(Ebook) Unravelling the Credit Crunch 1st Edition by David Murphy ISBN 1439802580 9781439802588

(Ebook) Unravelling the Credit Crunch 1st Edition by David Murphy ISBN 1439802580 9781439802588

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ISBN 10: 1439802580 
ISBN 13: 9781439802588
Author: David Murphy

Fascinating Insight into How the Financial System Works and How the Credit Crisis AroseClearly supplies details vital to understanding the crisis Unravelling the Credit Crunch provides a clearly written, comprehensive account of the current credit crisis that is easily understandable to non-specialists. Offering fascinating insight into how the financial system works and how the credit crisis arose, this book provides a clearly written, comprehensive account of the current credit crunch that is easily understandable to non-specialists. It explains how the financial system was drawn into the crunch and the issues that need to be addressed to prevent further disasters. The author supplies detailed descriptions on numerous specialist areas, including credit derivatives, structured finance, and the monoline insurance companies. He also explores accounting and financial regulation and discusses the legacy of the Great Depression and other historical events.

(Ebook) Unravelling the Credit Crunch 1st Table of contents:

1 What Happened?
Introduction
1.1 U.S. Residential Property: The Crunch Begins
1.1.1 Average Prices
1.1.2 Worst Hit Areas
1.1.3 Speculate to Accumulate
1.1.4 Leverage
1.1.5 Mortgage Foreclosures
1.1.6 Property-related Activity
1.1.7 Residential Property Outside the United States
1.2 Old and New Style Banking
1.2.1 Banking as Borrowing Short and Lending Long
1.2.2 How Safe is an Old Style Bank?
1.2.3 The Originate and Distribute Model
1.2.4 Ratings and Lemons
1.2.5 Playing ODM: When Interests are Not Aligned
1.3 What Happened in the Markets: The Second Stage
1.3.1 Trends in the ABX
1.3.2 Short Rate
1.3.3 Libor
1.3.4 The Wider Debt Markets
1.3.5 Stocks
1.3.6 Special Purpose Failures
1.4 Après Lehman le Déluge: The Third Stage
1.4.1 Freddie and Fannie Fail
1.4.2 Lehman Loses
1.4.3 The Various Fates of the Final Three
1.4.4 Bailouts and Busts
1.4.5 Qualitative Easing
Summary
Notes
2 Understanding the Slime: U.S. Residential Mortgages
Introduction
2.1 Mortgage Structures and Borrowers
2.1.1 Basic Mortgages
2.1.2 Mortgage Collateral and LTV
2.1.3 Mortgage Affordability and PTI
2.1.4 ARMs and Resets
2.1.5 Interest Rates and Prepayment
2.1.6 Hybrid ARMs
2.1.7 Option ARMs
2.1.8 Borrower Quality and FICO
2.1.9 Prime, Alt-A and Subprime
2.1.10 Houses as ATMs: Second Mortgages and HELOCs
Summary
2.2 How Mortgages Were Made
2.2.1 Mortgage Brokers
2.2.2 The Lender and Servicing
2.2.3 Mortgage Funding and Mortgage Banks
2.2.4 Correspondent Lending
2.2.5 Who Decides? The Changing Rôle of the Loan Officer
2.3 Mortgage Lending During the Greenspan Boom
2.3.1 Where did it all go wrong? Incentive Structures in the Mortgage Industry
2.3.2 Bad Behaviour in the Mortgage Market: Fraud and Related Scams
2.3.3 Prepayment penalties and sharing the rewards
2.3.4 Making Slime: The Rise of Subprime
2.3.5 Teaser Rate Subprime Loans
2.3.6 The Treadmill of Sales
2.3.7 ARM Resets
2.3.8 Predatory Lending
2.3.9 Stimulating Demand
2.4 A Story of the ODM: Countrywide Financial
2.4.1 Countrywide’s Growth...
2.4.2... And Decline
2.4.3 What Went Wrong
Notes
3 Financial Assets and Their Prices
Introduction
3.1 Securities
3.1.1 Primary and Secondary Markets
3.1.2 Equity, Debt and Leverage
3.1.3 Bonds and Credit Spread
3.1.4 Ratings Agencies
3.1.5 Bankruptcy and Seniority
3.1.6 Secured Bonds
3.1.7 Asset Backed Securities
3.2 Markets and Prices
3.2.1 What Are Prices Good For?
3.2.2 Trading Securities
3.3 The Liquidity of Financial Assets
3.3.1 What is Asset Liquidity?
3.3.2 Loan Liquidity
3.3.3 Security Liquidity
3.3.4 Equity Market Liquidity
3.3.5 Bond Market Liquidity
3.4 What’s In It For Me?
3.4.1 Loans in an Old-style Bank
3.4.2 Bonds Are Different
3.4.3 What is the Credit Spread of a Bond For?
3.4.4 Why Credit Spreads Matter
3.4.5 The Effect of ABS Issuance in the ODM
3.4.6 What Prices Mean
3.4.7 The Variation of Asset Returns
3.4.8 The Interaction between Rates, Asset Prices, and Beliefs
3.4.9 Pre-Crunch Conditions
Notes
4 Liquidity and Central Banks
Introduction
4.1 The Basis of Old-Style Banking
4.1.1 Where Does the Money Come From?
4.1.2 The Term Structure of Various Yield Curves
4.1.3 Funding Liquidity Risk
4.1.4 Liabilities and Confidence
4.1.5 How Financials Fail: Part 1
4.1.6 The Uninformative Nature of NII
4.2 Liability Liquidity
4.2.1 Retail Deposits
4.2.2 Wholesale and Interbank Borrowing
4.2.3 The Growth of Non-Deposit Funding
4.2.4 Commercial Paper
4.2.5 Term Debt
4.2.6 Lines of Credit
4.2.7 Repurchase Agreement
4.2.8 The Risk of Repo to the Lender
4.2.9 Collateralised Funding in the ODM
4.2.10 Managing Liability Liquidity
4.2.11 How Financials Fail: Part 2
4.3 Central Banks
4.3.1 What’s Good?
4.3.2 Financial Stability
4.3.3 Monetary Policy
4.3.4 The Conduct of Monetary Policy
4.3.5 The Window and Collateral at the Window
4.3.6 Emergency Funding: The Lender of Last Resort
4.4 Central Bank Policy in a Crunch
4.4.1 Engineering the Repo
4.4.2 The Quantity Theory of Stability
4.4.3 The Pawnbroker of Last Resort
4.4.4 Throwing Open the Clubhouse Doors
4.5 A Tale of Two Central Banks
4.5.1 Before the Stress
4.5.2 Rate Cuts Fail: the TAF is Introduced
4.5.3 Financing Not Liquidity: the TSLF and the PDCF
4.5.4 The Largest SIVs in the World
4.5.5 The Evolution of Central Bank Policy
4.6 A Twenty First Century Run: Northern Rock
4.6.1 What Was Northern Rock?
4.6.2 Funding Crunch
4.6.3 How Risky Was Northern Rock’s Funding Strategy?
4.6.4 Why Did The Man In The Street Run?
4.6.5 Uncertainty Persists
Notes
5 The Crash of 1929 and its Legacy
Introduction
5.1 The Crash of 1929 and the Great Depression
5.1.1 A Warm Weather Real Estate Bubble
5.1.2 Cheap Money and Its Consequences
5.1.3 The Crash
5.1.4 The Great Depression
5.2 Political Reactions
5.2.1 Bad Behaviour Broadcast
5.2.2 The Reconstruction Finance Corporation
5.3 The New Deal
5.3.1 The ’33 Act and Securities Regulation
5.3.2 Banking and the Glass-Steagall Acts
5.3.3 Lending in a Depression
5.4 The RFC and Other Rescuers
5.4.1 The RFC Becomes Bold
5.4.2 Supporting Home Ownership
5.4.3 The Taxpayer Takes Default Risk
5.4.4 The Secondary Mortgage Market
5.4.5 Lyndon Johnson and the Strange Status of Fannie
5.4.6 Private Gain, Social Loss: Subsidising Fannie and Freddie
5.4.7 Conforming Loans
5.4.8 Yet Another Institution: The FHLBs
5.4.9 A Fractured Landscape
5.5 The Evolution of Freddie and Fannie
5.5.1 The Use of Mortgage Backed Securities
5.5.2 Pass Throughs: Who Got What?
5.5.3 The Growth of Private Label MBS
Notes
6 Securitisation, Tranching, and Financial Modelling
Introduction
6.1 Securitisation
6.1.1 What Can Be Securitised?
6.1.2 Tranching
6.1.3 It’s Raining Cash
6.1.4 Prepayment
6.1.5 Making it Better: Credit Enhancement
6.1.6 Why Securitise?
6.1.7 The Rating of Securitisation Tranches
6.2 The Securitisation of Subprime Mortgages
6.2.1 The Structure of Subprime Securitisations
6.2.2 Sweet and Far from Cliff and Scar
6.2.3 The ABX
6.3 Models and Hedging
6.3.1 The Idea of Hedging
6.3.2 Models in Finance
6.3.3 How Financial Models Differ
6.3.4 ABS Models and Correlated Defaults
6.4 Model Risk
6.4.1 Elementary Mistakes
6.4.2 Calibration
6.4.3 Theory and Induction
6.4.4 Stress Testing
6.4.5 A Category Error
6.5 Where Did It All Go Wrong?
6.5.1 Intensifiers: Complexity and Leverage
6.5.2 Underwriting Standards
6.5.3 Model Error in the Assessment of Subprime Securitisations
6.5.4 A Waxman Pecora?
6.6 The Write-downs
6.6.1 Funding Arbitrage
6.6.2 ABS Liquidity Risk
6.6.3 How Wrong were the Firms’ Risk Estimates?
6.6.4 The Consequences of the Write-downs
Notes
7 The Legacy Fails: Fannie, Freddie and the Broker/Dealers in 2008
Introduction
7.1 The Growth, Distress, and Rescue of Fannie Mae and Freddie Mac
7.1.1 Fannie and Freddie Prosper
7.1.2 Oversight
7.1.3 Their Own Private Idaho
7.1.4 Fannie and Freddie in the Greenspan Boom
7.1.5 Losses Mount
7.1.6 Conservatorship
7.1.7 Full Circle: The Consequences of Conservatorship and the Future of Fannie and Freddie
7.1.8 And finally... The FHLBs
7.2 Financial Services Modernisation in the 1990s
7.2.1 Was Modernisation Necessary?
7.2.2 Building an American Supermarket
7.2.3 Broadening the Brokers
7.2.4 Breaking down Glass-Steagall
7.3 The End of the Broker/Dealer
7.3.1 The Europeans Force Change
7.3.2 Consolidated Supervised Entities
7.3.3 The Rise of Lehman Brothers
7.3.4 Choppy Seas
7.3.5 The Sudden Fall
7.3.6 The Aftermath
7.4 Lessons from the Failure of the Broker/dealer Model
7.4.1 What Distinguished the Broker/Dealers
7.4.2 Reviewing the CSE Regime
7.4.3 An Old Architecture in a New World
7.5 Compensating Controls
7.5.1 Incentive Compensation
7.5.2 Collective Bargaining
7.5.3 Incentives
7.5.4 Compensation in an Era of State Capitalism
Notes
8 Structured Finance
Introduction
8.1 Credit Derivatives
8.1.1 Specifying a Credit Default Swap
8.1.2 Separating Default Risk From Funding
8.1.3 The Pros and Cons of Exchanges
8.1.4 Counterparty Risk
8.1.5 The Beneficial Effects of Credit Derivatives
8.1.6 Risks Created By Credit Derivatives
8.1.7 Portfolio Credit Default Swaps
8.1.8 The Delta Hedging in Structured Finance
8.2 ABS in Structured Finance
8.2.1 CDOs of ABS
8.2.2 Where does the Money come from?
8.2.3 Adverse Selection of Bank Assets
8.3 Structured Finance in the Boom Years
8.3.1 Delta Hedged ABS Tranches
8.3.2 Credit Derivatives on the ABX
8.3.3 Seizing the Flow
8.3.4 Structured Finance Risks and their Management
8.3.5 Size is (nearly) everything
8.4 Insurance in Form and Name
8.4.1 Taking Insurance Risk
8.4.2 Traditional Insurance
8.4.3 Insurance Accounting
8.4.4 Credit Derivatives and Insurance: Similarities and Differences
8.5 The Rescue of AIG
8.5.1 AIG before the storm
8.5.2 Financial Products
8.5.3 The Danger of Downgrades
8.5.4 Shares Slide, System Stresses
8.5.5 $85B at Credit Card Rates
8.5.6 Aftermath
8.6 Off Balance Sheet Funding
8.6.1 ABCP
8.6.2 Conduits as Old Style Banks
8.6.3 SIVs
8.6.4 What the Vehicles bought
8.6.5 SIV and Conduit Risks
8.6.6 ABCP rolls and Backup Liquidity
8.6.7 Stand or Delever?
8.6.8 ABCP Fades Away
8.6.9 Where did subprime risk go?
8.6.10 The MLEC, R.I.P.
Was Structured Finance The Culprit?
Notes
9 Municipal Finance and The Monolines
Introduction
9.1 Municipal Finance
9.1.1 Sureties and the Monolines
9.1.2 Financial Guarantees
9.1.3 The Monoline Insurers
9.1.4 Ambac and MBIA before Structured Finance
9.2 The Monolines Do Structured Finance
9.2.1 New Business
9.2.2 Other Exposure
9.2.3 Investment Banks and Monolines
9.2.4 Counterparty Risk
9.2.5 Credit Support Default
9.2.6 Quick, quick, slow
9.2.7 Case Study: BillAckman vs. the Monolines
9.2.8 Get Shorting
9.3 Insurers and Finance: A Toxic Mix?
9.3.1 The Markets are Visible and Everyone’s Actions Matter
9.3.2 Diversification is Hard to Get
9.3.3 The Details Matter
9.3.4 Possible Mistakes
9.3.5 It’s Market Confidence, Stupid
9.4 Auction Rate Securities
9.4.1 Auction Rate Security Quality and Market
9.4.2 The Possibility of Auction Failures
9.4.3 The Reality of Auction Failures
9.4.4 Lies, Damned Lies, and Marketing
The Non-bank Banking Crunch
Notes
10 The Rules of the Game: Accounting and Regulation
Introduction
10.1 Accounting and Why It Matters
10.1.1 Accounting Standards and Financial Statements
10.1.2 Fair Value and Accrual
10.1.3 Fair Value vs. Accrual
10.1.4 Being Open About Uncertainty: The Levels of 157
10.1.5 Valuation and the Crunch
10.1.6 Consolidation
10.1.7 The Consequences of the Consolidation Rules
10.2 Regulation and Regulatory Capital
10.2.1 A Small Town in Switzerland
10.2.2 Something Simple: The 1988 Accord
10.2.3 Market Risk in ‘96
10.2.4 The Basel 2 Project
10.2.5 Designing a New Capital Accord
10.2.6 Calculating Capital
10.2.7 Risks included in Basel 2
10.2.8 Risks ignored in Basel 2
10.3 The Consequences of Basel 2
10.3.1 Bigger Is Better
10.3.2 Procyclicality
10.3.3 And The Winner Is...
10.3.4 Northern Rock’s Basel 2 Waiver
10.3.5 Model Risk and Internal Models
10.4 Regulation Away from Basel
10.4.1 Diversity and the Level Playing Field
10.4.2 Monoline Capital Adequacy
10.5 Understanding Earnings
10.5.1 Accrual Accounting, Capital Requirements, and the Behaviour of Financial Institutions
10.5.2 All the Fun of the Fair
10.6 Japan’s Lost Decade
10.6.1 Bubble and Crash: Japan towards the Millennium
10.6.2 Regulation and Accounting in Japan
10.6.3 The Crisis Intensifies
10.7 A Comparative Anatomy of Financial Crises
10.7.1 Underlying Causes of a Crisis
10.7.2 The Loss of Confidence
10.7.3 The Financial System Transmits Stress
10.7.4 Delay, then State Capitalism
10.7.5 Rewriting the Rules
Notes
11 Changes and Consequences
Introduction
11.1 Transmission
11.1.1 Two Spirals
11.1.2 Reducing the Transmissions
11.2 The Provision of Credit to the Broad Economy
11.2.1 Modifying Mortgages
11.2.2 Mortgage Structures and Walking Away
11.2.3 Funding the Economy: Forcing the Horse to Drink
11.2.4 Government Bailouts
11.3 What Worked and What Didn’t
11.3.1 ’I told you so’
11.3.2 Understanding Valuation, Understanding Earnings
11.3.3 Lessons in Risk Management
11.3.4 The Tail of Risk
11.3.5 Market Risk Misjudged
11.3.6 Unfunded Risk Taking
11.3.7 Liquidity Risks
11.3.8 Structured Finance Risks
11.3.9 Lessons for Financial Risk Management
11.3.10 Personal Incentives
11.4 Central Banks, Regulators and Accountants
11.4.1 The Failures and Futures of Regulatory Capital
11.4.2 Central Bank Mandates
11.4.3 Rescues and Moral Hazards
11.4.4 Product Regulation and Market Intervention
11.4.5 Improving Information
11.4.6 Transparency, Accounting and Disclosure
11.5 Experimental Finance
11.6 The Financial System from 2009
11.6.1 Some changed thinking
11.6.2 The Types of Financial Institutions
11.6.3 Society and Financial Institutions
Notes

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