Financial Boom and Gloom

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