Financial Boom and Gloom: The Credit and Banking Crisis of 2007-2009 and Beyond
| Date: 15 April 2011, 06:07
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The credit and banking crisis which hit the western world in 2007/2008 has and will continue to have far-reaching after-effects. At their core are Collateralized Debt Obligations (CDOs) and Credit Default Swaos (CDSs), the main themes of this book.
This is the biggest financial crisis of the post-World War II years. A superbubble has been created by high leverage, novel products and the assumption of more and more risk. This has swelled for a quarter of a century and now burst. Institutions are better placed to face this crisis when properly regulated. However, American, British, German and French big banks have fought for the last two decades to reduce the regulators' reach - bringing themselves and the economy the risk of a Second Great Depression.
Mortgages were pooled with other mortgages; the pools were sliced into tranches and marketed worldwide as bonds to banks, pension funds, insurance companies, hedge funds and other investors. No one knew, or cared to know, how much risk was embedded in them and how this exposure could be managed if worst came to worst. Supervisory authorities did not react. They looked the other way when the same shaky mortgages were repackaged 20 to 30 times over and sold on. Federal Reserve, Securities and Exchange Commission (SEC) and other regulators watched this happening in the false belief that markets correct their own excesses - they do not.
This book offers comprehensive coverage of how and why credit risk escaped management control and supervisory watch. It gives a down to earth explanation of Collateralized Debt Obligations (CDOs), Credit Defaults Swaps (CDSs), their business opportunities and their risks, plus a clear explanation of the difference between solvency and liquidity. It also includes practical examples on asset-backed commercial papers, structured investment vehicles, the carry trade, auction-rate securities and a case study on Northern Rock. The author brings the reader right up-to-date with events since this book went to press, in an extra chapter available online at palgrave dot com
List of Contents
Preface
PART I: CREDIT CRUNCH ASHES AND PAINS
The Mismanagement of Credit Risk
The Fed Has Got It Wrong
The Globalization of Credit Risk
PART II: THE SUBPRIMES CRISIS
Earthquake in the Subprime Mortgage Market
The Industralization of Credit Risk
Leveraged Instruments, Their Credit Rating and Other Unorthodox Practices
Northern Rock. A Case Study on Failure of Prudential Supervision
PART III: BANK SUPERVISORS AND THEIR REMIT
Responsibilities of Financial Regulation
Solvency, Liquidity, Asset-backed Paper and the Carry Trade
Is There a Remedy to the Problems of Bank Supervision?
Glossary
Index
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