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The Subprime Panic

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER)

September 30, 2008

Yale ICF Working Paper No. 08-25

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.

Number of Pages in PDF File: 40

Keywords: Banking panic, securitization, off-balance sheet vehicles, ABX index

JEL Classification: G1, G2

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Date posted: October 1, 2008  

Suggested Citation

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

Contact Information

Gary B. Gorton (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203 432-8931 (Fax)
HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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