Cdo and Cds

What started off as a bursting of the U.S. housing market bubble and a rise in foreclosures finally resulted in global financial crisis. Some of the largest and most esteemed banks, investment houses, and insurance companies either declared bankruptcy or had to be rescued financially. By 2008, credit flows froze, lender confidence dropped, and one after another countries around the world faced recession. The crisis uncovered fundamental and regulatory weaknesses in the financial systems worldwide, and it still continues despite coordinated easing of monetary policy by governments, trillions of dollars in intrusion by the governments, and several support policies and regulations by the International Monetary Fund. (Nanto, 2009)
This paper considers the role of credit derivatives in the financial crisis mainly CDO’s and CDS and aims at providing evidence that is a need of a strict control on these derivatives.
After the dot-com bubble which caused the sharp stock market correction in 2000 and the subsequent recession in 2001, The Federal Reserve reacted by cutting interest rates substantially. As a result, more “hot investment capital” began to flow into housing markets—not only in the United States but in other parts of the world as well. At the same time, China and other countries invested a large amount of their accumulations of foreign exchange into U.S. Treasury and other securities. While this helped to keep U.S. interest rates low, it also helped in keeping mortgage interest rates at lower and attractive levels for prospective home buyers. (Nanto, 2009)
Home prices in the United States had risen rapidly for several years. Based on history, people were optimistic that house prices in US will boom. in the frenzy of cheap loans and rising prices, lenders lowered their requirements and started issuing mortgages to sub-prime borrowers. (Weaver, 2008)   As a result, demand for homes began to rise thus sending the prices up. From the fourth quarter of 2002 to the...