Chicago Journal of International Law


The spread of the subprime crisis abroad has several implications. The reach and impact of the "made in America" subprime crisis has generated an urgent international issue engaging many central banks and finance ministries, as well as a wide variety of international bodies, especially the Basel-based international institutions, such as the Financial Stability Forum (renamed the Financial Stability Board in 2009) and the Basel Committee on Banking Supervision. The purchasers of these US mortgage securities were not simply victims. Many of the world's most sophisticated banks bought these securities, usually without doing their own investigation and analysis and almost certainly without adequate due diligence. And they did so because, like many US purchasers, they sought higher returns than elsewhere available. The underlying theme of this paper is thus that an analysis of the subprime crisis and proposed solutions is incomplete if international and comparative perspectives are not brought to bear. Contrary to popular impression, securitization (the pooling of loans, including mortgage loans, into securities) is common throughout the world. In Germany, mortgage-backed securities have been common for at least 200 years. In Asia, securitization markets are growing, in part because of the underdeveloped state of Asian bond markets. Indeed, US authorities have often looked to European precedents for reform. For example, a US Secretary of the Treasury called for adoption of the European institution of "covered bonds" for financing home mortgages.