What were they thinking? The Federal Reserve in the run-up to the 2008 financial crisis

Stephen Golub, Ayse Kaya, Michael Reay 08 September 2014

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Financial crises are caused by imprudent borrowing and lending, but as former Federal Reserve chairman William McChesney Martin noted, it is ultimately up to regulators to ‘take away the punch bowl’ when the larger economy is at risk. Indeed, many have criticised regulators for failing to anticipate and prevent the 2008 crash (Buiter 2012, Gorton 2012, Johnson and Kwak 2010, Roubini and Mihm 2010). Little work has been done, however, on why regulatory agencies failed to act despite warnings from prominent commentators (Borio and White 2004, Buffett 2003, Rajan 2005).

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Topics:  Financial markets Global crisis Monetary policy

Tags:  financial crisis, Federal Reserve, FOMC, global crisis, collateralised debt obligations, Credit Default Swaps, LTCM, CDOs, CDSs, central banking

Structural reform lowers country risk

Christopher Findlay, Silvia Sorescu, Camilo Umana Dajud 29 August 2014

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In late 2008, financial stress became widespread and perceptions of risk hit new highs. Concerns related to contagion among countries also had an increasing effect on premiums and increased the financing cost for many economies. The response to this problem was austerity – to stress the importance of getting the fiscal situation, and thereby the levels of debt of those countries with this problem, under control.

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Topics:  Financial markets

Tags:  structural reforms, risk premiums, Credit Default Swaps, sovereign debt

Watch the indices! Derivatives and the Eurozone sovereign debt crisis

Anne-Laure Delatte, Julien Fouquau, Richard Portes 17 April 2014

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The job of government bond analysts has been tough since the Eurozone crisis started. They’ve had to tell their clients a story behind every single bond spread hike since the fall of 2009. The list includes concerns over peripheral sovereigns’ public finances, deterioration of the fundamentals, financial sector credit risk, and European institutional coordination failures.

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Topics:  Financial markets Global crisis

Tags:  Credit Default Swaps, Eurozone crisis

The transmission of Federal Reserve tapering news to emerging financial markets

Joshua Aizenman, Mahir Binici, Michael M Hutchison 04 April 2014

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The quantitative easing (QE) policies of the US Federal Reserve in the years following the crisis of 2008–2009 included monthly securities purchases of long-term Treasury bonds and mortgage-backed securities totalling $85 billion in 2013. The cumulative outcome of these policies has been an unprecedented increase of the monetary base, mitigating the deflationary pressure of the crisis.

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Topics:  Exchange rates International finance Monetary policy

Tags:  exchange rates, Federal Reserve, asset prices, emerging markets, stock markets, Credit Default Swaps, tapering

A first look at the structure and dynamics of the UK credit default swap (CDS) market

Evangelos Benos, Anne Wetherilt, Filip Zikes 02 December 2013

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The financial crisis of 2007–08 gave rise to widespread concerns that over-the-counter derivatives contributed to the build-up of systemic risk. As such, regulators have been quick to request and gain access to more information about activity in these markets. This information is crucial for the supervision of financial institutions and for designing more effective prudential policies (see for example Brunnermeier et al. 2013 and Peltonen et al. 2013). Equally importantly, it is invaluable for understanding the structure and dynamics of these hitherto opaque markets.

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Topics:  Financial markets

Tags:  Credit Default Swaps, derivatives markets, over-the-counter derivatives

The European ban on naked sovereign credit default swaps: A fake good idea

Anne-Laure Delatte 23 July 2012

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The European debt crisis has raised concerns regarding the use of credit default swaps (CDSs). CDSs are a derivative financial product used to hedge against the default risk of any entity. From the outset, it has been suspected that the crisis has been exacerbated by a few investors driving up the prices in the CDS market. This issue has attracted much interest in policy circles and has led to the adoption of new European regulation, including the ban of naked sovereign CDSs.

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Topics:  EU institutions Financial markets

Tags:  Credit Default Swaps, EU regulation, over-the-counter derivatives

Credit default swaps: Useful, misleading, dangerous?

Richard Portes 30 April 2012

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Credit default swaps (CDSs) are derivatives, financial instruments sold over the counter. They transfer the credit risk associated with corporate or sovereign bonds to a third party, without shifting any other risks. European politicians have blamed the CDS market for destabilising Greece, and as a result, there is a new EU Regulation that restricts the use of ‘naked’ CDSs on sovereign (but not corporate) debt.1 These contracts offer payment on default of a financial instrument even if the buyer of the contract does not hold the underlying bonds.

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Topics:  Global governance International finance

Tags:  financial regulation, Credit Default Swaps

Economic consequences of speculative side bets: The case of naked CDS

Yeon-Koo Che, Rajiv Sethi 04 September 2010

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There is arguably no class of financial transactions that has attracted more impassioned commentary over the past couple of years than naked credit default swaps. Robert Waldmann has equated such contracts with financial arson, Wolfgang Münchau with bank robberies, and Yves Smith with casino gambling. George Soros argues that they facilitate bear raids, as does Richard Portes (2010) who wants them banned altogether, and Willem Buiter considers them to be a prime example of harmful finance.

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Topics:  Financial markets Global crisis

Tags:  financial regulation, Credit Default Swaps, global crisis

Stormy Weather in the Credit Default Swap Market

Mathieu Gex , Virginie Coudert 13 October 2008

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Are credit derivatives markets particularly prone to speculation and contagion? The answer is certainly yes if we take a look at the credit default swaps (CDSs), which are the most widely traded credit derivatives.

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Topics:  Financial markets

Tags:  financial meltdown, Credit Default Swaps