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STREET
SUMMARY
CDS
SUMMARY (CONT)
The JPMorgan managers came up with the idea to use
derivatives to manage their bank loan risks .Banks are
required to set aside a certain percentage of capital in
reserve for every loan they make in order to ensure that
if a certain number of loans default they will be able to
cover the loses. But, what if banks could find another
way to cover potential losses without setting aside their
own capital? The banks would then have more capital to
lend.
In 1994, one of JPMorgans whiz kids, Blythe Masters
brokered the worlds first Credit Default Swap with
Exxon.
SUMMARY (CONT)
HIGH PROFITS
COMPETITORS FOLLOWED
WORLD WIDE CREDIT BOOM
SUBPRIME LENDING
FINANCIAL CRISIS
The financial crisis was triggered by a complex interplay of
CAUSES
Widespread failures in financial regulation and
supervision
Dramatic failures ofcorporate governance andrisk
management at many systemically important
financial institutions
Combination of excessive borrowing, risky
investments
Lack of transparency" by financial institutions,
Ill preparation and inconsistent action by government
that "added to the uncertainty and panic
Systemic breakdown in accountability and ethics
Deregulation ofover-the-counter derivatives
especiallycredit default swaps.