The Subprime Panic

40 Pages Posted: 1 Oct 2008

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2008

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

JEL Classification: G1, G2

Suggested Citation

Gorton, Gary B., The Subprime Panic (September 30, 2008). Yale ICF Working Paper No. 08-25, Available at SSRN: https://ssrn.com/abstract=1276047

Gary B. Gorton (Contact Author)

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Yale University - Yale Program on Financial Stability

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