PM&IA Assignment_____________________________________________________________

Malaysia Campus

Nottingham University Business School

MBA Programme

Portfolio Management and Investment Analysis (N1DM29)

Convenor: Dr. Ghulam Sorwar

Assignment on:

Credit Crunch

Soh Chiew, Khor (UNIMKL 004178)

Zhijing, Eu (UNIMKL 004151)

Shoun Shin, Leow (UNIMKL 004205)

Soon Hek, Lim (UNIMKL 004176)

Date: 31.07.2008

COPY I

Abstract

_____________________________________________________________

PM&IA (N1DM29) Page 1/35

PM&IA Assignment_____________________________________________________________

This paper will focus on the basic principles of credit risk transfer, the factors

that lead up to the ongoing global credit crisis, the dire consequences

resulting from the crisis, and suggestions on preventive measures to avoid a

repeat scenario.

A key finding from this paper is that the speed of transmission and severity of

the credit crisis can be traced to the fundamental issue of asymmetric

information within the structure of the credit market that lead to moral

hazard and adverse selection exacerbated by a climate of low interest rates,

a boom in the housing sector and poor corporate governance.

Improvements to the existing financial controls must focus on the creation

and enforcement of mechanisms to promote much more transparency and

fair competition in credit marketplace transactions, standardization of risk

management methodologies, and stronger accountability and responsibility

in the oversight of regulatory compliance within commercial financial

institutions.

A simple message from this current credit crunch should be clear to all the

key players within the financial marketplace: “There is no such thing as a free

lunch.”

_____________________________________________________________

PM&IA (N1DM29) Page 2/35

PM&IA Assignment_____________________________________________________________

Table of Contents

1.0 Credit Crunches and Financial / Economic Crises ..................................3

2.0 Definition of Credit Risk .........................................................................4

3.0 Derivative Instruments ..........................................................................5

3.1 Common Credit Derivative Instruments ......................................5

3.2 Credit Derivative Instruments Market ..........................................6

4.0 The Causes of Credit Crunch ..................................................................7

5.0 Contagion Effect & Global Impact ........................................................10

5.1 US : Bear Sterns ........................................................................11

5.2 UK : Northern Rock ....................................................................12

6.0 Preventive Measures ............................................................................13

_____________________________________________________________

PM&IA (N1DM29) Page 3/35

PM&IA Assignment_____________________________________________________________

6.1 Improvements in Accountability in Regulatory Compliance .......14

6.2 Transparency and Fair Competition ...........................................15

6.3 Standardization of risk management methodologies ................16

6.4 The Emergence of the Islamic Banking/ Finance .......................17

7.0 Conclusion ...........................................................................................17

8.0 References ...........................................................................................18

9.0 Bibliographies ......................................................................................22

Words Count: approximately 3163

1.0 Lim : Factors that have lead up to the credit crunch.

What Is a Credit Crunch?Credit Crunches and Financial/Economic

Crises

Credit Crunches and Financial / Economic Crises

Historically, the world has witnessed a series of credit crunches

stemmed from a diverse form of financial or economic crises such as

1990 recession in US, stagnation of Japan economy in 1990s, 1997-98

Asian financial crisis, Argentina peso crisis in 2002 and the most recent

one, the US’s subprime-mortgage debacle in 2007. The subprime

mortgage turmoil has caused massive write-downs in several major

global financial institutions with fire sale of Bear Steams,

nationalization of Northern Rock and liquidation of Carlyle Capital

investment fund.

_____________________________________________________________

PM&IA (N1DM29) Page 4/35

PM&IA Assignment_____________________________________________________________

There are few existing theories regarding credit crunches, in each of

these, a credit crunch is defined as a reduction in the available supply

of credit. Bernanke and Lown (1991) define a credit crunch as decline

in the supply of credit that is abnormally large for a given stage of

business cycle,. A whereas Owens and Schreft (1992) define a credit

crunch as a period of sharply increased of non-pricing rationing and

according to Scott (2003), a credit crunch is a period during which

borrowed funds are difficult to obtain, even if funds can be found,

interest rates are very high.

While the outcome is the same under each interpretation – the decline

of loan supply, however the cause of this phenomenon may differs.

The next section will shed some light on the causes of credit crunch

stemmed from subprime mortgage debacle.

Historically, credit crunches often stem from financial or economic

crises such as 1990 recession in US, stagnation of Japan economy in

1990s, 1997-98 Asian financial crisis, Argentina peso crisis in 2002.

Although the outcome is the same in each case – the decline of loan

supply, the specific causes of this phenomenon may differs.

The most recent instance is the US subprime-mortgage debacle in

2007 which has directly (and indirectly) caused massive write-downs in

several major global financial institutions. It is widely held that this

particular crisis had it’sits roots in the mismanagement of credit risk

transfer processes within the global financial system.

This paper will focus on the how credit risk transfer works , the factors

that lead up to the crisis, the dire consequences resulting from the

crisis , and provide some suggestions on future preventive measures

to avoid a repeat scenario.

_____________________________________________________________

PM&IA (N1DM29) Page 5/35

PM&IA Assignment_____________________________________________________________

2.0 Definition oOf Credit Risk

Credit risk arises whenever a lender originates a loan due to the risk of

the borrower to fail to pay. Reasons for this could arise be due to credit

events such as bankruptcy, default, debt restructuring or delinquency.

Traditionally, lenders have dealt with credit risk through the use of

financial guarantee agreements and/or collateral securities (Kothari ,

2002).

3.0 Common Credit Derivative Instruments

3.1 Common Credit Derivative Instruments

In the early 1990s in the United States, the credit derivatives

market developed to meet large banks’ need ofto managinge

their risk exposure to large lenders. The earliest credit derivative

instrument, the credit default swap (CDS) was invented in 1995

by Blythe Masters who was then the head of JP Morgan’s Global

Credit Derivatives group (Tett, 2006).

Credit derivatives differ from traditional credit risk management

in that these instruments were concluded thru a standard

master agreement, subject to ongoing market valuation and did

not constitute a claim on the debtor of the underlying position

(Kothari, 2002). Aside from the improvement in risk

management of market traders, these instruments improved

market liquidity of otherwise illiquid loans, allowed for risk

seperationseparation of credit risk from other asset risks and

presented large financial institutions with a reliable funding

source (Choudhury, 2006).

_____________________________________________________________

PM&IA (N1DM29) Page 6/35

PM&IA Assignment_____________________________________________________________

Credit derivative instruments are built on the concept of trade in

risk transfer without direct ownership of the underlying

reference asset. The CDS (Credit Default Swap) is the most

common credit derivatives instrument. A CDS is similar to an

insurance policy where issuers of a debt (protection buyer)

enters into an agreement to make periodic payments to a

counterparty (protection seller) in return for the promise of a

pay-off if the third party ( The “reference entity”, i.e. the

borrower of the initial issue of debt) defaults on the re-payment

of the debt.

The CDS contract price is quoted in terms of a premium of basis

points against the reference credit asset. CDS pricing depends

on the expected recovery rates associated with the reference

entity and the protection seller, credit risk of the protection

seller and the default correlation between the reference entity

and the protection seller .(Bomfim, 2001). The most important

factor is the credit quality of the reference credit asset where

the poorer the credit quality, the greater the risk of default but

also the greater the premium/reward.

CDS reference only single entities. However CDS--s were soon

followed by collateralized debt obligation (CDO) instruments.

CDOs are a structure of fixed income securities whose cash

flows are linked to the incidence of default in a pool of debt

instruments such as loans or other asset backed securities such

as mortgatesmortgages that cover multiple reference entities .

(Lehman Brothers Guide).

3.2 Credit Derivative Instruments Market

_____________________________________________________________

PM&IA (N1DM29) Page 7/35

PM&IA Assignment_____________________________________________________________

This securitisationsecuritization in CDOs allows credit risk to be

transferred to the capital markets thru the act of embedding a

credit derivative feature into a capital market security. CDOs are

then marketed thru the formation of special investment vehicle

(SIV) companies which transfer credit risk from protection

buyers to investors by creating securities associated with

differing “tranches” of credit quality based on the initially poor

credit quality underlying asset that can be re-sold to match the

risk-return appetite level of investors.

There is no agreed single model that can provide a fair value for

these credit derivative instruments. In practice rating agencies

such as Standard & Poor, Moody’s or Fitch provide information

based on historical default probabilities. Also the mathematics

involved in the modellingmodeling the probability of default is

complex. In a practice many banks use in-house valuation

models but the wide range of differences in assumptions and

methodologies across models often lead to different results.

Credit derivative contracts are not publicly traded on exchange

markets and instead often rely on investment banks to privately

match counterparties in Over The Counter (OTC) transactions.

Therefore credit derivative trades participants tend to be

institutional investors such as banks, securities houses, hedge

funds or insurance companies rather than retail investors.

4.0 The Causes of Credit Crunch

The genesis of the US subprime meltdown in mid 2007 can be traced

to the housing boom of 2001-05. Additionally, low interest rates, .

increasing foreclosure rates and unwillingness of many homeowners to

_____________________________________________________________

PM&IA (N1DM29) Page 8/35

PM&IA Assignment_____________________________________________________________

sell their homes at reduced market prices significantly all contributed

to the increase in the supply of housing inventory.

The housing markets thrived amid historical low interest rate and at

the same time, the lenders became more creative, and enticed new

and increasingly less creditworthy home buyers into the market with

exotic mortgages, such as “interest only’ loans and “option adjustable

rate” mortgages (option ARMs).

Low interest rate, Eeasy credit, coupledombined with the assumption

that housing prices would continue to appreciate, encouraged many

subprime borrowers to obtain exotic mortgages such as Adjustable-

Rate-Mortgage’s (ARM). Option ARMs accounted 8.9% of mortgages

written in 2006 (Ivry and Shenn, 2008). These loans involve low or no

down payments and initially carry very low “teaser” rate, but then are

later reset in a way that causes the minimum payment to skyrocket.

Option ARMs accounted 8.9% of mortgages written in 2006 (Ivry and

Shenn, 2008).

This excess supply of home inventory placed significant downward

pressure on prices. Once housing prices started depreciating

moderately in many parts of the U.S., refinancing became more

difficult. Some homeowners were unable to re-finance and began to

default on loans as their loans reset to higher interest rates and

payment amounts. Other homeowners, facing declines in home market

value or with limited accumulated equity, choose simply to stop paying

their mortgage.

In addition, theAnother underlying factor was the increase in

unregulated mortgage brokers became the key player in the market;

they who accounted for 80% of market share of all mortgages

origination by 2006 (Whalen, 2007). The brokers are motivated by

commission, and do not hold loan or have long-term relationship with

borrowers . Ttherefore they pushed option ARMs hard as option

_____________________________________________________________

PM&IA (N1DM29) Page 9/35

PM&IA Assignment_____________________________________________________________

ARMsthese exotic mortagatesmortgages offer the brokers high

commissions.

Besides that they do not hold loan and do not have long-term

relationship with borrowers. This has driven further growth of option

ARMs.

With theThe growing utilization of complex structured credit products

through securitization of mortgagess, it hasalso increased uncertainty

about the valuation of financial assets. The high leverage embedded in

these products tends to blur the size of commitment in each layer of

securitization. This “originate-to-distributetransfer” model of financing

has weakened the link between lenders and borrowers, and

consequently, diluted the incentives to rigorously assess the credit

worthiness of the borrower and to monitor the obligator’s financial

state. (The Economist, 2008). Among theThe biggest purchasers of

such structured products have been hedge funds, which took

advantage of their largely unregulated status and use these mortgage

bundles as collateral for highly leverages loans – often using the loans

to purchase still more mortgage bundle. This is the key issue of

subprime mortgage mess andlack of structural regulation underscores

one of the key structuralal weaknessweaknesses in the evolution of

modern credit market.

Another key elementfactor behind the 2007 credit crunch is the

conflict of interest among credit-rating agencies. These agencies not

only rate debt packages but also offer the issuer assistancehelp in

constructing the product in order to obtain certain rating. This service

has become a lucrative business for the rating agencies, for instance,

structured finance deals accounted 40% of Moody’s total revenue in

2006 (Levitt, 2007). In addition, the rating agencies are paid by the

issuers of the securities, not by investors. Hence, they are always in

the pressure to providegive good rating unless absolutely unavoidable

(Howley, 2006).

_____________________________________________________________

PM&IA (N1DM29) Page 10/35

PM&IA Assignment_____________________________________________________________

As the result of above mentioned situations, the subprime mortgage

market , with an increasing portion made to borrowers with less-than-

perfect credit histories, grew rapidly after 2003. However,, as the the

Fed began to riseincrease in the interest rate in July 2004 by the Fed

and the subsequent slowdown in real estate market which has built

have caused a substantial increase of default on US subprime

mortgages. excess supply of home inventory placed significant

downward pressure on prices. Hence, housing prices started

depreciating moderately in many parts of the U.S., refinancing became

more difficult. Some homeowners were unable to re-finance and began

to default on loans as their loans reset to higher interest rates and

payment amounts. Other homeowners, facing declines in home market

value or with limited accumulated equity, choose simply to stop paying

their mortgage. This has caused a substantial increase of default on US

subprime mortgages. This quickly spilled over onto the balance sheet

of hedge funds and other investment funds and has also affected

banks through their off-balance sheet financial “conduits” – structured

investment vehicle (SIV), as SIVs were brought back onto banks’

balance sheet when asset values declined sharply. (Lee and Park,

2008).

Uncertainty about the valuation, disclosure of structure products and

rising risk aversion, has since spread the contagion. As financial

institutions have become concerned about counterparty risk and

unknown exposure to subprime mortgages and related credit

derivatives, this added pressure on assessment risk has driven

financial institutions to become very cautious and hoard liquidity.

Consequently, strains in the short-term funding markets in the US and

elsewhere – notably interbank and asset-back commercial paper

markets have intensified and by August 2007 a third of home loans

originated by mortgage brokers failed to close due to no take-up from

investors (Whalen, 2007),

_____________________________________________________________

PM&IA (N1DM29) Page 11/35

PM&IA Assignment_____________________________________________________________

basically by that moment a full-blown of credit crunch phenomenon

has arrived. As Whalen (2007) put it, the US credit crunch of 2007 can

aptly be described as a “Minsky moment”.

Z : Main types of financial instruments which have been used to deal

with the credit risk and how they have been priced and how they

have been sold

Credit risk arises whenever a lender originates a loan due to the risk

of the borrower to fail to pay. Reasons for this could arise be due to

credit events such as bankruptcy, default, debt restructuring or

delinquency. Traditionally, lenders have dealt with credit risk through

the use of financial guarantee agreements and/or collateral securities

(Kothari 2002).

In the early 1990s in the United States, the credit derivatives market

began to develop to meet large banks need to manage their risk

exposure to large lenders. The earliest credit derivative instrument,

the credit default swap (CDS) were invented in 1995 by Blythe

Masters who was then the head of JP Morgan’s Global Credit

Derivatives group (G.Tett 2006).

These credit derivatives differ from traditional credit risk

management in that these instruments were concluded thru a

standard master agreement, subject to ongoing market valuation and

did not constitute a claim on the debtor of the underlying position

(Kothari 2002). Aside from the improvement in risk management of

market traders, these instruments improved market liquidity of

otherwise illiquid loans, allowed for risk seperation of credit risk from

other asset risks and presented large financial institutions with a

reliable funding source (Choudhury 2006).

Credit derivative instruments are built on the concept of trade in risk

transfer without direct ownership of the underlying reference asset.

_____________________________________________________________

PM&IA (N1DM29) Page 12/35

PM&IA Assignment_____________________________________________________________

The CDS (Credit Default Swap) is the most common credit derivatives

instrument.A CDS is similar to an insurance policy where issuers of a

debt (protection buyer) enters into an agreement to make periodic

payments to a counterparty (protection seller) in return for the

promise of a pay-off if the third party ( The “reference entity”, i.e the

borrower of the initial issue of debt) defaults on the re-payment of

the debt.

The CDS contract price is quoted in terms of a premium of basis

points against the reference credit asset. CDS pricing depends on the

expected recovery rates associated with the reference entity and the

protection seller, credit risk of the protection seller and the default

correlation between the reference entity and the protection seller.

(Bomfim 2001). The most important factor is the credit quality of the

reference credit asset where the poorer the credit quality, the greater

the risk of default but also the greater the premium/reward.

CDS only single reference entities. However CDS-s were soon

followed by the introduction of collateralized debt obligation (CDO)

instruments. CDOs are a structure of fixed income securities whose

cash flows are linked to the incidence of default in a pool of debt

instruments such as loans or other asset backed securities such as

mortgates that cover multiple reference entities.(Lehman Brothers

Guide)

This securitisation in CDOs allows credit risk to be transferred to the

capital markets thru the act of embedding a credit derivative feature

into a capital market security. CDOs are then marketed thru the

formation of special purpose vehicle companies which transfer credit

risk from protection buyers to investors by creating securities

associated with differing “tranches” of credit quality based on the

initially poor credit quality underlying asset that can be re-sold to

match the risk-return appetite level of investors.

_____________________________________________________________

PM&IA (N1DM29) Page 13/35

PM&IA Assignment_____________________________________________________________

However an issue in the pricing of credit derivative instruments there

is no single clear agreed model that can provide a fair value for these

instruments. In practice rating agencies such as Standard & Poor,

Moody’s or Fitch provide information based on historical default

probabilities but as witnessed by the recent turn of events in the sub

prime credit crisis these values may not completely accurate.Also the

mathematics involved in the modelling the probability of default is

complex. In a practice many banks use in-house valuation models but

there are wide range of differences in assumptions and

methodologies across models that lead to different results.

Credit derivative contracts are not publicly traded on exchange

markets and instead often rely on investment banks to privately

match counterparties in Over The Counter (OTC) transactions.

Therefore credit derivative trades participants tend to be institutional

investors such as banks, securities houses, hedge funds or insurance

companies rather than retail investors.

However there are efforts to increase transparency , regulation and

standardisation. As an example, most credit derivative contracts now

reference standard definitions published by the International Swaps

and Derivatives Association. Also more recently, some financial

exchange organisations have launched standardised indices for

credit derivatives such as Itraxx in Europe (MarkIt Website) and the

fully exchange-traded CME credit index event contracts originated in

the Chicago Merchantile Exchange which reflects a shift towards

centrally cleared standardised contracts that reference a fixed

number of obligors.(CME Website 2007)

_____________________________________________________________

PM&IA (N1DM29) Page 14/35

PM&IA Assignment_____________________________________________________________

Albert : problems they are currently facing

5.0 Contagion Eeffect & of the credit crisis and impact on global

levelGlobal Impact

In recent years, overbuilding of American home during the boom

period, increasing foreclosure rates and unwillingness of many

homeowners to sell their homes at reduced market prices have

significantly increased the supply of housing inventory available. This

excess supply of home inventory places significant downward pressure

on prices. As prices decline, more homeowners are at risk of default

and foreclosure. Easy credit, combined with the assumption that

housing prices would continue to appreciate, also encouraged many

subprime borrowers to obtain Adjustable-Rate-Mortgage’s they could

not afford after the initial incentive period. Once housing prices started

depreciating moderately in many parts of the U.S., refinancing became

more difficult. Some homeowners were unable to re-finance and began

to default on loans as their loans reset to higher interest rates and

payment amounts. Other homeowners, facing declines in home market

value or with limited accumulated equity, are choosing to stop paying

their mortgage.

Many US analysts called it aconsidered domestic problem when the

cCredit crisisCrisis caused by sSubprime mMortgage crisis would

contain landed domestically problem andthat would impact only the

US housing markets-- one that would only affect US housing markets.

However, almost a year later, it can be seen that this is not the

casethe after-effects of the credit crisis have spreadhad far reaching

consequences through-out the entire global financial system.

_____________________________________________________________

PM&IA (N1DM29) Page 15/35

PM&IA Assignment_____________________________________________________________

For instance, the Bank of China announced in August of 2007, that it

holds $9.7 billion dollars of US Subprime debt (Shaw, 2007)1. In January

of 2008, Korean markets fell due to the "selling spree" of shares

caused by subprime ripple effect of US mortgages (Arirang News, Jan.

2008)2. Because of the global economy, and the huge Subprime "pool"

of mortgages that was bought by investors world wide, the

International Monetary Fund (IMF) “saysestimated that the worldwide

losses stemming from the US subprime mortgage crisis could run to

$945 billion.”

Crisis The crisis has caused panic in financial markets and encouraged

investors to cut off their holding in take their money out of risky

mortgage bonds and shaky equities and divertedput it into

commodities as "stores of value". This has partly contributed to Most

of the recent increases in global food prices, as result of 3 have been

the result of speculation and weakening of US dollarthe collapse in the

value of the US dollar. (MacWhirtler, 2008)4.

Many banks, mortgage lenders, real estate investment trusts (REIT),

and hedge funds suffered significant losses stemmed fromas a result of

mortgage payment defaults or mortgage asset devaluation, with

recognized . As of May 21, 2008 financial institutions had recognized

subprime-related losses and write-downs exceeding U.S. $379 billion

by May, 2008 (Onaran, 2008)5.

1Subprime Effects Felt Worldwide, August 24th, 2007, downloaded at http://www.straightstocks.com/foriegn-markets/subprime-

effects/felt-worlwide2Arirang News, “Subprime Ripple Effect Sends Stocks Down Worldwide”, Jan.23, 2008, downloaded at

http://english.chosun.com/w21data/html/news/200801/200801230005.html3 The cost of food: Facts and figures, May 29th, 2008 downloaded at http://news.bbc.co.uk/2/hi/7284196.stm

4 Mother of all bubbles prepares to burst, downloaded at

http://www.sundayherald.com/news/heraldnews/display.var.2104855.0.mother_of_all_bubbles_prepares_to_burst.php5 Yalman Onaran. "Subprime Losses Top $379 Billion on Balance-Sheet Marks: Table", Bloomberg.com, Bloomberg L.P., 2008-05-

19. Retrieved on 2008-06-04.

_____________________________________________________________

PM&IA (N1DM29) Page 16/35

PM&IA Assignment_____________________________________________________________

5.1 US : Bear Sterns

The credit crisis has also brought down share price of one of

largest US investment bank, Bear Sterns, from $169 to $ 2,

clearly due to the loss of confidence in credit markets. Bear

Sterns had been concentrated its main investments mainly on

sub-prime mortgage instruments, collateralized debt obligations

(CDOs) and other securities which are now seen as highly risky.

Bear Sterns then precipitatingIn the first stage of global credit

crunch when , two of its hedge funds, Bear Stearns High-Grade

Structured Credit Fund and Bear Stearns High-Grade Structured

Credit Enhanced Leveraged Fund, had lost nearly all of their

value amid a rapid decline in the market for subprime

mortgages. Following thatSubsequently, Bear Sterns then

pledged a collateralized loan of up to $3.2 billion to "bail out"

the Bear Stearns High-Grade Structured Credit Fund, while

negotiating with other banks to loan money against collateral to

another fund (Creswell et. al., 2007)6. Now However due to a

loss of confidence, other banks werhavee become unwilling to

invest money in Bear Stearns to keep its operations going and ,

leading Bear Sterns no longer has enough cash on hand, known

as liquidity, to fund its operationsto a liquidity crisis that quickly

escalated to a solvency crisis (BBC News, March 2008).7

If Bear Stearns collapsed, it would be forced to sell its assets,

such as sub-prime mortgage securities, into the market at cut

down prices. This would have lowered their value even further

and that could have affected the solvency of many other big US

banks due to the counterparty liability complexities involved. In

a vicious cycle, iIf other largebig banks went bust, then credit

would dry up rapidly across the whole economy andthen slowing

6 Creswell, Julie & Bajaj, Vikas, New York Times (2007-06-23), “$3.2 Billion Move by Bear Stearns to Rescue Fund”,

http://www.nytimes.com/2007/06/23/business/23bond.html.7 “Q&A: Bear Stearns banking crisis”, 17 March 2008, downloaded at http://news.bbc.co.uk/2/hi/business/7296827.stm

_____________________________________________________________

PM&IA (N1DM29) Page 17/35

PM&IA Assignment_____________________________________________________________

down economic activity, contagion effect of this credit crisis

cwould be leading to another Great Depression. Therefore,

JPMorgan Chase, in conjunction with the Federal Reserve Bank of

New York stepped in quickly by , providinged a 28-day

emergency loan to Bear Stearns in order to prevent the potential

market meltdowncrash that would result from Bear Stearns

becoming insolvent (Associated Press, March 2008)8.

5.2 UK : Northern Rock

Northern Rock (NR) was a building society and converted to a

stock-form UK bank in 1997, its business grew rapidly to become

Britain’s fifth-biggest mortgage provider. NR’s success crucially

hinged on a particular business model that relied heavily on

securitization and funding from wholesale markets, rather than

“conventional” model of banking of funding from retails deposits

and holding the loans on the balance sheet until maturity

(Yorulmazer, 2008). Hence, business model of NR made it

vulnerable to adverse development in wholesale markets.

The contagion effect from US subprime crisis led to a drying up

of liquidity in short-term debt markets such as the asset-backed

commercial paper (ABCP) where “conduits” and SIV rely on.

When the ABCP market seized to provide the needed liquidity,

“conduits” had no alternative but to tap their bank lines of

credit. But due to uncertainty issue associated with liquidity

needs and asymmetric information on complex financial

structures led banks hoard liquidity, which resulted in drying up

of liquidity in wholesale markets and the LIBOR reaching record

high levels (Yorulmazer, 2008). As the result, this has adversely

8 Associated Press, “JPMorgan Chase Funding Bear Stearns”, March 14, 2008, downloaded at

http://biz.yahoo.com/ap/080314/bear_stearns.html.

_____________________________________________________________

PM&IA (N1DM29) Page 18/35

PM&IA Assignment_____________________________________________________________

affected NR that depended on securitization and whole markets

for funding.

Subsequently, this triggered an old-fashioned bank run, the first

run in UK since the collapse of Overend Gurney in 1866.

However, the run has been contained by the bailout

announcement of the UK government that guaranteed all

deposits in NR (Giles et. al., 2007). Eventually, Northern Rock

was nationalized by the Bank of England in February 2008 after

an unsuccessful attempt to search for a buyer for Northern Rock

(Stephen Castle, 2008).

Elsewhere,half a world away, Northern Rock, being one of the

top five mortgage lenders in UK in term of gross lending, to free

capital for its rapid growth in mortgage lending, sold its credit

card business to The Co-operative Bank for a profit of more than

£7 million to free up capital for its rapid growth in mortgage

lending. Until November 2007 Northern Rock continued to sell

credit cards under their own brand through The Co-operative

Bank9.

The decision to stop was made before the 2007 crisis and

Northern Rock was struggling to raise money to fund its lending.

However, fFollowing the widespread losses made by investors in

loans to US homebuyers with poor credit history, investors have

become wary of buying all mortgage debt, including Northern

Rock's. The bank's assets were always sufficient to cover its

liabilities, but it had a liquidity problem because institutional

lenders became nervous about lending to mortgage banks

following the US sub-prime crisis.

9 Sean Farrell, The Independent, February 12, 2008, "Northern Rock and Co-op cancel credit card tie-up", downloaded at

http://www.independent.co.uk/news/business/news/northern-rock-and-coop-cancel-credit-card-tieup-781102.html

_____________________________________________________________

PM&IA (N1DM29) Page 19/35

PM&IA Assignment_____________________________________________________________

In general, aAll banks are had having greater difficulties than

normal getting in obtaining funding from the market but

specifically, Northern Rock is much more exposed than its rivals

to this disaster for mortgage debt as its business is

overwhelmingly focused on providing mortgages, rather than

other kinds of banking business.10 as a specialist mortgage

lender, no-one really wants to lend to Northern Rock. Northern

Rock was then forced to turn to Bank of England for emergency

funding to finance its lending ever since money markets seized

up over the summer 2007. The British Government moved to

reassure investors with the bank, with account holders urged not

to worry about the bank going bust11. Northern Rock is much

more exposed than its rivals to this disaster for mortgage debt

as its business is overwhelmingly focused on providing

mortgages, rather than other kinds of banking business.12

6.0

10 "Northern Rock gets bank bail out", September 13, 2007, downloaded at http://news.bbc.co.uk/2/hi/business/6994099.stm

11 Chris Giles, Jane Croft, Kate Burgess and Gillian Tett, "£3bn lent to Northern Rock", Septemnber 22, 2007, The Financial Times

Limited, downloaded at http://www.ft.com/cms/s/0/dbe3a046-68a4-11dc-b475-0000779fd2ac.html?nclick_check=1.12

"Northern Rock gets bank bail out", September 13, 2007, downloaded at http://news.bbc.co.uk/2/hi/business/6994099.stm

_____________________________________________________________

PM&IA (N1DM29) Page 20/35

PM&IA Assignment_____________________________________________________________

7.0 Soh Chiew : how to avoid scenarios in future

7.0 Preventive Measures

Subprime mortgage-backed securities that sparked the credit crunch

and crisis represent an extreme version of the credit risk transfer

process in which the core banks have engaged for a long time pursuing

the business model for originate of loan and distribute the underlying

risk to a myriad of outside investors. Preventive actions that intend to,

which deter the re-the difficulty of occurrence of the current credit

crisis must necessarily focus on minimisingminimizing the possibility of

circumstances that encourage dysfunctional financial

behaviouralbehavioral such as conflict of interest , undesirable

eventsmoral hazard or adverse selection .is the main defense to avoid

the above scenarios in future Therefore, improvements to the existing

financial controls must focus on the creation and enforcement of

mechanisms to promote much more transparency and fair competition

in credit marketplace transactions, standardisationstandardization of

risk management methodologies, and stronger accountability and

responsibility in the oversight of regulatory compliance within

commericalcommercial financial institutions. (Riehl, 2008)

Improvements In Accountability In Regulatory Compliance .

Government has a role to play in advancing people prosperity by

providing stable macroeconomic and financial conditions for

sustained growth, demanding transparency and ensuring fair

competition in the marketplace.

7.1 Improvements in Accountability in Regulatory

Compliance

_____________________________________________________________

PM&IA (N1DM29) Page 21/35

PM&IA Assignment_____________________________________________________________

Firstly, the heightened competition generated excessive risk-

taking by banks which was not supported by commensurate

enhancements to corporate governance processes and the risk

management infrastructure. This resulted in a significant

underestimation of risks being borne by banks. Effective

corporate governance and a good risk management practice by

banks that will protect against the seduction of high yields and

profits which result from assuming excessive and unpredictable

credit risks . (Riehl, 2008)

An applied example would be such as credit crunch is the use of

the Product Program Processs , building that build a sound

internal control and enhance effective internal audit function.

The Product Program Process scrutinizing scrutinizes and x-

raying rays complex products such as sSub- prime mortgage, for

assessing credit and liquidity risks. It and helps assure customer

suitability and appropriateness of a financial product . (Riehl,

2008). A Home Score system that will allow consumers to find

out more about mortgage offers and their capability to make

payments can be proposed. (Obama’08, 2008)

The Committee of Sponsoring Organizations (COSO) internal

control is assuring segregation of responsibilities, strengthen

managements’ oversight responsibilities, the use of best

practices protecting against errors and frauds which resulted the

credit crunch. A tough new penaltiesTough new penalties on

fraudulent lenders can be proposed.Toproposed . (Obama’08,

2008). To enhance the internal audit function’s effectiveness, an

audit quality assurance should be developed by professional

staff and reporting directly to the Board of Independent

Directors. (Riehl, 2008)

_____________________________________________________________

PM&IA (N1DM29) Page 22/35

PM&IA Assignment_____________________________________________________________

7.2 Transparency and& Fair Competition

The subprime problem is a clear reminder of how fast and

decisively market conditions can change when the credit and

liquidity risk landed back on bank. It points to the danger of

thinking that banks will have enough lead-time to ramp up their

capital as economic conditions deteriorate. Regulators such as

central banks need to find a way to deal with the off-balance

sheet operations of banks that to improve transparency

concerning banks’ effective exposure to risk and ensure that

banks have a strong enough capital cushion to withstand a

downturn. (FDIC, 2007)

Furthermore, regulators must remain vigilant on trading activity

that crosses the line to market manipulation. The regulators

should investigate and punish any kind of market manipulation.

For instance, Central Bank of Malaysia continues to direct

significant effort and resources towards strengthening

surveillance capabilities enhanced with more holistic risk

assessments to detect, monitor and to deal anticipatorypre-

emptively with emerging risks and vulnerabilities in the financial

system. (Riehl, 2008)The enhanced supervisory intervention

powers such as strengthen safety net by the lender of last resort

is to be embodied in the amendments to various registrations

administered by central bank.

Investors were also over-reliant on credit ratings which were

based on methodologies which lacked transparency about the

rating parameters. Improvement of the credit rating quality play

important role to increase credit worthiness and to avoid future

credit scrunch scenarios. The rating process should be re-

examined and improved through such means as third party

reviews of rating processes to encourage greater transparency _____________________________________________________________

PM&IA (N1DM29) Page 23/35

PM&IA Assignment_____________________________________________________________

to the risks involved with any investments products (Riehl,

2008).

. (Wikepedia, 2008)

Furthermore, banks themselves should be responsible for

educating the customer on the fundamental mechanisms, logic

and the intent of a product and to evaluate the suitability and

appropriateness of a product for a given customer. (Riehl, 2008)

7.3 StandardisationStandardization of risk management

methodologies

The capacity for regulatory framework stimulus to be

undertaken to manage the risks to growth is important to avoid

the credit crunch scenario such as Basel II (the second of the

Basel Accords), which are issued by the Basel Committee on

Banking Supervision. Regulatory frameworks such as The

purpose of Basel II, (the second of the Basel Accords), which are

issued by the is Basel Committee on Banking Supervision, canto

also drive the creation ofcreate an international standards that

banking regulators can use to set up rigorous risk and capital

management requirements requirements. designed to ensure

that a bank holds capital reserves appropriate to the risk the

bank exposes itself to through its lending and investment

practices and to ensure more risk-sensitive capital. Basel II uses

a "three pillars" concept – minimum capital requirements

(addressing risk), supervisory review and market discipline – to

promote greater stability in the financial system (FDIC, 2008).

. (wikipedia, 2008)

Nevertheless, there are criticismstisms on whether the Basel II

advanced approaches can tie capital requirements to risk is

_____________________________________________________________

PM&IA (N1DM29) Page 24/35

PM&IA Assignment_____________________________________________________________

subjective. Banks could be measuring identical risks in different

ways. Its wide latitude in capital requirements could lead to

inconsistency across banks, thus it could lead regulators to

accept capital requirements that are too low. (FDIC, 2007) In

general, an inadequate Pillar 1 capital requirement,

supplemented by inadequate consideration of potential stress

under Pillar 2, will end up with inadequately capitalized bank.

Given this uncertainty, regulators must proceed with caution.

Safeguards against precipitous and open-ended declines in risk

based capital requirements should be removed only when the

global framework has proved its capital sufficiency and

reliability.

Another notable improvement is that most credit derivative

contracts now reference standard definitions published by the

International Swaps and Derivatives Association. Also more

recently, some financial exchange organisationsorganizations’

have launched standardisedstandardized indices for credit

derivatives such as Itraxx in Europe (MarkIt Website) and the

fully exchange-traded CME credit index event contracts

originated in the Chicago MerchantileMercantile Exchange which

reflects a shift towards centrally cleared

standardisedstandardized contracts that reference a fixed

number of obligors.(CME Website 2007)

7.4 The Emergence of the Islamic Banking/ Finance

Islamic banks have been largely shielded from the U.S.

mortgage crisis because Islamic banks shunned collateralized

debt obligations linked to subprime, or high risk, mortgages

because such complex instruments do not comply with Muslim

_____________________________________________________________

PM&IA (N1DM29) Page 25/35

PM&IA Assignment_____________________________________________________________

Sharia law. For instance, lenders in the Gulf and Malaysia, the

global hubs of Islamic finance, barely reported any subprime

related losses. (Thomson Reuters, 2008) Hence, conventional

banking could do well to learn from Islamic banking principles in

area of financial risk management. Investors were over-reliant

on credit ratings which were based on methodologies which

lacked transparency about the rating parameters. Improvement

of the credit rating quality play important role to avoid the credit

scrunch scenario in future. It helps evaluate and report on the

risk involved with various investment alternatives. The rating

process can be re-examined and improved such as third party

reviews of rating processes to encourage greater transparency

to the risks involved with any investments products. (Wikepedia,

2008)

Going forward, embedded cooperation arrangements among the

central bank and various regulatory agencies in advancing

cross-border cooperation in the region for dealing with crisis will

continue be further enhanced by various mechanisms for

cooperation and coordination in surveillance, information

sharing and crisis management. Furthermore, the banks are

responsible for educating the customer on the fundamental

mechanisms, logic and the intent of a product and to evaluate

the suitability and appropriateness of a product for a given

customer.

A simple message from this current credit crunch should be

clear to all the key players (losers) within the financial

marketplace starting from institutions that originate or trade in

credit derivative products to the rating agencies who assess

credit risk to government regulators who establish and monitor

the guidelines that shape the market to the (largely)

unassuming public investors: There is no such thing as a free

_____________________________________________________________

PM&IA (N1DM29) Page 26/35

PM&IA Assignment_____________________________________________________________

lunch. Any iInvestment schemes orand businesses offering profit

margins significantly higher than the “risk-free” rate of return

must be must be subjected to the same scrutiny as investments

that cause losses. Whenever the returns are high, there must be

notable risks because there is no free lunch.

8.0 Conclusion

A simple message from this current credit crunch should be clear to all

the key players (losers) within the financial marketplace starting from

institutions that originate or trade in credit derivative products to the

rating agencies who assess credit risk to government regulators who

establish and monitor the guidelines that shape the market to the

(largely) unassuming public investors:; “There is no such thing as a

free lunch.” Any investment scheme or businesses offering profit

margins significantly higher than the “risk-free” rate of return must be

subjected to the same scrutiny as investments that cause losses.

9.0 References

_____________________________________________________________

PM&IA (N1DM29) Page 27/35

PM&IA Assignment_____________________________________________________________

Lim’s References

[1] Bernanke, Ben S., and Lown, Cara S, 1991, “‘The credit

crunch”’, Brooking Papers on Economic Activity , Issue 2, p.

205-247.

[2] Owens, Raymond E., and Schreft, Stacey L., 1992, “‘Identifying

credit crunches”’, Federal Reserve Bank of Richmond Working

Paper No. 92-1.

[3] Scott, David L., 2003, Wall Street Words: An A to Z Guide to

Investment Terms for Today’”s Investor, Boston: Houghton

Mifflin.

[4] Lee, Jong-Wha and Park, Cyn-Young, 2008, ‘“Global Financial

Turmoil: Impact and Challenges for Asia’”s Financial Systems,

ADB Working paper Series on Regional Economic Integrtaion

No. 18.

[5] Whalen, Charles J., 2007, ‘“The US Credit Crunch of 2007 – A

Minsky Moment’”, The Levy Economics Institute of Bard

College, Public Policy Brief No. 29.

[6] Ivry, B. and Shenn, J., 2008, ‘“Exploding ARMs Roil Bernanke'’s

Drive to Calm Markets’”. Retrieved 29th June, 2008 from

http://www.bloomberg.com/apps/news?

pid=newsarchive&sid=akYNTEygRJH8.

[7] Howley, Kathleen M., 2007, ‘“Rating Subprime Investment

Grade Made `Joke'” of Credit Experts’”. Retrieved 29th June,

2008 from http://www.bloomberg.com/apps/news?

pid=newsarchive&sid=ajdL7eUHeUro.

[8] Levitt, Jr., 2007, ‘“Conflicts and the Credit Crunch’”, Wall Street

Journal (Eastern edition), 7th September.

[9] The Economist, 2008, ‘“Ruptured credit’”, 15th May.

_____________________________________________________________

PM&IA (N1DM29) Page 28/35

PM&IA Assignment_____________________________________________________________

2. Allen and Overy, 2002, Z’s References

3. International Swaps & Derivatives Association “AN

INTRODUCTION TO THE DOCUMENTATION OF OTC

DERIVATIVES”. Retrieved 4th July, 2008 from ALLEN & OVERY

May 2002

http://www.isda.org/educat/pdf/documentation_of_derivatives

.pdf

[1] THE J.P. MORGAN GUIDE TO CREDIT DERIVATIVES. Retrieved

4th July, 2008 from

http://www.investinginbonds.com/assets/files/Intro_to_Credit_D

erivatives.pdf.

[2] Credit Derivatives Explained :Market, Products, and

Regulations. Retrieved 4th July, 2008 from

http://www.investinginbonds.com/assets/files/LehmanCredDeri

vs.pdf.

[3] Bomfim, Antulio N., “Understanding Credit Derivatives and

their Potential to Synthesize Riskless Assets”, Antulio N.

Bomfim , Federal Reserve Board July 11, Retrieved 4th July,

2008 from 2001

http://www.federalreserve.gov/Pubs/feds/2001/200150/200150

pap.pdf

[4] V. Kothari, 2002, “Introduction to Credit Derivatives, Credit

Derivatives and Synthetic Securitisation”., V. Kothari, July 2002

, ISBN Number: 81-901463-0-0Retrieved 4th July, 2008, from

http://credit-deriv.com/introduction%20to%20credit

%20derivatives%20article%20by%20Vinod%20Kothari.pdf.

[5] Tett, G., 2006, “The dream machine: invention of credit

derivatives.” Retrieved 4th July, 2008, from By Gillian Tett,

Published: March 24 2006 15:21 | Last updated: March 24

2006 15:21 http://www.ft.com/cms/s/0/7886e2a8-b967-11da-

9d02-0000779e2340.html?nclick_check=1.

[6]

_____________________________________________________________

PM&IA (N1DM29) Page 29/35

PM&IA Assignment_____________________________________________________________

Shaw, R., 2007, “Albert’s References :

Subprime Effects Felt Worldwide”, 27th August 24th, 2007.,

Retrieved 4th July, 2008, from downloaded at

http://www.straightstocks.com/foriegn-markets/subprime-

effects/felt-worlwide

[7] Arirang News, 2008, “Subprime Ripple Effect Sends Stocks

Down Worldwide”., Retrieved 4th July, 2008, from Jan.23, 2008,

downloaded at

http://english.chosun.com/w21data/html/news/200801/200801

230005.html.

[8] BBC News, 2008, “The cost of food: Facts and figures”, 29th

May 29th. Retrieved 4th July, 2008, from, 2008 downloaded at

http://news.bbc.co.uk/2/hi/7284196.stm

[9] MacWhirter, I., 2008, “Mother of all bubbles prepares to burst”,

Sunday Herald News, 5th July. Retrieved 4th July, 2008, from

http://www.sundayherald.com/news/heraldnews/display.var.21

04855.0.mother_of_all_bubbles_prepares_to_burst.php.

[10] Mother of all bubbles prepares to burst, downloaded at

http://www.sundayherald.com/news/heraldnews/display.var.21

04855.0.mother_of_all_bubbles_prepares_to_burst.php

[[11]] Yalman Onaran, Y., 2008,. "Subprime Losses Top $379 Billion

on Balance-Sheet Marks: Table"., Bloomberg.com, Bloomberg

L.P., 2008-05.19. Retrieved on 4th June, 2008, from

Bloomberg.com. 2008-06-04

[11][[12]] Creswell, Julie & Bajaj, Vikas, 2007, New York Times (2007-

06-23), “$3.2 Billion Move by Bear Stearns to Rescue Fund”.,

Retrieved 4th July, 2008, from

http://www.nytimes.com/2007/06/23/business/23bond.html.

[12][[13]] BBC News, 2008, “Q&A: Bear Stearns banking crisis”, 17th

March. Retrieved 4th July, 2008, from 17 March 2008,

downloaded at

http://news.bbc.co.uk/2/hi/business/7296827.stm.

_____________________________________________________________

PM&IA (N1DM29) Page 30/35

PM&IA Assignment_____________________________________________________________

[13][[14]] Associated Press, 2008 “JPMorgan Chase Funding Bear

Stearns”, March 14th March. Retrieved 4th July, 2008, from ,

2008, downloaded at

http://biz.yahoo.com/ap/080314/bear_stearns.html.

[14][[15]] Yorulmazer, T., 2008, “Liquidity, Bank Runs and Bailout:

Spillover Effects During the Northern Rock Episode”, Federal

Reserve Bank of New York. Retrieved 4th July, 2008, from

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1107570

[15][[16]] Castle, S., 2008, “Inquiry Opens Into Northern Rock

Bailout”, June 5, 2008, Retrieved 9th July, 2008, from

http://www.nytimes.com/2008/06/05/business/worldbusiness/0

5rock.html?partner=rssnyt&emc=rss.

[16][[17]] Sean Farrell, The Independent, February 12, 2008,

"Northern Rock and Co-op cancel credit card tie-up",

downloaded at

[17][[18]] Chris Giles, Jane Croft, Kate Burgess and Gillian Tett, 2007,

"£3bn lent to Northern Rock", The Financial Time, 22nd

September. Retrieved 4th July, 2008, from

http://www.ft.com/cms/s/0/dbe3a046-68a4-11dc-b475-

0000779fd2ac.html?nclick_check=1.

[18][[19]] Federal Deposit Insurance Cooperation (FDIC), 2007, Risk

Management and Allocation Conference, 25th June. Retrieved

4th July, 2008, from

http://www.fdic.gov/news/speeches/archives/2007/chairman/sp

j 07.html.

[19][[20]] Obama, B., 2008, “Modernizing our regulation of financial

markets.” Retrieved 4th July, 2008, from

http://www.barackobama.com/2008/03/27/in_major_speech_ob

ama_calls_fo.php.

[20][[21]] Reihl, H., 2008, Subprime Crisis Confirms: There”s No Free

Lunch”, Institute Bank-bank Malaysia (IBBM), Issue January-

February 2008, p.6-8.

_____________________________________________________________

PM&IA (N1DM29) Page 31/35

PM&IA Assignment_____________________________________________________________

[21][[22]] Thomson Reuters, 2008, “Islamic banks shielded from

subprime, Bahrain says”, 4th February. Retrieved 4th July, 2008,

from

http://www.reuters.com/article/IslamicBankingandFinance08/id

USL0421657020080204?pageNumber=2.

[22][[23]]

Federal Deposit Insurance Corperation (FDIC), (2007). “ Remarks

By Sheila Bair Chairman, U.S. Federal Deposit Insurance

Corporation; 2007 Risk Management and Allocation Conference,

Paris, France”, Press Releases, 25th June. Downloaded from

http://www.fdic.gov/news/news/speeches/archives/2007/

chairman/spj 07.html

Obama’ 08, (2008). “In Major Speech, Obama Calls For

Modernizing

Our Regulation of Financial Markets”, Obama News and

Speeches,

27th

March. Downloaded from

http://www.barackobama.com/2008/03/27/in_major_speech_obama

_calls_fo.php

Riehl. H., 2008, Subprime Crisis Confirms: There’s No Free Lunch”,

Institute Bank-bank Malaysia (IBBM), Issue January- February 2008,

p.6-8.

Thomson Reuters, (2008). “Islamic banks shielded from subprime,

Bahrain says”, 4th February. Downloaded from

http://www.reuters.com/article/IslamicBankingandFinance08

_____________________________________________________________

PM&IA (N1DM29) Page 32/35

PM&IA Assignment_____________________________________________________________

/idUSL0421657020080204?pageNumber=2

Wikepedia, (2008). "Basel II Accord", Retrieved 26th June 2008.

Downloaded from http://en.wikipedia.org/wiki/Basel_II

Wikepedia, (2008). "Subprime Mortgage Crisis", Retrieved 26th June

2008. Downloaded from

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Soh Chiew’s References

?

Lim’s Bibliography

10.0 Bibliographies

[1] Wallenwein, A., 2007, ‘“Credit Crunch – or Credit Collapse?’”.

Retrieved 28th June, 2008, from

http://www.safehaven.com/article-8972.htm.

[2] Clair, Robert T. and Tucker, P., 1993, ‘“Six Causes of the Credit

Crunch’”, Economic and Financial Policy Review, 3rd Quarter,

p.1-19.

[3] Mishkin, Frederic S., 2007, The Economics of Money, Banking,

and Financial Markets, Eighth Edition, Pearson International, p.

234.

[4] Stiglitz, J., and Weiss, A., 1981, ‘“Credit rationing in markets

with imperfect information’”, American Economic Review,

Issue 71, p.393-410.

[5] K. Choudhury, 2006, “Credit Default Swaps: Development,

Pricing and Correlation To Default Risk”. Retrieved 4th July,

2008, from http://www.crisil.com/crisil-young-thought-leader-

2006/dissertations/Kaushik-Choudhury_Dissertation.pdf

_____________________________________________________________

PM&IA (N1DM29) Page 33/35

PM&IA Assignment_____________________________________________________________

Gibson, M., 2007, “Z’s Bibliography

Credit Default Swaps : Development, Pricing and Correlation

To Default Risk , K.Choudhury 2006

http://www.crisil.com/crisil-young-thought-leader-

2006/dissertations/Kaushik-Choudhury_Dissertation.pdf

[6] Credit Derivatives and Risk Management , Finance and

Economics Discussion Series”. Divisions of Research &

Statistics and MonetaryAffairs Federal Reserve

Board ,Washington,D.C. Retrieved 4th July, 2008, from Michael

Gibson 2007

http://www.federalreserve.gov/Pubs/feds/2007/200747/200747

pap.pdf.

[7] Pool, F., and Mettler, B., 2007, Countdown to Credit Derivative

Futures. Retrieved 4th July, 2008, from

http://www.securitization.net/pdf/Publications/CreditDerivative_

Mar07.pdf.

Countdown to Credit Derivative Futures, Fiona Pool and Betsy Mettler

, Mar 2007

http://www.securitization.net/pdf/Publications/CreditDerivative_

Mar07.pdf

[8] BBA – Credit Derivatives Report 2006

[9] ISDA Market Survey Year End 2007. Retrieved 4th July, 2008,

from http://www.isda.org/statistics/recent.html.

[10] MarkIIt – ITraxx CDS Indices. Retrieved 4th July, 2008, from

http://www.indexco.com/

[11] CME Website - CME Credit Index Event Contracts. Retrieved 4th

July, 2008, from

http://www.cme.com/trading/prd/ir/creditevent.html

[12] Giesecke, K., 2004, “CREDIT RISK MODELING AND VALUATION:

AN INTRODUCTION”. Retrieved 4th July, 2008, from , Cornell

University, Kay Giesecke ,2004

_____________________________________________________________

PM&IA (N1DM29) Page 34/35

PM&IA Assignment_____________________________________________________________

http://www.stanford.edu/dept/MSandE/people/faculty/giesecke/

introduction.pdf.

[13] James, J., 2008, “Credit derivatives - How much should they

cost?” Retrieved 4th July, 2008, from

http://www.financewise.com/public/edit/riskm/credit/cre-

deriv.htm.

Credit derivatives - How much should they cost? , Jessica James

Albert’s Bibliography

Soh Chiew’s Bibiliography

_____________________________________________________________

PM&IA (N1DM29) Page 35/35