An edited version of this post originally appeared on Yahoo! Homes and is being republished on South Florida Law Blog with their permission.
I am often asked how Wall Street has managed to be so reckless, with little to no regard for its customers and its investors, yet avoid any real consequence for its actions.
The easy answer, if there is one, is that no one has really tried to change the very culture of the banking industry. Corrections have been at the micro level, yes, but these granular solutions have merely chipped away at the problems with mortgage securitization.
No one until this point has been bold or audacious enough to stand up to the banks. Maybe it’s because of fear of blowback from the bankers and their powerful allies, maybe it’s that the regulators and legislators actually don’t know how take them on.
Wall Street has always managed to have a defense that it always seems to fall back on whenever its motives are questioned.
Banks have used it so often there is actually a name for it. It’s called the Wall Street Rule.
Two Brooklyn Law School professors recently, and succinctly, brought attention to the Wall Street Rule and how it applies to the mortgage securitization engine. Bradley Borden and David Reiss correctly argue mortgage backed securities were flawed from the start.
By convincing Congress to ease certain tax restrictions back in 1986, these securities called REMICS were created and became a loophole to allow the banks to avoid paying income tax on millions upon millions of mortgages, which I alluded to back in August.
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