Financial Boom and Gloom: The Credit and Banking Crisis of 2007-2009 and Beyond (Palgrave Macmillan Studies in Banking and Financial Institutions)

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. Cover......Page 1 Contents......Page 8 List of Tables......Page 11 List of Figures......Page 12 Preface......Page 13 C......Page 17 D......Page 18 L......Page 19 O......Page 20 S......Page 21 U......Page 22 Y......Page 23 Part I: Credit Crunch Ashes and Pains......Page 24 1. Are we running out of bubbles?......Page 26 2. A quadrillion dollars in derivatives......Page 30 3. "26-year- olds with computers are creating financial hydrogen bombs"......Page 33 4. The visible blight of failed bank management......Page 36 5. Debt crisis takes center stage: $62 trillion of CDSs......Page 40 6. Wrong-way risk: the downgrading of monolines......Page 44 7. MBIA and Ambac: a case study......Page 49 Appendix: credit default swaps defined......Page 52 1. Central banks lost control of monetary policy and of supervision......Page 57 2. The fed rushes to protect the markets......Page 61 3. Backwards into the carter years......Page 64 4. LCBGs and systemic risk......Page 67 5. The need for a new glass-steagall act......Page 70 6. Fraud and punishment......Page 73 7. Sovereign wealth funds as lenders of last resort......Page 76 8. Central banks as repositories of last resort......Page 80 1. Effects of financial globalization......Page 84 2. The instruments of financial globalization......Page 88 3. Global structured products......Page 91 4. Auction-rate securities and the attorney general's reaction......Page 94 5. The search for yield weakens credit ratings......Page 98 6. A credit spread alarm......Page 100 7. The impact of globalized crises......Page 103 8. The global sheriff of George Soros......Page 106 Part II: The Subprimes Crisis......Page 110 1. The banking industry's self-inflicted wounds......Page 112 2. Institutionalization of subprime mortgages......Page 115 3. Borrowers at the edge of bankruptcy......Page 119 4. A mare's nest of low quality housing loans......Page 122 5. Economic aftermath of subprimes......Page 126 6. Impact of the subprime crisis on the economy......Page 129 7. A business opportunity for distressed-debt artists......Page 132 1. Credit derivatives......Page 135 2. Risk associated with securitization......Page 138 3. Originate to distribute......Page 142 4. Variable-interest entities......Page 146 5. Structured investment vehicles and conduits......Page 149 6. State funds pay the bill: the case of Florida......Page 152 7. The US government looks at the subprime mess......Page 154 8. The way out of recession is not paved with more debt......Page 157 1. How to lose your money with collateralized debt obligations......Page 161 2. The mechanics of collateralized debt obligations......Page 165 3. Synergy between debt market and equity market......Page 167 4. Credit rating the subprimes......Page 170 5. Spread of the credit risk crisis: a snapshot......Page 174 6. Concentration risk and assets valuations......Page 177 7. A horde of unjustifiable bonuses......Page 180 8. Golden parachutes for failed CEOs......Page 184 1. Lender of last resort......Page 187 2. Northern rock and the FSA......Page 190 3. Failure of prudential supervision......Page 193 4. The many forms of bailouts......Page 196 5. A scandal too far?......Page 199 Part III: Bank Supervisors and Their Remit......Page 204 1. Updating the regulation of free markets......Page 206 2. Liquidity assurance and the regulatory authorities......Page 209 3. Liquidity injection and consumer protection......Page 212 4. Derivatives and government policy......Page 216 5. Regulating derivatives and hedge funds: a case study......Page 219 6. Watch over debt risk......Page 222 7. The global need for new financial regulation......Page 225 8. The important role of accounting standards......Page 228 1. Capital requirements......Page 232 2. Solvency and liquidity......Page 235 3. Liquidity fears......Page 238 4. Liquidity management......Page 241 5. Liquidity stress testing......Page 244 6. Asset-backed commercial paper......Page 248 7. Carry trade......Page 251 8. Liquidity and the carry trade......Page 254 1. The banks' wounded balance sheets......Page 258 2. Financial stability forum......Page 262 3. The shadow banking system destabilizes the economy......Page 265 4. The error of trying a quick fix......Page 268 5. Paulson's restructuring: a call for zero regulation......Page 271 6. Nuts and bolts of Paulson's supervisory restructuring......Page 274 7. The experts' opinion on banks supervision......Page 278 Epilog......Page 282 Notes......Page 287 B......Page 296 D......Page 297 G......Page 298 L......Page 299 O......Page 300 S......Page 301 V......Page 302 Z......Page 303 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.--publisher's Website. Pt. 1: Credit Crunch Ashes And Pains. The Mismanagement Of Credit Risk -- The Fed Has Got It Wrong -- The Globalization Of Credit Risk -- Pt. 2: The Subprimes Crisis. Earthquake In The Subprime Mortgage Market -- The Industrialization Of Credit Risk -- Leveraged Instruments, Their Credit Ratings, And Other Unorthodox Practices -- Northern Rock: A Case Study -- Pt. 3: Bank Supervisors And Their Remit. Responsibilities Of Financial Regulation -- Solvency, Liquidity, Asset-backed Paper, And The Carry Trade -- Is There A Remedy For The Problems Of Bank Supervision? Dimitris N. Chorafas. Includes Bibliographical References (p. 264-271) And Index. 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 www.palgrave.com