. Better Markets advocates for transparency, oversight, and accountability with the goal of a stronger, safer financial system that is less prone to crisis and failure, thereby eliminating or minimizing the need for more taxpayer funded bailouts.