The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Banking

US policy failures: Who dropped the ball?

US policy failures in the autumn of 2007 were crucial both in letting the financial crisis fester and then spiral out of control, and in a premature, panicky slashing of interest rates that paradoxically aggravated the slowdown severely, writes Charles Dumas.

Investors can find value if they pick and mix

Why all financial entities, including hedge funds, must be regulated


UNTIL RECENTLY, MOST of us thought financial debt was simply interposed between final borrowers and lenders, and of minor significance in itself. Thus the $2.7 trillion of mortgages (at September 2008 – down from the $3 trillion peak a year earlier) held in vehicles that had issued asset-backed securities were 20% of the 109% of GDP that is financial sector debt.

This seemed like a mere pass-through to the household mortgages held in the ABSs. It was not. The principal chain of potential grief in the banking system has been default on mortgages leading to reduced value of ABSs, knocking on to reduced values of the collateralized debt obligations that are themselves an assemblage of ABSs. Thus from the disastrous 2007 batches of CDOs, triple-A securities are now valued at about 35 cents on the dollar, and triple-B as low as three to four cents. The equity tranche prices are invisible. There are further elaborations of how another recent innovation, credit default swaps, have been written on CDOs and have thus underpinned so-called synthetic CDOs.


You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree