Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors

CHAPTER 1

Introduction

Brian P. Lancaster

Senior Analyst

Wachovia Capital Markets, LLC

Glenn M. Schultz, CFA

Senior Analyst

Wachovia Capital Markets, LLC

Frank J. Fabozzi, Ph.D., CFA

Professor in the Practice of Finance

Yale School of Management

Since the summer of 2007 and as this book goes to press in late 2007, it has been difficult to ignore the news on television, in the print media, and online without one or more of the following financial instruments mentioned: “subprime ABS CDOs,” “structured finance products,” and “credit derivatives.” Even the popular web siteYouTube.com has seen the posting of numerous comedy skit videos and music videos about these financial instruments.

This greater awareness of the new media, comedians, and would-be musicians was obviously due to the 2007 subprime residential mortgage-backed security crisis. These terms have been referred to in some media reports as financial “toxic waste.” While real credit issues have surfaced in subprime ABS and some CDOs, it is important to keep the current turmoil roiling the structured product markets in perspective. Securitized subprime mortgage backed securities represent 6% of the approximately $10 trillion structured products markets which consists of a wide variety of assets ranging from commercial real estate loans, to credit card debt to equipment leases, most of which have performed as well as if not better than equivalent rated corporate bonds. Put another way 94% or about $9.4 trillion of structured ...