Financial Boom and Gloom: The Credit and Banking Crisis of by Dimitris N. Chorafas (auth.)

By Dimitris N. Chorafas (auth.)

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Additionally, just like the case of subprimes, the coming credit derivatives debacle is evidence of the mismanagement of credit risk. CDS games started in 1991 because the net interest margin of American commercial banks had been under pressure, with the result that: ● ● Credit risk standards were bent, and New leveraged instruments were invented to fill the gap. The Mismanagement of Credit Risk 15 Bankers say that if they were to enforce a cautious attitude to lending (which they should have done years ago), then their return on equity would fall; hence the laxity which prevailed till July/August 2007.

In fact, they did worse than that by renting their AAA rating to dubious securities, for a fee. As competition for municipals grew, they were seduced by the higher returns of structured finance, particularly what seemed to them to be the infinite market of subprimes. 2 billion in writedowns25 from its 24 Financial Boom and Gloom credit-derivatives portfolio, which includes the subprimes. Subsequently, on 18 January, Fitch cut its AAA credit rating for Ambac, suggesting the monolines may not be reliable counterparties for the states and cities that work with them – and by extension for banks and investors who: ● ● Accumulated pseudo-AAA securities in their portfolio, and As the crisis gains steam see their investments turn into ashes.

2000/2001, big stock market bubble. 2007, major bubble of the subprimes and of real estate. 5 standard deviation event, preceded the actions of Greenspan’s Fed, the bond crisis of 1994 has been the result of a steady escalation in interest rates in a succession of more than a dozen steps, without paying attention to the fact that classically conservative bond investments were invaded by: ● ● Derivatives, and Leveraging. Leveraging and an accommodating interest rate policy by Greenspan went into high gear in the late 1990s, inflating the stock market bubble of 2000.

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