Investigating the Role of Regulation and Accounting in the Subprime Crisis

Pamela Smith Baker¹, Jay Keith Baker²
(1. Texas Woman’s University, USA; 2. North Lake College, USA)

Abstract: The study queries whether low information asymmetry affects lack of proper regulatory oversight and auditor professional capabilities in the subprime mortgage crisis. This paper examines events leading up to the subprime financial crisis and finds evidence to suggest that warnings signs for a looming subprime financial crisis existed that should have triggered reaction by the accounting profession, investors and regulators. The mortgage market was able to grow into a bubble because of: (1) innovative asset securitization products, (2) risk shifting through complex derivative instruments and credit default swaps, (3) easy money policies given by central banks and (4) lack of regulatory vigilance.

Key words: financial crisis; MBS; subprime; government sponsored enterprises

JEL Code: M