Why Did the Mortgage Crisis Lead to a Credit, Illiquidity and Capital Crisis? Key Factors Enabling Contagious-but-Confinable Risk of Mortgage Crisis to Spread to Entire Financial Market
28 Pages Posted: 26 Feb 2010 Last revised: 19 May 2010
Date Written: April 17, 2010
A PowerPoint presentation, Mortgage Crisis led to Credit and Illiquidity Crisis, delineates the key factors which the author believes enabled the contagious-but-confinable risks of the mortgage crisis to spread to the entire financial market. The prime cause was the weakened health of leveraged credit intermediaries, like banks and shadow banks, which became illiquid, insolvent or near-insolvent, and developed capital shortages. Shadow banks include hedge and equity funds. One of the enabling viruses was credit default swaps. Banks failed to fully distribute securitized risk. Regulatory capital requirements adequately measured earnings volatility but not the impact of large market price moves. A run on entities in the shadow banking system was a catalyst to the credit and illiquidity crisis.
This presentation was designed as a sequel to "The Mortgage Crisis," by the same author.
Keywords: credit, illiquidity and capital crisis, mortgage crisis, shadow banking system, credit intermediaries, securitization, mortgage-backed structured notes, regulatory capital requirements, Great Depression, credit default swaps, Basel II, A.I.G., 'Greenspan put'
JEL Classification: E32, E58, E65, G24, I22, N20
Suggested Citation: Suggested Citation