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The Subprime Panic

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  • Gary B. Gorton

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14398.

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Date of creation: Oct 2008
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Publication status: published as Gary Gorton, 2009. "The Subprime Panic," European Financial Management, Blackwell Publishing Ltd, vol. 15(1), pages 10-46.
Handle: RePEc:nbr:nberwo:14398

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  1. Gary B. Gorton, 2008. "The Panic of 2007," NBER Working Papers 14358, National Bureau of Economic Research, Inc.
  2. Gary Gorton & George Pennacchi, . "Are Loan Sales Really Off-Balance Sheet," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 18-88, Wharton School Rodney L. White Center for Financial Research.
  3. Gary Gorton & Nicholas Souleles, 2005. "Special Purpose Vehicles and Securitization," NBER Working Papers 11190, National Bureau of Economic Research, Inc.
  4. Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Working Papers 5100, National Bureau of Economic Research, Inc.
    • Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 299-349 National Bureau of Economic Research, Inc.
  5. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 11-90, Wharton School Rodney L. White Center for Financial Research.
  6. Calomiris, Charles W & Mason, Joseph R, 1997. "Contagion and Bank Failures during the Great Depression: The June 1932 Chicago Banking Panic," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 863-83, December.
  7. David B. Gross & Nicholas S. Souleles, 2001. "An Empirical Analysis of Personal Bankruptcy and Delinquency," NBER Working Papers 8409, National Bureau of Economic Research, Inc.
  8. Gorton, Gary, 1994. "Bank Regulation When 'Banks' and 'Banking' Are Not the Same," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 10(4), pages 106-19, Winter.
  9. Englund, Peter, 1999. "The Swedish Banking Crisis: Roots and Consequences," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 15(3), pages 80-97, Autumn.
  10. Calomiris, Charles W. & Schweikart, Larry, 1991. "The Panic of 1857: Origins, Transmission, and Containment," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 51(04), pages 807-834, December.
  11. Charles Calomiris & Joseph Mason, 2004. "Credit Card Securitization and Regulatory Arbitrage," Journal of Financial Services Research, Springer, Springer, vol. 26(1), pages 5-27, August.
  12. Gary Gorton & George Pennacchi, 1990. "Banks and Loan Sales: Marketing Non-Marketable Assets," NBER Working Papers 3551, National Bureau of Economic Research, Inc.
  13. Kelly, M. & O'Grada, C., 1999. "Market Contagion: Evidence from the Panics of 1854 and 1857," Papers, College Dublin, Department of Political Economy- 99/19, College Dublin, Department of Political Economy-.
  14. Adrian D'Silva & Brian Gordon, 2008. "Hedges in the warehouse: the banks get trimmed," Chicago Fed Letter, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Apr.
  15. Bank for International Settlements, 1999. "Implications of repo markets for central banks," CGFS Papers, Bank for International Settlements, number 10.
  16. Bhardwaj, Geetesh & Sengupta, Rajdeep, 2012. "Subprime mortgage design," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(5), pages 1503-1519.
  17. Moen, Jon & Tallman, Ellis W., 1992. "The Bank Panic of 1907: The Role of Trust Companies," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 52(03), pages 611-630, September.
  18. Gorton, Gary & Mullineaux, Donald J, 1987. "The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 19(4), pages 457-68, November.
  19. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-81, December.
  20. Gary Richardson, 2006. "Bank Distress During the Great Contraction, 1929 to 1933, New Data from the Archives of the Board of Governors," NBER Working Papers 12590, National Bureau of Economic Research, Inc.
  21. Pagano, Marco, 1989. "Endogenous Market Thinness and Stock Price Volatility," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(2), pages 269-87, April.
  22. Gr da, Cormac & White, Eugene N., 2003. "The Panics of 1854 and 1857: A View from the Emigrant Industrial Savings Bank," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 63(01), pages 213-240, March.
  23. Gary Richardson & William Troost, 2006. "Monetary Intervention Mitigated Banking Panics During the Great Depression: Quasi-Experimental Evidence from the Federal Reserve District Border in Mississippi, 1929 to 1933," NBER Working Papers 12591, National Bureau of Economic Research, Inc.
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