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Smith
Faculty Opinion Article
The 30
Seconds Outlook
April 15, 2009
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“[T]he market for securitized claims is not going to
operate the same way it did in the past. Investors . . . are setting prices that
reflect both the high expected losses of the securities and the highly
systematic nature of these expected losses.”
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— Joshua D. Coval, Jakub W.
Jurek, and Erik Stafford,
Working paper, March 30,
2009 |
Improved regulation of banking and other financial institutions to further
stability and risk moderation should also include the following: First, as
discussed previously, the Fed should be made responsible for assessing “systemic
risk” (including use of leverage) in financial markets and prohibiting the
contributing behaviors by major banks and financial institutions. This is very
important as models of credit risk have failed to recognize the extreme
nonlinearity in risks of credit securities, especially those using
securitization in tranches. Second, regulation of financial markets and
institutions should require real transparency of disclosure and regulatory
actions only as proven necessary. This transparency requires that credit
security transactions be made on exchanges or through regulated clearing houses
to identify participants and pricing. (more to follow)
John A. Haslem
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