The Credit Crisis of 2007

[brian.field]

In Hull's Chapter 6, The Credit Crisis of 2007, he mentions that "...when mortgages were securitized, the only information received about the mortgages by the buyers of the products that were created from them was loan-to-value and the borrower's FICO....)

Speaking from specific experience (many years) in this space, this is simply not true.

A variety of other information was provided to those securitizing the mortgages. Further, buyers of the tranches issued from the securitizations could ask for, and often did, loan level detail related to the underlying mortgages themselves.

It is painful to think that Hull could be so wrong about something that is so obvious.

 

[Dr. Jayanthi Sankaran]

Hi Brian,

That is very interesting information. It is the game of just passing the buck and the buck never stops! When I was working at Bankers Trust (now part of Deutsche bank), they had sold inverse floaters to P&G and Orange County. It was not as though the clients were not aware of the risks involved. They just went along and after all, as Michael Douglas says in the movie Wall Street "Greed is good".

The clients on the other side of the trade were Treasurers. They knew just what they were in for. Eventually, of course, Orange County had to declare bankruptcy and P&G filed lawsuits against Bankers Trust. It was at that time that all newcomers to Bankers Trust lost their jobs - one of them was me! Those who had no clue as to what was going on above were let go!!

Simply venting - this was in 1996

Jayanthi

 

[brian.field]

Fascinating! I recall reading about Orange County!

Although I really like Hull and generally agree with his literature, the statement I mentioned above just seems lazy and, as you suggest, simply blaming.

I worked in CDOs from 1999 through 2007. I was very active in that space and was an expert in structured finance. The notion that securitization shops and subsequent tranche purchasers didn't have access to loan level information is absurd.

That being said, many, if not most, of the folks analyzing the loan level detail were not "good at it!" Indeed, many may not have "used" the loan level detail due to lacking the technical capabilities.

Lastly, responsibility does remain with those that failed to contemplate the spikes in correlations. Then again, people were buying ratings and it amazes me to this day that the agencies were not held more responsible. The agencies marketed their ratings as canon but then tried to blame participants for relying on the ratings by saying things like "investors need to understand that risks they are taking and perform their own research!" If investors were entirely responsible for performing their own research, then the agencies shouldn't exist in the first place!

Simpy venting here too!

I am rereading the entire curriculum, hence, my return to the Part I materials.

Hope you are well!

Brian

 

[Dr. Jayanthi Sankaran]

In addition to ratings being bought, audits are also bought! Talking about doing internal credit ratings, doesn't Basel II recommend internal ratings and this is superseded by Basel III which reverts to external ratings. Correct me if I am wrong on that...

Did you know that Blythe Masters at JP Morgan was the first structurer of credit derivatives? A really smart woman - although I have met her, while at Morgan, I don't know her. Also, what do you think of Janet Tavakoli's books?

Well, I am racing against time too. Wish I had 96 hours in a day. But glad to have you back in the Student Forums

Jayanthi

 

[brian.field]

Now this is funny. I was in the CDO structuring group at JPMorgan - at that time, I worked for Blythe Masters.....well, I worked for Romita Shetty, who worked for Blythe Masters, who worked for Bill Demchack (now CEO of PNC). If I remember, Blythe was the youngest partner ever at JPM and I think it was Blythe and Bill that invented Credit Derivatives!

 

[brian.field]

I don't know Janet's books but I guess I should take a look!

 

[brian.field]

Ah yes....I recognize her after a google search.

 

[brian.field]

Footnote 14 is also similarly inaccurate. It wasn't the case that "sometimes" ABS CDOs included other ABS CDOs as collateral. This was virtually ALWAYS the case. Virtually every ABS CDO included a bucket, which allowed the manager to invest 5%-25% in other ABS CDOs. CDO-squared were slight different in that they allowed significantly more of the collateral portfolio to be invested in other CDOs, i.e., 80-100% of the collateral loans were other ABS CDO tranches.

 

[Dr. Jayanthi Sankaran]

What a small world we live in, Brian. One thing I can say about Blythe Masters was that she was very approachable and helpful. I remember asking her if she would send me her booklet on Credit Derivatives which she promptly did. Thanks for the info on ABS CDO's.....interesting and informative

Jayanthi