The Subprime Panic

Gary Gorton

Yale School of Management Working Papers from Yale School of Management

Abstract: Understanding the ongoing credit crisis or panic requires understanding the designs of a number of interlinked securities, special purpose vehicles, and derivatives, all related to subprime mortgages. I describe the relevant securities, derivatives, and vehicles to show: (1) how the chain of interlinked securities was sensitive to house prices; (2) how asymmetric information was created via complexity; (3) how the risk was spread in an opaque way; and (4) how trade in the ABX indices (linked to subprime bonds) allowed information to be aggregated and revealed. These details are at the heart of the origin of the Panic of 2007. The events of the panic are described.

Keywords: Banking panic; securitization; off-balance sheet vehicles; ABX index (search for similar items in EconPapers)
Date: 2008-09-01
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:wpaper:amz2504

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