The SEC now has a proposal for how to implement the Dodd-Frank requirement that institutions retain some of the risk of loans when securitizing and selling loans. The idea of this requirement is to give originators better incentives to originate and sell good loans. Not sure why the private sector screwed this up – one reasonably hypothesis is that a few large players screwed it up, AIG, Lehman and others — but anyway. The proposed SEC rules are here for public comment. To make things interesting, important government officials are now weighing in. Here is the comptroller of the currency’s response (mostly concerned with fighting exemptions), and here is the press release for Tim Geitner’s (Treasury is supportive of the general rule and accepting of the specifics). In my opinion, financial institutions need retain no common or systemic risk to be properly incentivized, they just need to hold the risk of the loans they originate relative to similar other loans. Otherwise, systemic crises damage bank capital. But I have blogged a fair bit on this before . . .
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