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The Subprime Panic

Gary B. Gorton

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

October 2008

NBER Working Paper No. w14398

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

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Date posted: October 10, 2008  

Suggested Citation

Gorton, Gary B., The Subprime Panic (October 2008). NBER Working Paper No. w14398. Available at SSRN: https://ssrn.com/abstract=1281890

Contact Information

Gary B. Gorton (Contact Author)
Yale School of Management ( email )
165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States
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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