The Art of Credit Derivatives: Demystifying the Black Swan

24

Conclusion

Sometimes I lie awake at night, and I ask, “Where have I gone wrong?” Then a voice says to me, “This is going to take more than one night.”

Charles M. Schulz, Charlie Brown in “Peanuts”

 

 

The main topic in this book is the securitization business model for financial institutions. From the originator point of view it permits the financial institution to distribute idiosyncratic risks to the market and remain focused on the origination process. From the investor point of view one is less exposed to idiosyncratic risks, increasing diversification and potentially the level of systemic risk. It increases the level of economic activity by increasing the levels of consumption while reducing the prices of goods and services, making them accessible to the whole population. However, the benefits come via increasing leverage. To avoid increases in the levels of systemic risk having a catastrophic impact on economic activity, as has happened since June 2007, the leverage ratios of a financial institution need to be carefully monitored and appropriately managed in accordance with the point in time of the economic cycle and the nature and long-term strategic goals of the different activities within the financial institution.

The inappropriate framework for handling securitization instruments in the portfolios of financial institutions is responsible for the huge losses observed since June 2007. We have shown that the deterioration in the MBS market was certainly observable in ...