Disclosure's Failure in the Subprime Mortgage Crisis

This article examines the "finance" part of the subprime mortgage crisis. In a separate article, I examined financial-market anomalies and obvious market protections that failed, seeking insight into the subprime mortgage crisis. The crisis, I argued, can be attributed in large part to three causes: conflicts, complacency, and complexity. This article focuses on the third cause complexity and, in particular, on complexity's undermining of the disclosure paradigm of securities law, causing investors such as commercial and investment banks to lose many billions of dollars on securities backed by subprime mortgages.