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Essay / Research Paper Abstract
This 5-page paper discusses how credit derivatives contributed to AIG, Bear Stearns' and Lehman Brothers' collapse. Bibliography lists 4 sources.
Page Count:
5 pages (~225 words per page)
File: AS43_MTcredderi.rtf
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Unformatted sample text from the term paper:
followed on the heels of the collapse of another investment giant, Bear Stearns. As so-called "toxic assets" clogged the banking system, prohibiting any kind of lending and literally freezing up
the credit markets, finger-pointing began. Some pointed to the collapse of the subprime mortgage market, of which the effects had been seriously felt during the summer of 2008. Others blamed
securitization of mortgages, turning home mortgages into investments, and then selling them to investors, based on the strength of an overinflated housing market. Still others blamed those shadowy instruments of
investment called credit derivatives. Sometimes also known as "swaps," credit derivatives are privately held contracts, permitting users to manage their exposure to risk (Credit Derivative, 2010). The price of these
derivatives (which are financial assets) are driven by the perceived credit risk of economic agents (Credit Derivative, 2010). For example, banks sometimes
will sometimes transfer credit risk to another party, while keeping a loan on its books, thereby spreading the credit risk (Credit Derivative, 2010). This is done, many times, if a
borrower is considered high risk - and given the fact that many of the subprime borrowers were, in fact, high-risk borrowers, this meant more credit swapping.
But how did this help lead to the financial collapse. A credit derivatives company basically comes into a situation and promises, for a fee, to take
the risk for the bank (Amerman, 2008). The fee (which is typically a hefty one) is what makes money for the derivative companies (Amerman, 2008). This is fine if the
financial company involved in derivatives isnt a financial institution or insurance institution such as AIG. But when it involves AIG, and the derivatives were backed by loans to people who
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