No. of Recommendations: 0
A simpler reform would be to require banks to keep at least part of any mortgage they finance on their books. Then they would actually care about the underwriting standards. As long as the banks could securitize all their loans and get them off their books, booking fees for making the loans and for securitizing them, as well as a profit for selling them for securitization, then they had no skin in the game on how the loans performed, as they were no longer their problem. (Not on their books, not their problem.) In the past, the banks kept and serviced the loans that they funded, so they cared about underwriting standards and whether or not the borrower could repay the loan. This change has been one of the biggest disconnects that caused this whole mess.
You could also require anyone that securitizes a bunch of loans to keep 10% or so of the value of the security on their books. This would force some of the investment banks to care about the performance of the loans, instead of just the size of the fees they could get for securitizing the loans. Also, if they had to keep the stuff on their books, they might have been a little more reluctant to set up highly leveraged CDO's. Finally, it seems like they shouldn't be allowed to short the securities they are selling as AAA-rated, investment-grade securities, (as GS did and made a bunch of money doing so).
If everyone involved in the mortgage transaction, (borrower, bank, broker), was forced to have some skin in the game, then a lot of this mess would never have happened, as people would have paid more attention to the contracts, how they were written and whether or not the loans would ever be repaid.
Just my opinion.
Craig