What Role Did the Accounting Profession Play in the Sub-Prime Mortgage Crisis

721 WordsJul 21, 20123 Pages
What role did the Accounting profession play in the recent sub-prime mortgage crisis? What could they have done differently? *Disclaimer* I don’t know much about accounting (or anything in business for that matter) at this point in time. This will be the first time I will be looking into the sub-prime mortgage crisis and my opinions could well be wrong. However this is exactly what it looks like, my opinion on this topic. Hopefully it is sufficient for the purposes of this discussion and this class. The first thing to consider is what a sub-prime mortgage is. A subprime mortgage is granted to borrowers whose credit history is not sufficient to get a conventional mortgage. Often these borrowers have impaired or even no credit history.…show more content…
Instead, you are buying a promise to be paid the return that the bundle will receive. An MBS is a derivative, because its value is derived from the underlying asset2. This is where the major problem occurs MBS at first glance seem to be level 1 assets used in mark to market accounting as this works on the underlying assumption that the people who take out the loans will pay the interest and this has defined market value. The knock on effect of people defaulting on their mortgages breaks this underlying assumption and quickly become level 3 assets which have no clear value whatsoever. When people started defaulting on their mortgages as a result of the poor housing market the downhill trend becomes quite apparent. At this point it is clear that the accounting profession is really to blame for the massive crisis. There is no real guarantee that people will pay back their loans / mortgages and using this as a tradable asset puts into question the profession. How can one trade something that has no clearly defined money value? I don’t know much about this profession at this time but this seems to be an example of the fundamental flaw that is associated with mark to market trading. What could have been done to avert this crisis? Possibly not giving loans / mortgages during a time period where the specific market is down could be a solution, however mark to market accounting seems to be fundamentally flawed. It seems to be long the lines of old times

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