1. For an understanding of the economics of the subprime mortgage market, see Bernanke.2,3 The imbroglios of the subprime mortgage market and, particularly, of subprime lenders are vividly captured by the president and co-founder of Kellner Mortgage Investment, Richard Bitner,4 in a book aptly entitled Confessions of a Subprime Lender: An Insider's Tale of Greed, Fraud, and Ignorance, John Wiley & Sons, Inc., Hoboken, New Jersey, 2008. For an excellent discussion of (1) misaligned incentives and the mechanisms that drove mortgage brokers to encourage not particularly qualified individual mortgage borrowers to borrow and (2) why institutional investors were not sufficiently incentivised to systematically and rigorously assess the risk‘-return trade-offs for subprime debt vís-a-vís prime debt, see Wachter.5
2. Bernanke, B. S. (2007) ‘Subprime mortgage lending and mitigating foreclosures’, Testimony before the Committee on Financial Services, US House of Representatives, Washington, DC, 20th September, 2007.
3. Bernanke, B. S. (2007) ‘The subprime mortgage market’, Speech given at the Federal Reserve Bank of Chicago, 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois, 17th May, 2007.
4. Bitner, R. (2008) Confessions of a Subprime Lender: An Insider's Tale of Greed, Fraud and Ignorance, John Wiley & Sons, Inc., Hoboken, New Jersey.
5. Wachter, S. M. (2008) ‘Incentives and the Current Crisis’ before the Hearing entitled ‘Executive Compensation: CEO Pay and the Mortgage Crisis’ before the United States House of Representatives Committee on Oversight and Government Reforms, 7th March, 2008.