Roy C. Smith, Ingo Walter, and Gayle Delong
- Published in print:
- 2012
- Published Online:
- May 2012
- ISBN:
- 9780195335934
- eISBN:
- 9780199932146
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195335934.003.0006
- Subject:
- Economics and Finance, Economic Systems
Few events have stimulated international capital market activity as much as the development of derivative securities. Derivatives, which include futures and options, are contracts whose values ...
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Few events have stimulated international capital market activity as much as the development of derivative securities. Derivatives, which include futures and options, are contracts whose values reflect changes in the price of underlying assets such as stocks, bonds, commodities, or foreign currency. Swaps, which are over-the-counter instruments involving the exchange of one stream of payment liability for another, are presented, including credit default swaps and collateralized debt obligations. Derivatives are intended as a tool to manage the various risks associated with financial assets and liabilities, the market values of which can fluctuate widely. However, derivatives tend to be complicated, and understanding the full spectrum of their risks can be difficult. During financial turmoil, the risks can become exaggerated, as evidenced by the part they played in the global financial crisis that began in 2007.Less
Few events have stimulated international capital market activity as much as the development of derivative securities. Derivatives, which include futures and options, are contracts whose values reflect changes in the price of underlying assets such as stocks, bonds, commodities, or foreign currency. Swaps, which are over-the-counter instruments involving the exchange of one stream of payment liability for another, are presented, including credit default swaps and collateralized debt obligations. Derivatives are intended as a tool to manage the various risks associated with financial assets and liabilities, the market values of which can fluctuate widely. However, derivatives tend to be complicated, and understanding the full spectrum of their risks can be difficult. During financial turmoil, the risks can become exaggerated, as evidenced by the part they played in the global financial crisis that began in 2007.
Claus Munk
- Published in print:
- 2011
- Published Online:
- September 2011
- ISBN:
- 9780199575084
- eISBN:
- 9780191728648
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199575084.003.0013
- Subject:
- Economics and Finance, Financial Economics
For bonds and other financial contracts issued by some firms and countries, there is a non-negligible risk that the issuer will default and the holder of the contract will not receive the promised ...
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For bonds and other financial contracts issued by some firms and countries, there is a non-negligible risk that the issuer will default and the holder of the contract will not receive the promised payments. The prices of the contracts will reflect that credit risk. This chapter introduces various key concepts and relations used in the markets for defaultable bonds. The two main modelling frameworks — the structural models and the reduced-form models — are presented with several concrete models studied in detail. The characteristics and possible pricing techniques for the most important credit derivative securities — credit default swaps and collateralized debt obligations — are also explained.Less
For bonds and other financial contracts issued by some firms and countries, there is a non-negligible risk that the issuer will default and the holder of the contract will not receive the promised payments. The prices of the contracts will reflect that credit risk. This chapter introduces various key concepts and relations used in the markets for defaultable bonds. The two main modelling frameworks — the structural models and the reduced-form models — are presented with several concrete models studied in detail. The characteristics and possible pricing techniques for the most important credit derivative securities — credit default swaps and collateralized debt obligations — are also explained.
Perry Mehrling
- Published in print:
- 2010
- Published Online:
- February 2010
- ISBN:
- 9780199578801
- eISBN:
- 9780191723285
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199578801.003.0010
- Subject:
- Economics and Finance, Macro- and Monetary Economics, Financial Economics
Based on the importance of CDS, Mehrling argues in his chapter that the current crisis is best seen as the first test of the new system of structured finance. That test has revealed the crucial role ...
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Based on the importance of CDS, Mehrling argues in his chapter that the current crisis is best seen as the first test of the new system of structured finance. That test has revealed the crucial role played by credit insurance of various kinds, including CDS, for supporting both valuation and liquidity of even the top tranches of structured finance products. The various government interventions of the last year amount, in his view, to the public sector going into the credit insurance business in response to crisis—by either writing credit insurance or taking over insurance contracts written by others. The author calls this the “Paulson‐Bernanke CDS put.” In his view, a basic lesson of the crisis is that the government must be in the credit insurance business in normal times as well.Less
Based on the importance of CDS, Mehrling argues in his chapter that the current crisis is best seen as the first test of the new system of structured finance. That test has revealed the crucial role played by credit insurance of various kinds, including CDS, for supporting both valuation and liquidity of even the top tranches of structured finance products. The various government interventions of the last year amount, in his view, to the public sector going into the credit insurance business in response to crisis—by either writing credit insurance or taking over insurance contracts written by others. The author calls this the “Paulson‐Bernanke CDS put.” In his view, a basic lesson of the crisis is that the government must be in the credit insurance business in normal times as well.
Alan N. Rechtschaffen
- Published in print:
- 2014
- Published Online:
- May 2014
- ISBN:
- 9780199971541
- eISBN:
- 9780199361458
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199971541.003.0009
- Subject:
- Law, Company and Commercial Law
This chapter looks at the different types of swaps, including plain vanilla interest rate swaps, in which counterparties exchange fixed-rate risk for floating rate risk, and currency swaps, which can ...
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This chapter looks at the different types of swaps, including plain vanilla interest rate swaps, in which counterparties exchange fixed-rate risk for floating rate risk, and currency swaps, which can be foreign exchange swaps or foreign currency swaps. It also considers credit-default swaps including their purpose and function and describes the ISDA Master Agreement. In addition, it explains concepts such as credit event and reference entity, along with the impact of the financial crisis on over-the-counter derivatives. The chapter concludes with a discussion of reform in the regulation of financial institutions in the United States in the wake of the financial crisis. This discussion includes an analysis of the MF Global bankruptcy.Less
This chapter looks at the different types of swaps, including plain vanilla interest rate swaps, in which counterparties exchange fixed-rate risk for floating rate risk, and currency swaps, which can be foreign exchange swaps or foreign currency swaps. It also considers credit-default swaps including their purpose and function and describes the ISDA Master Agreement. In addition, it explains concepts such as credit event and reference entity, along with the impact of the financial crisis on over-the-counter derivatives. The chapter concludes with a discussion of reform in the regulation of financial institutions in the United States in the wake of the financial crisis. This discussion includes an analysis of the MF Global bankruptcy.
Alan N. Rechtschaffen
- Published in print:
- 2019
- Published Online:
- May 2019
- ISBN:
- 9780190879631
- eISBN:
- 9780190879662
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/oso/9780190879631.003.0012
- Subject:
- Law, Company and Commercial Law
A swap is a bilateral over-the-counter derivatives contract in which two parties agree to exchange cash flows on a “notional amount” over a period of time. The notional amount is a reference amount ...
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A swap is a bilateral over-the-counter derivatives contract in which two parties agree to exchange cash flows on a “notional amount” over a period of time. The notional amount is a reference amount upon which the payment formula is based. The parties exchange cash flows pursuant to an agreed-upon payment schedule, made up of one or more payment dates throughout the life of the contract. Cash flows are computed by applying the agreed-upon formula relating to each party's respective set of payments of the swap to a notional amount, that is, a hypothetical underlying value that does not necessarily itself change hands. This chapter discusses “plain vanilla” interest rate swaps, currency swaps, credit-default swaps, and the move toward regulatory reform.Less
A swap is a bilateral over-the-counter derivatives contract in which two parties agree to exchange cash flows on a “notional amount” over a period of time. The notional amount is a reference amount upon which the payment formula is based. The parties exchange cash flows pursuant to an agreed-upon payment schedule, made up of one or more payment dates throughout the life of the contract. Cash flows are computed by applying the agreed-upon formula relating to each party's respective set of payments of the swap to a notional amount, that is, a hypothetical underlying value that does not necessarily itself change hands. This chapter discusses “plain vanilla” interest rate swaps, currency swaps, credit-default swaps, and the move toward regulatory reform.
Vieri Ceriani, Stefano Manestra, Giacomo Ricotti, and Alessandra Sanelli
- Published in print:
- 2012
- Published Online:
- May 2012
- ISBN:
- 9780199698165
- eISBN:
- 9780191738630
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199698165.003.0004
- Subject:
- Economics and Finance, Financial Economics
This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these ...
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This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on certain aspects of the tax treatment of performance-based remuneration of managers, which, coupled with other provisions, may have fostered an ever-increasing use of these instruments, resulting in overemphasis of short-term profitability and incentive to excessive risk taking. Second, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.Less
This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on certain aspects of the tax treatment of performance-based remuneration of managers, which, coupled with other provisions, may have fostered an ever-increasing use of these instruments, resulting in overemphasis of short-term profitability and incentive to excessive risk taking. Second, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.
Kathleen C. Engel and Patricia A. McCoy
- Published in print:
- 2011
- Published Online:
- April 2015
- ISBN:
- 9780195388824
- eISBN:
- 9780190258535
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780195388824.003.0011
- Subject:
- Business and Management, Political Economy
This chapter discusses how federal regulators contributed to the subprime crisis. Congress laid the groundwork back in 1999 and 2000, when it deregulated over-the-counter credit default swaps, which ...
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This chapter discusses how federal regulators contributed to the subprime crisis. Congress laid the groundwork back in 1999 and 2000, when it deregulated over-the-counter credit default swaps, which ultimately became pathways of contagion. The Securities and Exchange Commission (SEC) for its part looked the other way while banks issued droves of subprime bonds and collateralized debt obligations (CDOs) marred by shoddy due diligence, skimpy disclosures, and inflated credit ratings. Then federal banking regulators sealed the financial system's fate by allowing commercial banks to load up on toxic mortgage-backed securities.Less
This chapter discusses how federal regulators contributed to the subprime crisis. Congress laid the groundwork back in 1999 and 2000, when it deregulated over-the-counter credit default swaps, which ultimately became pathways of contagion. The Securities and Exchange Commission (SEC) for its part looked the other way while banks issued droves of subprime bonds and collateralized debt obligations (CDOs) marred by shoddy due diligence, skimpy disclosures, and inflated credit ratings. Then federal banking regulators sealed the financial system's fate by allowing commercial banks to load up on toxic mortgage-backed securities.
Padma Desai
- Published in print:
- 2011
- Published Online:
- November 2015
- ISBN:
- 9780231157865
- eISBN:
- 9780231527743
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231157865.003.0005
- Subject:
- Economics and Finance, Public and Welfare
This chapter explores various financial instruments and activities. These include hedge funds, derivatives, and credit default swaps. A hedge fund is a legally restricted investment vehicle ...
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This chapter explores various financial instruments and activities. These include hedge funds, derivatives, and credit default swaps. A hedge fund is a legally restricted investment vehicle maneuvered by managers in an attempt to dodge fluctuations in currencies, interest rates, and commodity prices, using over-the-counter derivatives and credit default swaps. Derivatives, while transacted over-the-counter, permit the buying and selling of currencies and stocks, commodities, and securities in private deals rather than openly on a stock exchange. Credit default swaps, as these resemble derivatives, are known for their destabilizing features. Amidst these transactions, rating agencies are tasked with evaluating financial instruments involved in the trade.Less
This chapter explores various financial instruments and activities. These include hedge funds, derivatives, and credit default swaps. A hedge fund is a legally restricted investment vehicle maneuvered by managers in an attempt to dodge fluctuations in currencies, interest rates, and commodity prices, using over-the-counter derivatives and credit default swaps. Derivatives, while transacted over-the-counter, permit the buying and selling of currencies and stocks, commodities, and securities in private deals rather than openly on a stock exchange. Credit default swaps, as these resemble derivatives, are known for their destabilizing features. Amidst these transactions, rating agencies are tasked with evaluating financial instruments involved in the trade.
Vincent Antonin Lépinay
- Published in print:
- 2011
- Published Online:
- October 2017
- ISBN:
- 9780691151502
- eISBN:
- 9781400840465
- Item type:
- book
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691151502.001.0001
- Subject:
- Economics and Finance, Financial Economics
The financial industry's invention of complex products such as credit default swaps and other derivatives has been widely blamed for triggering the global financial crisis of 2008. This book takes ...
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The financial industry's invention of complex products such as credit default swaps and other derivatives has been widely blamed for triggering the global financial crisis of 2008. This book takes readers behind the scenes of the equity derivatives business at the bank before the crisis, providing a detailed firsthand account of the creation, marketing, selling, accounting, and management of these financial instruments-and of how they ultimately created havoc inside and outside the bank. The book explains how financial operators and financial products coexist and how this coexistence is tense because the bank deals with innovative products that yield unexpected reactions on unevenly charted markets. The book is also a case study of economic derivation, but rather than look at derivatives as a class of economic goods, it studies derivation as a process.Less
The financial industry's invention of complex products such as credit default swaps and other derivatives has been widely blamed for triggering the global financial crisis of 2008. This book takes readers behind the scenes of the equity derivatives business at the bank before the crisis, providing a detailed firsthand account of the creation, marketing, selling, accounting, and management of these financial instruments-and of how they ultimately created havoc inside and outside the bank. The book explains how financial operators and financial products coexist and how this coexistence is tense because the bank deals with innovative products that yield unexpected reactions on unevenly charted markets. The book is also a case study of economic derivation, but rather than look at derivatives as a class of economic goods, it studies derivation as a process.
Padma Desai
- Published in print:
- 2011
- Published Online:
- November 2015
- ISBN:
- 9780231157865
- eISBN:
- 9780231527743
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231157865.003.0006
- Subject:
- Economics and Finance, Public and Welfare
This chapter discusses the U.S. and EU regulatory proposals for dealing with the global financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act were two of the landmark ...
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This chapter discusses the U.S. and EU regulatory proposals for dealing with the global financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act were two of the landmark legislations for overhauling the U.S. regulatory framework. The Dodd Frank proposal sought to address five regulatory issues: (i) the excessive risk taking of financial institutions; (ii) regulatory controls for over-the-counter derivatives and credit default swaps; (iii) the protection of consumers as holders of mortgages and credit cards; (iv) the distribution of regulatory functions among regulatory agencies; and (v) the uniformity and accessibility of global regulatory agencies. In contrast, the regulatory momentum in the EU was slow and dissonant due to the lack of political cohesiveness of nation-states.Less
This chapter discusses the U.S. and EU regulatory proposals for dealing with the global financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act were two of the landmark legislations for overhauling the U.S. regulatory framework. The Dodd Frank proposal sought to address five regulatory issues: (i) the excessive risk taking of financial institutions; (ii) regulatory controls for over-the-counter derivatives and credit default swaps; (iii) the protection of consumers as holders of mortgages and credit cards; (iv) the distribution of regulatory functions among regulatory agencies; and (v) the uniformity and accessibility of global regulatory agencies. In contrast, the regulatory momentum in the EU was slow and dissonant due to the lack of political cohesiveness of nation-states.
Andrew Farlow
- Published in print:
- 2013
- Published Online:
- April 2015
- ISBN:
- 9780199578016
- eISBN:
- 9780191808623
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199578016.003.0003
- Subject:
- Economics and Finance, Financial Economics
This chapter examines how financial innovations and excesses in banking contributed to the financial crisis of 2008. It begins by considering the growth of the banking system, with many firms ...
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This chapter examines how financial innovations and excesses in banking contributed to the financial crisis of 2008. It begins by considering the growth of the banking system, with many firms deciding to put spare cash in very short-term loans to investment banks and hedge funds. It then explains why bank capital fell dramatically and proceeds by discussing the ‘shadow’ banking system as well as structured finance and securitization. It also analyzes derivatives and credit default swaps and how the growing interdependence between bank-like activities and financial market-based activities gave rise to bank liquidity problems. Finally, it looks at the nature of incentives and risk-taking as well as the financial institutions' failures in risk management.Less
This chapter examines how financial innovations and excesses in banking contributed to the financial crisis of 2008. It begins by considering the growth of the banking system, with many firms deciding to put spare cash in very short-term loans to investment banks and hedge funds. It then explains why bank capital fell dramatically and proceeds by discussing the ‘shadow’ banking system as well as structured finance and securitization. It also analyzes derivatives and credit default swaps and how the growing interdependence between bank-like activities and financial market-based activities gave rise to bank liquidity problems. Finally, it looks at the nature of incentives and risk-taking as well as the financial institutions' failures in risk management.
Irene Spagna
- Published in print:
- 2018
- Published Online:
- February 2018
- ISBN:
- 9780190864576
- eISBN:
- 9780190869557
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/oso/9780190864576.003.0002
- Subject:
- Political Science, International Relations and Politics, Political Economy
This chapter analyzes the growth of OTC derivatives before the global financial crisis of 2008 and the role of credit default swaps, in particular, in the near collapse of the global economy. It ...
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This chapter analyzes the growth of OTC derivatives before the global financial crisis of 2008 and the role of credit default swaps, in particular, in the near collapse of the global economy. It begins by exploring the basic characteristics of derivatives used as risk management instruments by investors to hedge against or exploit the volatility of asset prices. The analysis further reveals that the pre-crisis period was characterized by a broad-based consensus favoring deregulated markets and globally designed private rules. While not always unanimously supported, permissive public regulatory choices were often encouraged by interest group lobbying, the market-friendly views of many domestic authorities, and concerns about regulatory uncertainty and international competitiveness.Less
This chapter analyzes the growth of OTC derivatives before the global financial crisis of 2008 and the role of credit default swaps, in particular, in the near collapse of the global economy. It begins by exploring the basic characteristics of derivatives used as risk management instruments by investors to hedge against or exploit the volatility of asset prices. The analysis further reveals that the pre-crisis period was characterized by a broad-based consensus favoring deregulated markets and globally designed private rules. While not always unanimously supported, permissive public regulatory choices were often encouraged by interest group lobbying, the market-friendly views of many domestic authorities, and concerns about regulatory uncertainty and international competitiveness.
Eric S. Belsky
- Published in print:
- 2014
- Published Online:
- September 2014
- ISBN:
- 9780199993277
- eISBN:
- 9780199395767
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199993277.003.0005
- Subject:
- Economics and Finance, Financial Economics
This chapter examines the evolution of the structure, conduct, and performance of mortgage markets in the United States. It traces federal interventions in the mortgage markets from the 1930s to the ...
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This chapter examines the evolution of the structure, conduct, and performance of mortgage markets in the United States. It traces federal interventions in the mortgage markets from the 1930s to the present. These interventions dramatically shaped mortgage markets. The failure of regulators to contain private risk taking in mortgage markets during the 2000s led to excessive leverage and risk. The financial crisis that ensued prompted the federal government to bailout the housing finance system. The chapter concludes with a set of issues raised by the near collapse of mortgage markets. These issues include how to: (1) regulate originators, securitizers and rating agencies; (2) protect claim hierarchies in first and second mortgages to allow debt restructuring, (3) construct pooling and servicing agreements; (4) regulate credit default swaps (CDS) so that sellers are monitored to ensure they have the capital to honor their commitments; and (5) provide adequate disclosures and protection against interest rate risk as markets soak up low-yielding debt obligations.Less
This chapter examines the evolution of the structure, conduct, and performance of mortgage markets in the United States. It traces federal interventions in the mortgage markets from the 1930s to the present. These interventions dramatically shaped mortgage markets. The failure of regulators to contain private risk taking in mortgage markets during the 2000s led to excessive leverage and risk. The financial crisis that ensued prompted the federal government to bailout the housing finance system. The chapter concludes with a set of issues raised by the near collapse of mortgage markets. These issues include how to: (1) regulate originators, securitizers and rating agencies; (2) protect claim hierarchies in first and second mortgages to allow debt restructuring, (3) construct pooling and servicing agreements; (4) regulate credit default swaps (CDS) so that sellers are monitored to ensure they have the capital to honor their commitments; and (5) provide adequate disclosures and protection against interest rate risk as markets soak up low-yielding debt obligations.
John Geanakoplos
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199844333
- eISBN:
- 9780190258504
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199844333.003.0015
- Subject:
- Business and Management, Finance, Accounting, and Banking
This chapter examines leverage as a major cause of asset price bubbles. It outlines four reasons why the most recent leverage cycle was worse than previous cycles. First, leverage reached levels ...
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This chapter examines leverage as a major cause of asset price bubbles. It outlines four reasons why the most recent leverage cycle was worse than previous cycles. First, leverage reached levels never seen before in previous cycles. Second, there was a double leverage cycle: in securities on the repo market and in real estate in the mortgage market. Third, credit default swaps (CDSs), which had been absent from previous cycles, played a major role in the financial crisis of the late 2000s. Fourth, extremely high leverage and low prices put a much larger number of people and businesses underwater than in earlier cycles. The chapter initially discusses the relationship between leverage and asset pricing before turning to a discussion of models of collateral and debt forgiveness (or punishment for default). It then suggests that collateral and leverage need to be integrated into macro models, and that by taking collateral seriously the effect on asset prices of new derivatives like CDSs can be properly assessed. Finally, it considers the optimal punishment for default and the adverse effects of debt overhang.Less
This chapter examines leverage as a major cause of asset price bubbles. It outlines four reasons why the most recent leverage cycle was worse than previous cycles. First, leverage reached levels never seen before in previous cycles. Second, there was a double leverage cycle: in securities on the repo market and in real estate in the mortgage market. Third, credit default swaps (CDSs), which had been absent from previous cycles, played a major role in the financial crisis of the late 2000s. Fourth, extremely high leverage and low prices put a much larger number of people and businesses underwater than in earlier cycles. The chapter initially discusses the relationship between leverage and asset pricing before turning to a discussion of models of collateral and debt forgiveness (or punishment for default). It then suggests that collateral and leverage need to be integrated into macro models, and that by taking collateral seriously the effect on asset prices of new derivatives like CDSs can be properly assessed. Finally, it considers the optimal punishment for default and the adverse effects of debt overhang.
Andrew Farlow
- Published in print:
- 2013
- Published Online:
- April 2015
- ISBN:
- 9780199578016
- eISBN:
- 9780191808623
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199578016.003.0004
- Subject:
- Economics and Finance, Financial Economics
This chapter deals with key events in financial markets leading up to the financial crisis of 2008 and around the times when spreads rose dramatically. It examines the key amplification mechanisms at ...
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This chapter deals with key events in financial markets leading up to the financial crisis of 2008 and around the times when spreads rose dramatically. It examines the key amplification mechanisms at work, which moved restlessly from markets to banks to whole countries and back again, wreaking their own peculiar kinds of havoc. It also considers the problems that affected the housing market in the United States, including the fall in house prices; the collapse of liquidity among banks and other financial institutions; the fall of the Northern Rock bank in the UK; and the collapse of major companies such as Bear Stearns, Lehman Brothers, and AIG. Finally, the chapter analyzes the circumstances that led to the United States's Fannie Mae and Freddie Mac into government conservatorship, the overselling of credit default swaps and its impact on derivatives, and the interaction between market-value accounting standards and capital adequacy regulations based on credit ratings.Less
This chapter deals with key events in financial markets leading up to the financial crisis of 2008 and around the times when spreads rose dramatically. It examines the key amplification mechanisms at work, which moved restlessly from markets to banks to whole countries and back again, wreaking their own peculiar kinds of havoc. It also considers the problems that affected the housing market in the United States, including the fall in house prices; the collapse of liquidity among banks and other financial institutions; the fall of the Northern Rock bank in the UK; and the collapse of major companies such as Bear Stearns, Lehman Brothers, and AIG. Finally, the chapter analyzes the circumstances that led to the United States's Fannie Mae and Freddie Mac into government conservatorship, the overselling of credit default swaps and its impact on derivatives, and the interaction between market-value accounting standards and capital adequacy regulations based on credit ratings.
Mark R. Reiff
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199664009
- eISBN:
- 9780191751400
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199664009.001.0001
- Subject:
- Political Science, Political Theory
This book develops the first new, liberal theory of economic justice to appear since John Rawls and Ronald Dworkin proposed their respective theories back in the 1970s and early 1980s. It does this ...
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This book develops the first new, liberal theory of economic justice to appear since John Rawls and Ronald Dworkin proposed their respective theories back in the 1970s and early 1980s. It does this by presenting a new, liberal egalitarian, non-Marxist theory of exploitation that is designed to be a creature of capitalism, not a critique of it. Indeed, the book shows how we can regulate economic inequality using the presuppositions of capitalism and political liberalism that we already accept. In doing this, the book uses two concepts or tools: a re-conceived notion of the ancient doctrine of the just price, and my own concept of intolerable unfairness. The resulting theory can then function as either a supplement to or a replacement for the difference principle and luck egalitarianism, the two most popular liberal egalitarian theories of economic justice of the day. It provides a new, highly-topical specific moral justification not only for raising the minimum wage, but also for imposing a maximum wage, for continuing to impose an estate tax on the wealthiest members of society, and for prohibiting certain kinds of speculative trading, including trading in derivatives such as the now infamous credit default swap and other related exotic financial instruments. Finally, it provides a new specific moral justification for dealing with certain aspects of climate change now regardless of what other nations do. Yet it is still designed to be the object of an overlapping consensus—that is, it is designed to acceptable to those who embrace a wide range of comprehensive moral and political doctrines, not only liberal egalitarianism, but right and left libertarianism too.Less
This book develops the first new, liberal theory of economic justice to appear since John Rawls and Ronald Dworkin proposed their respective theories back in the 1970s and early 1980s. It does this by presenting a new, liberal egalitarian, non-Marxist theory of exploitation that is designed to be a creature of capitalism, not a critique of it. Indeed, the book shows how we can regulate economic inequality using the presuppositions of capitalism and political liberalism that we already accept. In doing this, the book uses two concepts or tools: a re-conceived notion of the ancient doctrine of the just price, and my own concept of intolerable unfairness. The resulting theory can then function as either a supplement to or a replacement for the difference principle and luck egalitarianism, the two most popular liberal egalitarian theories of economic justice of the day. It provides a new, highly-topical specific moral justification not only for raising the minimum wage, but also for imposing a maximum wage, for continuing to impose an estate tax on the wealthiest members of society, and for prohibiting certain kinds of speculative trading, including trading in derivatives such as the now infamous credit default swap and other related exotic financial instruments. Finally, it provides a new specific moral justification for dealing with certain aspects of climate change now regardless of what other nations do. Yet it is still designed to be the object of an overlapping consensus—that is, it is designed to acceptable to those who embrace a wide range of comprehensive moral and political doctrines, not only liberal egalitarianism, but right and left libertarianism too.
Mauro Megliani
- Published in print:
- 2018
- Published Online:
- January 2019
- ISBN:
- 9780198810445
- eISBN:
- 9780191847783
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/oso/9780198810445.003.0005
- Subject:
- Law, Human Rights and Immigration, Public International Law
The purpose of this chapter is to illustrate the role of syndicated and bonded loans as a source of sovereign financing. This analysis will concentrate on the dynamics of the primary and secondary ...
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The purpose of this chapter is to illustrate the role of syndicated and bonded loans as a source of sovereign financing. This analysis will concentrate on the dynamics of the primary and secondary markets of these debts and the protective clauses reproduced in the loan agreements, with particular reference to the problems originated by a controversial interpretation of the pari passu clause.Less
The purpose of this chapter is to illustrate the role of syndicated and bonded loans as a source of sovereign financing. This analysis will concentrate on the dynamics of the primary and secondary markets of these debts and the protective clauses reproduced in the loan agreements, with particular reference to the problems originated by a controversial interpretation of the pari passu clause.
Albert Banal-Estanol, Enrique Benito, and Dmitry Khametshin
- Published in print:
- 2018
- Published Online:
- January 2018
- ISBN:
- 9780198815815
- eISBN:
- 9780191853418
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/oso/9780198815815.003.0021
- Subject:
- Economics and Finance, Financial Economics
Asset encumbrance refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank’s ability to freely transfer or realize them. Asset encumbrance has ...
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Asset encumbrance refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank’s ability to freely transfer or realize them. Asset encumbrance has recently become a much discussed subject and policymakers have been actively addressing what some consider to be excessive levels of asset encumbrance. Despite its importance, the phenomenon of asset encumbrance remains poorly understood. We build a novel data set of asset encumbrance metrics based on information provided in the banks’ public disclosures for the very first time throughout 2015. We provide descriptive evidence of asset encumbrance levels by country, credit quality, size, and business model, using different encumbrance metrics. Our empirical results point to the existence of an association between CDS premia and asset encumbrance that is negative, not positive. That is, on average, encumbrance is perceived to be beneficial. Still, certain bank-level variables play a mediating role in this relationship. For banks that have high exposures to the central bank, high leverage ratios, and/or are located in southern Europe, asset encumbrance is less beneficial and could even be detrimental in absolute terms.Less
Asset encumbrance refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank’s ability to freely transfer or realize them. Asset encumbrance has recently become a much discussed subject and policymakers have been actively addressing what some consider to be excessive levels of asset encumbrance. Despite its importance, the phenomenon of asset encumbrance remains poorly understood. We build a novel data set of asset encumbrance metrics based on information provided in the banks’ public disclosures for the very first time throughout 2015. We provide descriptive evidence of asset encumbrance levels by country, credit quality, size, and business model, using different encumbrance metrics. Our empirical results point to the existence of an association between CDS premia and asset encumbrance that is negative, not positive. That is, on average, encumbrance is perceived to be beneficial. Still, certain bank-level variables play a mediating role in this relationship. For banks that have high exposures to the central bank, high leverage ratios, and/or are located in southern Europe, asset encumbrance is less beneficial and could even be detrimental in absolute terms.
