1st Edition

Unravelling the Credit Crunch

By David Murphy Copyright 2009
    328 Pages 65 B/W Illustrations
    by Chapman & Hall

    328 Pages
    by Chapman & Hall

    Fascinating Insight into How the Financial System Works and How the Credit Crisis Arose
    Clearly 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. It explains how the financial system was drawn into the crunch and the issues that need to be addressed to prevent further disasters.

    To enable an understanding of the credit crunch, the author first examines the rules that constrain how financial institutions operate. He discusses how these institutions do business, what products were central to the development of the crunch, and how they behave. He thoroughly describes how financial institutions raise money and the legal and regulatory frameworks under which they operate. After exploring how the system works, the book illustrates how to change the rules to make financial disasters less likely.

    Focusing on the rules involved in the game of finance is essential if we want to figure out what happened that led to this financial debacle. This book shows us how the actions of many financial institutions, regulatory bodies, central banks, and investment managers adversely affected the entire financial system.

    Introduction

    What Happened?

    U.S. Residential Property: The Crunch Begins

    Old- and New-Style Banking

    What Happened in the Markets: The Second Stage

    Après Lehman le Déluge: The Third Stage

    Understanding the Slime: U.S. Residential Mortgages

    Mortgage Structures and Borrowers

    How Mortgages Were Made

    Mortgage Lending during the Greenspan Boom

    A Story of the ODM: Countrywide Financial

    Financial Assets and Their Prices

    Securities

    Markets and Prices

    The Liquidity of Financial Assets

    What’s in It for Me?

    Liquidity and Central Banks

    The Basis of Old-Style Banking

    Liability Liquidity

    Central Banks

    Central Bank Policy in a Crunch

    A Tale of Two Central Banks

    A Twenty-First Century Run: Northern Rock

    The Crash of 1929 and Its Legacy

    The Crash of 1929 and the Great Depression

    Political Reactions

    The New Deal

    The RFC and Other Rescuers

    The Evolution of Freddie and Fannie

    Securitization, Tranching, and Financial Modeling

    Securitization

    The Securitization of Subprime Mortgages

    Models and Hedging

    Model Risk

    Where Did It All Go Wrong?

    The Write-downs

    The Legacy Fails: Fannie, Freddie, and the Broker/Dealers in 2008

    The Growth, Distress, and Rescue of Fannie Mae and Freddie Mac

    Financial Services Modernization in the 1990s

    The End of the Broker/Dealer

    Lessons from the Failure of the Broker/Dealer Model

    Compensating Controls

    Structured Finance

    Credit Derivatives

    ABS in Structured Finance

    Structured Finance in the Boom Years

    Insurance in Form and Name

    The Rescue of AIG

    Off Balance Sheet Funding

    Municipal Finance and the Monolines

    Municipal Finance

    The Monolines Do Structured Finance

    Insurers and Finance: A Toxic Mix?

    Auction Rate Securities

    The Rules of the Game: Accounting and Regulation

    Accounting and Why It Matters

    Regulation and Regulatory Capital

    The Consequences of Basel 2

    Regulation away from Basel

    Understanding Earnings

    Japan’s Lost Decade

    A Comparative Anatomy of Financial Crises

    Changes and Consequences

    Transmission

    The Provision of Credit to the Broad Economy

    What Worked and What Didn’t

    Central Banks, Regulators, and Accountants

    Experimental Finance

    The Financial System from 2009

    Index

    Biography

    David Murphy is principal of rivast Consulting, a leading London risk management consultancy.

    "The crisis is a bafflingly complex phenomenon. This complexity is considerably amplified by the incomprehensible jargon that most experts use to discuss it. This book is the first that I have seen to explain the many different aspects of the crisis in terms that everybody can understand. The coverage is excellent starting with why the crisis started in the housing sector, the role of the Federal Reserve, and so forth. The book also explains securitization, tranching, and many other technical aspects the reader needs to understand what happened. It provides historical context by discussing what happened in the 1930s and the 1990s in Japan. While the U.S. is naturally central, the effect of the crisis on other countries is also discussed. I highly recommend this book to everybody."
    —Franklin Allen, Nippon Life Professor of Finance and Economics, The Wharton School of the University of Pennsylvania, Philadelphia, USA