Credit Crises: From Tainted Loans to a Global Economic Meltdown

Overview

The description of the chronology of the subprime crisis is theintroduction to the complex topic of credit crises in Chapter I.Besides a detailed analysis of the course of the subprime crisis(which proves to be a very good template for credit crises ingeneral), the authors also introduce some credit-specificinstruments (e.g. CPDOs), players (e.g. credit-linked hedge funds),and vehicles (e.g. SIVs).

Chapter 2 is a description of the most important instruments inglobal credit ...

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Overview

The description of the chronology of the subprime crisis is theintroduction to the complex topic of credit crises in Chapter I.Besides a detailed analysis of the course of the subprime crisis(which proves to be a very good template for credit crises ingeneral), the authors also introduce some credit-specificinstruments (e.g. CPDOs), players (e.g. credit-linked hedge funds),and vehicles (e.g. SIVs).

Chapter 2 is a description of the most important instruments inglobal credit markets, including cash instruments like loans andbonds and synthetic instruments ranging from single-name CreditDefault Swaps to complex credit structures and correlationproducts. The chapter ends with a brief overview of thesecuritization market, which moved center stage during the subprimeturmoil.

In Chapter 3, the authors present all the major players in thecredit market, including those who, at first glance, have nothingto do with credits, e.g. money market funds. However, knowing themotivation and constraints of these players is crucial tounderstanding the origination and development of credit crises.

Strategies in the credit market are discussed in Chapter 4. Manytrading strategies include the use of leverage either through theunfunded nature of credit derivatives or through funding viashort-term debt. Leveraged-Super-Senior (LSS) tranches, SpecialInvestment Vehicles (SIVs) and SIV-lites have been center stageduring the subprime crisis.

Chapter 5 shows the anatomy of a credit crisis. While there aremany similarities between the crises experienced so far, there arealso many differences. The authors briefly discuss crises in thepast, including the savings & loan crisis in the US, but alsorecent ones like the correlation crisis in the credit derivativesuniverse in 2005.

The crucial questions are: What can we learn from analyzingthese crises, and are there crisis models that help us to explainthe mechanism behind those crises? In this respect, the bookdiscusses overshooting models, financial panic, and moral hazard.One conclusion that is drawn by the authors: crises have a cyclicalcharacter and are rather normal adjustment processes in cases wheremarkets are moving too far away from fundamentally justifiedlevels!

The book ends with a discussion of whether credit crises can beavoided in the future. The conclusion is as simple as it isimportant: Generally not, but you can make money from them!

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Product Details

  • ISBN-13: 9783527503759
  • Publisher: Wiley
  • Publication date: 7/15/2008
  • Edition number: 1
  • Pages: 277
  • Product dimensions: 6.30 (w) x 9.40 (h) x 1.10 (d)

Meet the Author

Dr. Jochen Felsenheimer works in the Global Research department atUnicredit. He heads the Credit Strategy & Structured CreditTeam. He holds a PhD degree in Economics fromLudwig-Maximilians-Universität München.

Dr. Philip Gisdakis works as a Senior Quantitative CreditStrategist at Unicredit. He studied Mathematical Finance at theUniversity of Oxford and holds a PhD degree in TheoreticalChemistry from Technische Universität München.

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Table of Contents

Foreword.

Preface.

Acknowledgements.

1. Prologue: Chronology of a Crisis.

1.1. The subprime turmoil included all ingredients of a severefinancial markets crisis.

1.2. An exemplary credit crisis.

1.3. The chronology of a crisis - The US subprime crisis.

2. Credit Instruments.

2.1. Bonds.

2.2. Loans.

2.3. Credit Default Swaps.

2.4. CDS Indices.

2.5. Tranches.

2.6. Securitization.

3. Credit Players.

3.1. Banks.

3.2. Fannie Mae and Freddy Mac.

3.3. Money Market Funds.

3.4. Central Banks.

3.5. Hedge Funds.

3.6. Bond Insurer.

3.7. Private Equity Sponsors.

4. Credit Strategies.

4.1. Leverage.

4.2. Leveraged Super Senior Tranches.

4.3. Constant Proportion Debt Obligations.

4.4. Structured Investment Vehicles.

4.5. Collateralized Debt Obligations.

4.6. Structured-Squared Madness.

5. The Anatomy of a Credit Crisis.

5.1. Introduction.

5.2. Crisis Classification.

5.3. A brief history of credit crises.

5.4. What can we learn from existing crises models?

5.5. The credit cycle.

6. Epilogue: How Can we Avoid Credit Crises in theFuture?

Index.

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