Please find attached an essay entitled “The Subprime Market Roller Coaster.” The essay discusses the economic and societal implications of the subprime market losses with an emphasis on the federal regulators’ inability to curtail such losses. It discusses collateralized mortgage obligations and how these debt securities fueled the subprime market. The essay discusses how each of the players – lenders, debtors, investment bankers, securities firms and investors – speculated on homes whose values were a mere illusion. It describes how each party along the chain starting with the lender used basic risk-shifting principles to engage in reckless speculation assuming they could externalize the cost associated with their behavior. It also discusses the economic consequences of the subprime losses, and criticizes the inability of federal regulators to monitor trade transactions involving esoteric financial products, and to forecast the many financial crises the economy and financial markets have experienced over the last 20 years – from Orange County, California over-the-counter derivatives losses to Long Term Capital Management hedge fund losses to the present day collateralized mortgage securities losses. The essay reviews the remedial efforts currently underway, and criticizes the Treasury’s recent proposal to eliminate the SEC and make the Fed the “super-cop” of the financial market. It discusses what federal and state regulators could have done to stymie losses in the subprime market without broad sweeping changes. The essay concludes that the price tag for the government’s failure to regulate the financial markets and to require market players and debtors to internalize their negative externalities will cost the taxpayers millions – creating a moral hazard.

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