Ppt on credit default swaps aig

Financial Crisis: Private & Public Sector Impacts Challenges Amid Economic and Regulatory Uncertainty Robert P. Hartwig, Ph.D., CPCU, President Insurance.

of the Federal Reserve: http://www.federalreserve.gov/releases/housedebt/default.htm;http://www.federalreserve.gov/releases/housedebt/default.htm 08q2 % of Disposable Personal Income Government Rescue Package of AIG Motivation & Structural Details AIG Rescue Package by the Fed AIG suffered a liquidity crisis due to large positions, mostly associated with Credit Default Swaps, related to mortgage debt through its AIG Financial Products division The losses at AIGFP brought/


INTRODUCTION TO CORPORATE FINANCE SECOND EDITION Lawrence Booth & W. Sean Cleary Prepared by Ken Hartviksen & Jared Laneus.

version of forward contracts. 11.4 Describe the mechanics of simple swap structures, including interest rate swaps and currency swaps. 11.5 Explain how the credit default swap market contributed to the financial crisis. 3 Booth/Cleary Introduction to /Credit Default Swap Market As the sub-prime market in the United States collapsed in 2007 and 2008, major issuers of CDS such as American International Group (AIG) were burdened with fulfilling the contracts as a result of default The very solvency of AIG/


American International Group

the system is repaired Confidential information may be misused or mishandled leading to legal liabilities Thomas Regulatory Capital Credit Default Swap Portfolio Deterioration in credit markets may cause AIG to experience unrealized market valuation losses Could be required to post additional collateral Net of $38.1 Billion in credit default portfolio for providing capital relief rather than for arbitrage purposes Thomas Management of Risk Factors Gordon Major/


CHAPTER 25 Insurance Operations. Copyright© 2002 Thomson Publishing. All rights reserved. Historical and Religious Connotations Ways to deal with risk.

of mass destruction.” Multiple CDS were contracted on the same bonds Credit Default Swaps (ticking time bombs) Copyright© 2002 Thomson Publishing. All rights reserved. AIG rolled the dice by providing credit insurance on $700B of Lehman Bros. When the bonds went bad, AIG could not make good. As a tell-tale symbol, the DJIA replaced AIG with Kraft (Altria) – a financial stock substituted with a food/tobacco/


1 The Financial Crisis: Causes and Consequences Michael S. Pagano, Ph.D., CFA June 14-16, 2009 1.

MBS $91.8 Equity $3.2 Homeowner 20X’s Increasing Leverage Mort. Securitiz 30X’s CDO Structure 50X’s Credit Default Swap ∞ CDS on CDO – Infinite Leverage 18 In-Class Exercise: Compare and Contrast the Make & Hold and Originate/ the Crisis Fed Liquidity for Fin. Institutions (FIs) beyond traditional Commercial Banks Too-Big-To-Fail (TBTF) Bailouts (Fannie, Freddie, AIG, Citi) Increased Deposit Insurance ($250K / account) $700 Bil. Troubled Asset Relief Program ( TARP ) Federal Guarantees: Commercial Paper, FI/


David Robinson © D. Robinson, 2010 October 2010 Special Talk for PBL The Great Recession: How did it happen & where do we go from here?

a stock at a specific price » In general, listed and regulated by certain stock or commodity exchanges Credit Default Swaps (CDFs) Investment Banks Bond holders Hmm… what if these guys default ? No problem! We’ll write you a CDS Who are these guys? Other banks, Insurance Cos (AIG), Hedge funds C B A Hmm, is this Insurance or a “derivative”? Fade to black How it/


9/17/2015 1 Topic Various risks associated with investing in the bond market Pricing Bond, pricing floating rate and inverse floating rate securities Computing.

offsetting potential losses by selling the stocks of those companies short 9/17/2015 24 AIG: Why Did They Loose So Much? They sold default insurance, credit default swap, whose payoff is a binary; 0 or (Par)(1-f), where f is recovery rate on the bond in the event of default or Material events as covered in the ISDA master agreement. They could not or/


Understanding the Response of the Federal Reserve to the Recent Financial Crisis Sandy Krieger April 14, 2010 This presentation presents preliminary findings.

30 Spread: One-Month London Interbank Offered Rate (LIBOR) to O/N Index Swap (OIS) Rate 30 June 1, 2007 – October 23, 2009 Source: / UST MBS purchase program Limited Fed purchases of Agency debt and MBS AIG credit facility Money markets US Treasury guarantee Fed special liquidity programs: AMLF, /AIGs many investment portfolios would likely have caused enormous downward pressure on valuations across all asset classes held by AIG Default by AIG on its commercial paper could have harmed the money markets (AIG/


Suspecting the Rating Agencies Dan diBartolomeo Northfield Information Services January 2012.

abandoned BET in 2005, many institutions such as AIG continued to use the method Although Moodys largely abandoned BET in 2005, many institutions such as AIG continued to use the method The Secret Formula/in the credit default swap market Bankers used observable correlations from changes in spreads in the credit default swap market CDO/CDS Default Correlations Assessing default correlations from credit swap curves and CDO trading was horrendously faulty Assessing default correlations from credit swap curves /


T HE C REDIT C RISIS C AUSES, C ONSEQUENCES & C URES University of Nevada, Reno Institute for the Study of Gambling & Commercial Gaming 14th International.

 Causes Bond Prices to Fall Federal Reserve Increases Interest Rates  Causes Bond Prices to Fall Credit Default Swaps: Bets that firm will fail. Credit Default Swaps: Bets that firm will fail. C ONSEQUENCES – F ORECLOSURES H OW L ONG THIS WILL/ to US Zombies Zombies ◦ Firms kept alive for political reasons but that consume resources and slow the recovery  GM, AIG, Citigroup, Chrysler New Regulations New Regulations ◦ Expansion of bankruptcy and government to intervene in private agreements ◦ End of high/


Derivative Markets. Agenda An Introduction to Derivatives Types of Derivatives Call Options Put Options Options Resources.

parties exchange cash flows in return for security against default on payments Credit Default Swaps Interest Rate Swaps Credit Default Swap Example My company decides to purchase Greek debt bonds (15% interest payments a year) However; I am worried that Greece may fail and default on the bonds, giving me nothing. I go to an insurance company to organize a credit default swap Credit Default Swap Example AIG (the insuring party) agrees to insure my transaction/


© 2012 Pearson Education, Inc. Publishing as Prentice Hall R. GLENN HUBBARD ANTHONY PATRICK O’BRIEN Money, Banking, and the Financial System.

CDOs. At first, the CDOs included relatively high-quality corporate bonds, with only a few mortgage-backed securities. But at the height of the housing boom, AIG was issuing hundreds of billions of dollars worth of credit default swaps against CDOs consisting largely of mortgage-backed securities. Contractual Savings Institutions: Pension Funds and Insurance Companies © 2012 Pearson Education, Inc. Publishing as Prentice Hall 40/


Special Purpose Vehicle https://store.theartofservice.com/the-special-purpose-vehicle-toolkit.html.

Reserve responses to the subprime crisis - AIG Assistance 1 # Maiden Lane III, a special purpose vehicle created to purchase collateralized debt obligations on which AIG Financial Products had written credit default swaps. https://store.theartofservice.com/the-special-purpose/html Tranche - Example 1 *A bank transfers risk in its loan portfolio by entering into a credit default swap|default swap with a ring-fenced special purpose vehicle (SPV). https://store.theartofservice.com/the-special-purpose-vehicle-/


Unit 4: Macro Failures The Subprime Crisis 12/9/2010.

doesn’t have any actual liquidity problem. Credit Default Swaps credit default swap (CDS) credit default swap (CDS) – bet on whether a loan will be repaid; type of insurance that allows hedging Credit Default Swaps credit default swaps bet on whether loan repaid o type of insurance o helped hedging risk models wrong o housing prices always up o premiums too low insurers defaulted on CDSs o AIG, Lehman Brothers Credit Default Swaps Credit default swaps of MBSs allowed banks to hedge against/


Unit 4: Macro Failures The Subprime Crisis 5/3/2011.

doesn’t have any actual liquidity problem. Credit Default Swaps credit default swap (CDS) credit default swap (CDS) – bet on whether a loan will be repaid; type of insurance that allows hedging Credit Default Swaps credit default swaps bet on whether loan repaid o type of insurance o helped hedging risk models wrong o housing prices always up o premiums too low insurers defaulted on CDSs o AIG, Lehman Brothers Credit Default Swaps Credit default swaps of MBSs allowed banks to hedge against/


Today’s lecture covers: 1.AICs rules that shaped global neoliberalism 2.The resulting capitalist crisis: The Financial crisis of 2008.

allow risk about the price of the underlying asset to be transferred from one party to another. Options, futures and swaps, including credit default swaps, are types of derivatives. A common misconception is to refer to derivatives as assets. This is erroneous, since a /allowing investors who did not own a security to purchase insurance in case of its (CDOs they did not own) default. AIG (American International Group of insurers) almost collapsed because of these bets, as it was left on the hook for tens/


Derivatives A Fair and Balanced Look Kurt Wilhelm Director, Financial Markets Group Office of the Comptroller of the Currency October 17, 2013.

term and illiquid assets. This investment strategy yielded high returns before the crisis; however, it contributed to AIG’s liquidity squeeze during the crisis. The firm experienced something similar to a run as borrowers of its/ Bank Trading Revenues 24 Are Credit Derivatives Effective Hedges? Banks have used credit default swaps (CDS) very effectively to hedge corporate credit exposures The CDS market, however, has morphed into a product to hedge/speculate on sovereign credit exposures – The top 9 /


Term 2: Lecture 1 Topic 1: Global Impact of the 2008 Financial Crisis: Comparing Canada and the Third World Countries.

risk related to the price of the underlying asset to be transferred from one party to another. Options, futures and swaps, including credit default swaps, are types of derivatives. A common misconception is to refer to derivatives as assets. This is erroneous, since a /allowing investors who did not own a security to purchase insurance in case of its (CDOs they did not own) default. AIG (American International Group of insurers) almost collapsed because of these bets, as it was left on the hook for tens/


COURS TITLE Derivatives Markets dr Krzysztof SPIRZEWSKI Wydział Nauk Ekonomicznych Uniwersytetu Warszawskiego.

the CDS spread. Several large banks are market makers in the credit default swap market. When quoting on a new 5-year credit default swap on a company, a market maker might bid 250 basis /credit default swaps were a source of vulnerability for financial markets. The danger is that a default by one financial institution might lead to big losses by its counterparties in CDS transactions and further defaults by other financial institutions. Regulatory concerns were fueled by troubles at insurance giant AIG/


Income Research & Management 0 CDOs and CDS: The Insatiable Appetite for Innovation Derivatives Market Update Presented By: Jack Sommers, CFA Managing.

¹ $B Income Research & Management 5 CDS Market Began in the Late 1990s  Credit Default Swaps were invented in 1997 by a team working for JPMorgan Chase  Credit Default Swaps became exempt from regulation with the Commodity Futures Modernization Act of 2000  The market/, or projected returns of any particular IR&M product. Income Research & Management 12 CMBS CDO FNMA SIV FGIC FSA AIG ML ARS MBIA Casualty Soup ARM LEH MMF CLO CDS C Income Research & Management 13 Recent Government Market Intervention ¹Term/


Managing Risk off the Balance Sheet with Derivative Securities

capital gain or loss may be on a related index to avoid liquidity problems with individual loans; thus, basis risk and interest rate risk remain 20 Swaps Credit Swaps and the crisis Lehman Brothers and AIG sold credit default swaps worth billions of dollars in payments insuring mortgage-backed securities (MBS) When mortgage security values collapsed, required outflows at these firms far exceeded capital Other institutions invested/


DISTORTIONS IN THE SECURITIES MARKETS Wayne Klein Lewis B. Freeman & Partners, Inc. October 17, 2008.

Bn collateral. This capital need hastened AIGs failure. New standard: too interconnected to fail? 27 Short-term effects: Country credit problems: Iceland CDS at 50% Higher capital for BDs, become banks, BHCs. Bond insurers downgraded, might fail. Issuers cannot get AAA ratings. Banks are protecting against default risk. Some banks tie interest rates to swaps prices. Participants must settle defaulted CDS. Confidence problem: will sellers/


Globalization, Financial Stability and Depression Assaf Razin, Tel-Aviv University Fall 2008 Updated 2010 1.

to its balance sheet in the last few months, and finally, Wednesday’s $85bn bail-out of the insurance giant AIG.Freddie Mac Fannie MaeBear Stearnsbail-outAIGFreddie Mac Fannie MaeBear Stearnsbail-outAIG Moral Hazard A HOUSE INSURED FOR MORE THAN ITS VALUE /, MOST OF THE TIME CDS The same cannot be said of the credit default swap industry. The private, over- the-counter market allowing two parties to bet on the likelihood of a company defaulting on its debt has grown to about $90 trillion in notional amounts/


The Financial Crisis. Mortgages Mortgages are financial instruments that allow people to buy houses when they don’t have the full price. Traditionally,

about you Mortgaged Back Securities, you could buy insurance in case they failed. For a small premium, AIG would sell you an insurance policy called a Credit Default Swap AND get this, EVEN if you didn’t own any Mortgaged Backed Securities, you could bet that/ taking with it Trillions of dollars of wealth and the entire world banking system. REMEMBER THE Credit Default Swaps, they had to pay them off too. Too Big to FAIL If AIG goes under…there is no one to pay off the losers (the bankers and other gamblers /


1 ECONOMICS 3150N Winter 2013 Professor Lazar Office: N205J, Schulich 736-5068.

hierarchy, much greater default risk than at bottom –If bank or ultimate borrower at top defaults, default could create domino effect – Royal’s exposure may be much different because of interbank lending Consider structure of CDOs, credit default swaps 10 Counter-Party/ and Freddie Mac placed into conservatorship Bear Stearns Lehman, Merrill Lynch –Credit markets worldwide freeze up –Money market mutual fund breaks the “buck” AIG Washington Mutual Wachovia (4 th largest bank) Citigroup Bank of America Just/


By James Bleach Chris Moorhead Ji Hyun Lee and Timothy Becher

for low-quality, unsecured debt and debt instruments/insurance policies. One such debt/insurance instrument is called a Credit Default Swap (CDS). A CDS is a contract where the buyer makes periodic payments to the seller in exchange for the right to/ many prominent institutions that are vital to the function of the financial structure of the United States. To name a few: AIG, Fannie Mae, Bear Sterns, Lehman Brothers. Most troubles/failures are related to mortgage-backed securities. This is primarily because of/


1 The Financial Melt-Down Of 2008-2009 A Demon Of Our Own Design Online Economic Seminars www.econseminars.com March 30, 2009.

Pools Private Mortgage Insurance (MBIA, ANBAC, FSA) Credit Default Swaps Sold By Investment Banks 59 A Dysfunctional Mortgage Market Structure ¶ Subprimes Were Especially Sensitive To Housing Prices Credit-Worthy Loans Had Low LTV Ratio So Equity / UST Guarantee for Fed Levered Public- Private Toxic Asset Purchases $ 75B Mortgage Modification Program $ 30B Purchase Of Additional AIG Equity $107B Still Available 69 U.S. Treasury Government Sponsored Enterprise Support Program ¶ $600B Asset Purchase And Loan /


Restricted Regional Seminar for Insurance Supervisors in Latin America on Supervision of Insurance Groups International Standards on Financial Conglomerates.

Time deposit Loans Mutual funds Money market funds Savings account Equities Options Investment -linked product Mortality bond Deposit administration Mortgage- backed securities Credit default swaps Hedge funds “The former director said he was never sure what authority the OTS had over AIG Financial Products, which he said had slipped through a regulatory gap” – US Financial Crisis Inquiry Commission Restricted 6 Alarm Bell when Something/


Prepared by: Patel Mitalee s. Patel Sonal Shah Pratik Sakaria Ashish Paresh.

a 45% plunge in the stock and a 66% spike in credit-default swaps on the companys debt. The companys hedge fund clients began pulling out, while its short-term creditors cut credit lines. On September 10, Lehman pre-announced dismal fiscal third-quarter/ US mono line insurers, so called because they only insure the bonds of large companies, including mortgage lending institutions. Like AIG, the insurance cover they provide could be invoked by customers and, like a tsunami, overwhelm their finances. In the UK/


The Current Economy: From an Economic Historian’s Perspective Price Fishback University of Arizona 1Copyright, Price Fishback, April 26, 2012.

group of mortgages – Collateralized Debt Obligation (CDO) Fund made up of MBSs – Credit Default Swaps (CDS) Insurance on the CDOs 56Copyright, Price Fishback, April 26, 2012. AIG Credit Default Swap Goldman owns a CDO and pays insurance premium to AIG to cover CDO If bunch of mortgages default and MBS and CDO fall sharply in value, AIG pays Goldman and takes over CDO 57Copyright, Price Fishback, April 26, 2012. Posting/


The Financial Crisis of 2008 By Franz Soerensen. The Creation of the bubble (1 of 8) Prior to deregulation fewer could get mortgages (Ferguson) Lenders.

(Ferguson) Investors then insured their CDO’s by buying Credit Default Swaps produced by AIG (Ferguson) When purchasing a credit default swap, you would have to pay AIG a quarterly premium, and if your CDO failed, AIG would finance the loss (Ferguson) The increasing number of/ Banks Investment banks Investors Money for CDO’s* Money for mortgage Payment with interest *CDO’s insured by AIG through credit default swaps to eliminate risk New System The Creation of the Bubble (7/8) A simple system, where it was/


La crisi finanziaria (Slides in inglese + pdf di «Macroeconomia della crisi» in italiano al sito web del corso) Francesco Daveri.

in investment banks and “hedge funds” was 27. Lehman Brothers: 25 billions $ of K and 680 billions of assets. AIG, extended Credit Default Swaps to Lehman, Bear Stearns & other investment banks: 25 of K and 3200 of assets. The higher the leverage, the /easiest-to-satisfy criteria. On top of that, such securities have often been insured with insurance companies (Credit Default Swaps, CDS). Example: AIG, American Insurance Group, bailed out one day after Lehman has gone under. Finally, liquidity was an /


INTRO TO THE BOOK OF L.I.F.E. Warning:  The opinions and ideas in this presentation do not reflect those of the school district. This presentation is.

FINANCIAL INSTRUMENT KNOWN AS A “CREDIT DEFAULT SWAP”  ESSENTIALLY THE “SWAP” WAS “INSURANCE” ON A MORTGAGE (THE “CREDIT” IN CREDIT DEFAULT SWAP)- IF A HOMEOWNER DEFAULTED  Same as saying “mortgage default insurance” HISTORY  THE REASON IT WAS NOT CALLED “MORTGAGE DEFAULT INSURANCE” WAS BECAUSE IF /WERE GOING TO BURN DOWN,  the companies who insured the NOTES WENT BANKRUPT; I.E.- AIG AND LEHMAN BROTHERS  aig would ultimately crash due to how many “aaa” mortgages they hade insured– where the people would/


Donald J. Weidner1 Real Estate Finance Spring 2016 Dean Don Weidner Nine sets of slides for the Spring 2016. –Are available on my web page under “Course.

bailouts of Fannie and Freddie, automotive companies (Chrysler, GM), AIG and other financial institutions AIG had experienced its own financial crisis because of the credit default swaps (CDSs) it issued –It went far beyond its successful core insurance business to sell massive amounts of Credit Default Swaps –Investment banks and other financial institutions has also issued CDSs Credit Default Swap (CDS) A credit default swap is a contract under which the seller of the/


We have lived through something more than a financial crisis. We have witnessed the death of a planet. Call it Planet Finance. …Planet Finance was beginning.

– Cheaters must not prosper (e.g. Madoff) – Legal one-way bets must be spotted quickly and the profits drained (e.g. AIG’s CDS traders) More Steps 3. Encourage true innovation, discourage evasive innovation – E.g., weather derivatives are good – SIVs for evading capital/of the U.S.’s $12 trillion mortgage market as of 2008. Ginny Mae (GNMA) is still operating as a GSE. Credit Default Swap (CDS) A contingent contract. The buyer makes a series of payments to the seller. The seller promises a large payment to/


Unit 17: Financial Derivatives Financial English.

several instances of massive losses in derivative markets, such as the need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written. It was reported that the recapitalization was necessary because further losses were foreseeable/


© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.

balance sheets indicate because of these transactions. ■Regulation of Credit Default Swaps ■Regulators increased their oversight of this market and asked commercial banks to provide more information about their credit default swap positions. Regulation of the Accounting Process ■The Sarbanes-/these subsidiaries served as collateral for the loans extended by the federal government to rescue AIG. ■The risk of taxpayer loss due to the AIG rescue was low. 31 © 2013 Cengage Learning. All Rights Reserved. May not/


Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Ten Derivative Securities Markets.

or bond to the CDS buyer CDS played a major role in the financial crisis, AIG and others were major sellers of CDS that insured mortgage- backed securities, but lacked capital and could not pay when the mortgage securities failed Credit default swaps (CDS) allow financial institutions to hedge credit risk A CDS buyer is buying insurance on a loan or bond CDS seller receives/


© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.

bonds in the event that the bond issuers default on their bonds. Mortgage Insurance  Mortgage insurance protects the lender that provides mortgage loans in the event of homeowner default.  Credit Default Swaps as a Form of Mortgage Insurance  Privately / for classroom use. Exposure of Insurance Companies to Risk Exposure to Risk during the Credit Crisis (cont.)  Government Rescue of AIG  American International Group (AIG) is the largest insurance company in the world, with annual revenue of more than/


Aspects of Financial Regulation MSc Financial Economics Anne Sibert Spring 2014.

AIG (the subject of the largest government bailout of a private company in US history) is a global insurance company with a balance sheet of more than a trillion dollars – the 18th largest publicly owned company in the world in 2008. Regulated by the New York State Regulator of Insurance, it developed a rogue investment banking unit that sold credit default swaps/Regulator of Insurance, it developed a rogue investment banking unit that sold credit default swaps out of sight of the Fed, the FDIC or the SEC. /


Lecture 10 – The global financial crisis 10.1 Introduction 10.2 Pre-crisis financial system 10.3 Upswing of the financial cycle 10.4 The crisis 10.5 Policy.

at the center of the 2008-09 financial crisis: – The mortgage-backed security (MBS) – The collateralised debt obligation (CDO) – The credit default swap (CDS) Fig 7.2 shows how the innovation of these instruments evolved during the 2000’s Figure 7.2 Mortgage-backed securities (MBS) An/i.e. govt’s took control of financial institutions by taking very high equity stakes (e.g. Northern Rock and RBS in UK and AIG in US) – MBS’s that had lost their value (had come to be called toxic assets) so CB’s agree to buy /


Pre-Examination Session Class Review IB2002 Risk Management for IFIs

-Term Capital Management (LTCM) Enron WorldCom Global Crossing Parmalat Lehman Morgan Stanley AIG Bears & Stearn Northernrock Washington Mutual More coming soon… subprime world crisis Islamic/BBA application from Salim. After full assessment of his credit ratings, the bank felt that Salim has a 20% default risk (pd = 0.2). This also implies/and not mark-to market Ijarah Sukuk – Ownership of asset by SPV Profit-rate swaps – speculation or gambling? #1 AQAD Method Aqad Agents of Contract Objective of Contract /


SayItVisually--US Financial Crisis 4 min 2008

investors who did not own a security to purchase insurance in case of its (CDOs they did not own) default. AIG (American International Group of insurers) almost collapsed because of these bets, as it was left on the hook / The region’s financial sector had no complex new financial instruments (such as in US: Collateralized Debt Obligation (CDO) Credit Default Swap (CDS)) Effective financial supervision and prudent risk management Foreign exchange reserves have been built up in Asia based on export surpluses/


Copyright © 2010 Cengage Learning 13 THE FINANCIAL CRISIS OF 2007-2009.

in the CDS market and was now left seriously exposed The US government stepped in to help AIG because of the huge impact that AIG’s bankruptcy would have had on the financial system and the wider economy Copyright © 2010 Cengage Learning/ early 2000s encouraged banks to become more risk seeking. Some of this risk could be insured against through new products such as credit default swaps (CDS). Banks in the US increased lending to the sub-prime market at rapid rates. The resulting effects on the housing /


Municipal Market Update December 4, 2008. 1 Discussion Topics Recent events in the capital markets Impact on national and local municipal markets Historical.

Quarter for Wall Street Week ofSignificant Events September 15 Lehman files for bankruptcy; Bank of America announces buyout of Merrill Lynch AIG downgraded; government “Invests” $85 billion Reserve Primary Fund “breaks the buck” Treasury and Fed bolster Money Market Funds/ Events October 20 U.S. Government and N.Y. Attorney General open joint investigation into the $34.8 trillion credit-default swap market Municipal bonds rally most in 26 years as the tax-exempt market thaws; yields drop 73 basis points in /


The Financial Crisis. Mortgages Mortgages are financial instruments that allow people to buy houses when they don’t have the full price. Traditionally,

written, so they were ready to go under, taking with it Trillions of dollars of wealth and the entire world banking system. REMEMBER THE Credit Default Swaps, they had to pay them off too. Too Big to FAIL If AIG goes under…there is no one to pay off the losers (the bankers and other gamblers with our money) in this whole thing, the/


Financing Catastrophe Losses Amid a Financial Catastrophe A Growing Challenge Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute.

volatility levels are volatile. VIX >30: Extreme Volatility VIX<20: Low Volatility Lehman fails; AIG “rescued” VIX Index Election day Oct 27, 2008 Nov 20, 2008 Credit Default Swaps: Notional Value Outstanding, 2002:H2 – 2008:H1* *End of calendar half (H1 =/states have large state-run entities  About 25 states operate workers comp state funds or monopolistic insurers Regulation of Credit Default Swaps as Insurance: Will Feds take this up? Insurer Divisiveness: Industry is Not United on Many Key Issues Source/


1 Finance and Insurance: Converging or Diverging? Stephen Mildenhall May 2002.

Insurance Comparison of Pricing Methods Insurance shares concepts and structures with finance Swaps and Options  Excess of Loss Insurance Actuarial Pricing No consensus on/ Apply same model to corporate bonds Fit yield spreads using historical default probability and yield spread by bond rating Wang 2-factor model fits/ consistent earnings were considered good: GE, AIG Advantages of consistent earnings Consistent earnings results in virtuous circle of higher credit rating, lower cost to borrow, larger scale/


An Overview of the 2008 Financial Crisis (the perspective of an electrical engineer on Wall Street) 1 Samir Padalkar PhD,

1 Samir Padalkar PhD, samirpad@gmail.com Roadmap Real Estate Bubble Security Definitions CDO Issues Rating Agencies, FNMA, FHLMC, AIG Federal Reserve 2000 Internet Bubble Comparison Where are we today Case Shiller Property Values Index (source Wikipedia) Fed Funds Rate/contained subprime mortgages Subprime --- FICO score < 640 CDS BUYER CDS SELLER Reference MBS Premium Face Value upon default CREDIT DEFAULT SWAP 7 CDS is insurance on an underlying reference bond CDS buyer pays a premium to the CDS Seller CDS/


The Financial Crisis: Why Did the U.S. Economy Meltdown?

, National Delinquency Survey. Large U.S. Financial Institutions Were Shaken Activity in the market for credit defaults swaps had accelerated between 2003 and 2008. Firms like JPMorgan sold credit default swaps to allow pension companies to lend to corporations, governments, and businesses in emerging markets at reduced risk. Other firms like AIG emerge in the CDS market. These markets were shaken when housing prices collapsed. Emergency Economic/


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