Securitization and Structured Finance Post Credit Crunch: A Best Practice Deal Lifecycle Guide

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Looking back: What went wrong?

2.1 OVERVIEW

To answer the question, “Looking back: What went wrong?”, the answer can be succinctly given as “Quite a few things actually.”

But in all fairness, each of the following sore points on their own would probably not have led to the spectacular collapse of the structured finance market, in particular, and the global financial markets, in general. The combination of them, however, within the framework of globally operating and highly interconnected capital markets led to the chain of events that unfolded into the financial crisis 2007 to 2010.

This was then further exacerbated by a panicked reaction of the global financial regulators as well as market participants. For instance, the decision to withdraw formal support for Lehman Brothers in September 2008: I remember working for one of my clients who was at that time holding one of the largest portfolios of structured finance bonds—approximately 1,100 bonds worth around £45bn at the time—and many of these bonds were in one way or another exposed to Lehman credit risk as counterparties. The impact of Lehman’s bankruptcy on those bonds as well as countless transactions where it acted as credit default swap (CDS) or interest rate swap (IRS) counterparty was almost impossible to assess—you can imagine the tension in the air; something I will never forget.

Some call this “the law of unintended consequences” and I guess they are right. These panicky decisions were taken in a matter of days—sometimes ...