Wall Street Firms Will Pay a Price for the Subprime Mess

Implications: Congress is in the process of re-acting to the problems caused by subprime lending and securitization of subprime debt.  As the extent of the problem grows, Congress will respond with legislation to "reform" the marketplace and "punish" the guilty.  Wall Street firms will be a clear target, and one can expect new laws and rules to be forthcoming in 2008,

Analysis: When millions of constituents are hurt by foreclosures, and significant negative impact is felt across the economy, Congress will feel compelled to address the "problem."  It will be a political necessity to enact "reforms" and to "punish" the wrongdoers.  Wall Street firms and credit rating agencies are two obvious targets.  In 2008 one can expect a number of legislative and regulatory proposals to make sure this problem does not re-occur.  The unintended consequences of such action may be a problem in themselves (remember Sarbanes-Oxley).  For example, its becoming more and more likely that securitization vehicles will have on going liability to the borrower for loans that do not meet some form of subjective lending standard, such as "in the borrower's best interests."  The increased risk caused by this liability will make securitization more expensive and more difficult.