Foreword
Now, more than ever, credit-market professionals rely on sound guidance through the changing world of structured credit products. Moorad Choudhry once again delivers, with a completely updated treatment of the topic, and the same high level of clarity and comprehensiveness.
The timing is perfect. The market has been put back on its heels with the shocking default losses of the past year. It is time to re-think the design, risk measurement, risk management, rating and pricing of these products. The premise of the market, particularly with respect to collateralised debt obligations (CDOs), is that most of the default risk would be distributed outside of the banking system, leaving banks and other originators holding only slivers of equity risk, just enough to provide them with an incentive to protect senior tranches from significant losses. In concept, the highly rated senior tranches would be almost immune to loss, and would be held by institutional investors outside of the banking system, where losses that did occur would be less likely to cause systemic risk. Instead, the senior tranches were, in several alarming cases, held in massive quantities by systemically important banks or dealers, who suffered immense write-downs on these exposures.
What went wrong? It will be some time before we have a complete picture. Was it just bad luck that mortgage-related CDOs suffered such significant losses through an anomalously widespread and deep decline in home prices? Or, as some ...
