This is a running list of articles Knowledge@Wharton has published on the Subprime Crisis -- and related topics -- over the last 18 months.
Collateralized Damage: Commercial Mortgage Securities Are at a Standstill
Media outlets and regulators have scrutinized the securitization of risky residential mortgages for their role in the global credit crunch. Not as much attention has been paid to their less-risky cousin, the commercial mortgage-backed securities (CMBS) market, which has been tarnished by problems on the residential side. Despite their superior fundamentals, says one Wharton professor, the CMBS market is "pretty much gone." The question now: Can it come back?
From: July 23, 2008 in Finance and Investment
The Credit Crisis and Failed Risk Analysis: 'We're Nowhere Near the End Here'
When you sit down, you probably don't check under your seat for a bomb. Even though it could kill you, chances are slim that it's there. A similar view of risk led bankers, their regulators and other government officials to overlook dangerous investments and business models that contributed to the global credit crisis, according to speakers at the financial risk roundtable held by the Wharton Financial Institutions Center and the Oliver Wyman Institute.
From: June 25, 2008 in Finance and Investment
Subprime Crisis: Did Bernanke Go Too Far, or Did He Not Go Far Enough?
To restart the economy, the Federal Reserve created new channels of lending, cut target rates. The prompt and aggressive action was spurred by Chairman Ben Bernanke's research on the Great Depression. How will history judge his strategy?
From: June 20, 2008 in Strategic Management
Subprime Crisis: Could New Rules Avert Another Credit Crisis? Perhaps, but Be Wary
An unusual alignment of economic conditions -- and some very careless and risky bets -- triggered the meltdown. Should regulators step in to prevent a repeat? Should the government rescue the wounded? Experts say some new rules may be in order, but the details will be important. A concern: Bailouts may encourage risky behavior.
From: June 20, 2008 in Law and Public Policy
Subprime Crisis: A Bouquet of Opportunity Masked a Reek of Risk
In this Special Report, Knowledge@Wharton finds that the credit crisis was triggered when Wall Street alchemists, overeager borrowers and aggressive lenders let their eye for opportunity trump their nose for risk. New regulations might prevent a recurrence -- but so would diligent decision-making.
From: June 20, 2008 in Finance and Investment
Following the Era of Large Buyouts, Private Equity Funds Find New Ways to Compete
Now that credit has dried up, the future of large private equity buyouts has become uncertain. Today, buyout firms are looking to compete in middle-market and foreign deals and, in many cases, are teaming up with strategic buyers and corporations in new types of transactions. According to PE firm partners and other industry experts, the economic downturn has also paved the way for a resurgence in distressed investing, as lenders and investors alike begin to adjust to new pricing realities.
From: May 06, 2008 in Finance and Investment
Private Equity Abroad: Despite the Credit Crunch, Opportunities in Developed Markets Are Waiting
With the collapse of credit markets, private equity funds are increasingly willing to tread into unknown territory to find new deals abroad. While international buyers continue to increase their presence in the U.S., opportunities for investment in Europe and Asia are equally abundant, according to private equity experts. Although individual markets have their inherent challenges, adopting a global strategy may be one approach to weathering the current economic slowdown.
From: May 06, 2008 in Finance and Investment
Do China's Financial Markets Need More Freedom and Less Government Regulation?
While China's manufacturing sector booms and people sock away money in savings accounts, the country's financial markets remain in their infancy, according to international finance experts who gathered at the recent 2008 Wharton China Business Conference. One reason for the relative underdevelopment of China's capital markets, they note, is the role of the country's powerful central government. "Regulators are not comfortable letting the market do its own work," noted one conference participant.
From: April 30, 2008 in Finance and Investment
Compensation Consultants and Conflicts of Interest: Two Different Views
Companies that use compensation consultants end up paying more to their CEOs, leading to allegations that these consultants push for excessively high CEO packages because many of them profit from doing other work for the company. A recent Congressional committee report supported the idea that such conflicts drive up CEO pay. But a new Wharton study by accounting professor Mary Ellen Carter and two colleagues suggests that conflicts of interest between the consultant and the firm aren't to blame.
From: April 16, 2008 in Finance and Investment
Coming Soon ... Securitization with a New, Improved (and Perhaps Safer) Face
Securitization is often blamed for aggravating -- if not causing -- the subprime mortgage crisis that keeps roiling U.S. real estate and credit markets. By repackaging pools of mortgages into securities that could be resold to investors, the argument goes, securitization permitted unscrupulous underwriters to offer housing loans to poor borrowers and transfer the risk to Wall Street. How, then, will the present credit crisis affect the future of securitization? According to professors from Wharton's finance and real estate departments, securitization will not disappear -- but it is in for radical changes.
From: April 02, 2008 in Finance and Investment
Gaming the System: Are Hedge Fund Managers Talented, or Just Good at Fooling Investors?
Hedge funds are key players in the world's financial markets, but no one knows exactly what they're up to. Critics and supporters tend to share an assumption, however, that hedge funds are run by talented people who merit their hefty management fees. But new research by Wharton statistics professor Dean P. Foster and Brookings Institution senior fellow H. Peyton Young questions that idea, arguing that it's easy for hedge funds to fool their investors into believing the managers are better than they really are. The industry "risks being inundated by managers who are gaming the system ... which could ultimately lead to a collapse in investor confidence," they say.
From: April 02, 2008 in Finance and Investment
Market Manipulation, or Just Business as Usual?
The financial markets are in turmoil. Inflation is picking up. Home prices are falling. More companies are laying off workers. Oil prices are sky-high. It's getting harder and harder to borrow money. It seems like a nest of conspirators is preying on America. Even Washington is reinforcing the impression with talk of sweeping reforms to the system of economic oversight. Indeed, economic commentator Ben Stein has promoted the notion of market manipulation from the shadows, largely in the form of hedge funds. Yet Wharton faculty reject that idea, saying instead that the market is suffering a hangover from the easy-money excesses of recent years.
From: April 02, 2008 in Finance and Investment
Mortgage Crisis Bailout: Relief for Some, Risk for Others
Does the mortgage crisis demand a government bailout? A year ago, most experts thought not. Sad as the situation was for some homeowners, many felt the problem would be confined to those who had gambled on risky loans with eyes open. But things have changed. The mortgage crisis is behind a nationwide drop in home values that is impeding all types of lending. More and more experts now say some sort of government response is necessary to avert a prolonged recession. But what kind of bailout is affordable, and fair?
From: March 05, 2008 in Law and Public Policy
Are Overconfident Executives More Inclined to Commit Fraud?
No one makes it to the top ranks of corporate management without a healthy amount of self-assurance. Confidence underlies decisive, strong leadership, but does overconfidence lead managers to cross the line and commit fraud? New research by Wharton accounting professor Catherine M. Schrand and doctoral student Sarah L. C. Zechman examines patterns in frauds to determine if some frauds evolve, not out of pure self-interest, but because executives are overly optimistic that they can turn their firms around before fraudulent behavior catches up with them. Their paper is titled, "Executive Overconfidence and the Slippery Slope to Fraud."
From: March 05, 2008 in Business Ethics
Forget Those Big Deals (and Headlines): Private Equity Firms Are Shopping the Middle Market
Big buyout firms like the Blackstone Group and Kohlberg Kravis Roberts do headline-grabbing transactions and collect eye-popping paychecks. But when the economy slows down and lenders turn wary, those mega-deals are the first to dry up. Meanwhile, the modest middle market -- typically deals in the $500 million to $1 billion range -- keeps plugging along. In fact, according to panelists at the 2008 Wharton Private Equity Conference, middle-market investors are, to some extent, insulated from the current credit crisis and other economic ups and downs. "We're delighted with the credit crunch," one speaker said.
From: March 05, 2008 in Finance and Investment
Victimizing the Borrowers: Predatory Lending's Role in the Subprime Mortgage Crisis
As fallout from the subprime lending crisis continues, a number of remedies have been proposed to deal with it. One is legislation to curtail predatory lending, which is generally thought to be a factor behind the issuing of so many subprime loans to borrowers with poor credit. What qualifies as predatory lending? And what are the conditions that make it flourish? Wharton finance professors David Musto, Philip Bond and Bilge Yilmaz analyze predatory lending in a new paper titled, "Predatory Lending in a Rational World."
From: February 20, 2008 in Finance and Investment
Bridging Your Goals with Their Goals: A 'Context-driven Approach to Leadership'
While changing jobs and shifting careers is hardly unusual in today's business world, Russ Palmer is somewhat unique in that he has been the leader of three very different organizations over the past several decades. He was CEO of Touche Ross (now Deloitte & Touche) for 10 years, dean of Wharton for seven years, and now owner, chairman and CEO of The Palmer Group, a corporate investment firm. Each of these positions required very different skills and the ability to adapt to a unique set of challenges -- what Palmer calls "a context-driven approach to leadership." In his new book, Ultimate Leadership: Winning Execution Strategies for Your Situation, Palmer describes how today's leaders can adapt to, and succeed in, any business environment.
From: February 06, 2008 in Leadership and Change
David Rubenstein: Private Equity's 'Purgatory' Phase and the 'Combat Sport' of Capitalism
Private Equity has passed through a Golden Age, but will now spend a year or so in "purgatory" before entering an even greater period of expansion, or "Platinum Age," according to David Rubenstein, co-founder and managing director of The Carlyle Group, the Washington, D.C.-based private equity firm with more than $70 billion in assets. In a keynote address at the 14th annual Wharton Private Equity and Venture Capital Conference titled, "Harnessing the Winds of Change," Rubenstein talked about the effect of the subprime credit crisis on the industry, and how "the private equity world needs to spend much more time letting people know what [we] do to create value."
From: February 06, 2008 in Finance and Investment
Missing the Big Gains: Foreign-Stock Funds and the Benefits of International Diversification
In 2007, mutual funds specializing in non-U.S. stocks returned a fat 16%, while funds with diversified holdings in U.S. equities returned just over 6%. In fact, the foreign-stock funds have beaten domestic-stock funds over periods of two, three, five, 10 and 15 years. Moreover, owning foreign stocks helps a U.S. investor diversify risk by reducing a portfolio's volatility. Why, then, does the typical U.S. investor do little more than dabble in foreign stocks? Wharton finance professor Karen Lewis studies this issue in a paper titled, "Is the International Diversification Potential Diminishing for Foreign Equity inside the U.S.?"
From: February 06, 2008 in Finance and Investment
It's a Bird...It's a Plane...It's a Recession, or Is It?
It's been quite a week. Stock markets around the world showed sharp declines on Monday; on Tuesday, the Federal Reserve cut its benchmark interest rate by three-quarters of a percentage point. The rate cut helped stem the losses on some indexes, but by January 23, the volatility had returned. The obvious fear is one of recession -- a possibility that the White House and Congress are trying to avert by coming up with a stimulus package that will keep the economy off life support. How effective will the Fed's interest rate cut be, and what is the outlook for the Asian and European economies? Knowledge@Wharton asked finance professors Jeremy Siegel and Franklin Allen to comment on these issues.
From: January 23, 2008 in Finance and Investment
Advice to Investors: Sit Tight and Batten Down the Hatches
The worldwide collapse of stock prices has many victims -- pension funds, insurance companies, hedge funds, financial services firms. But those are players who, if they are smart, have the wherewithal to withstand a steep sell-off. What about the small investor, the individual who is socking away modest sums for retirement or college costs? Should small investors rush for the sidelines? Or should they view this as a buying opportunity? Knowledge@Wharton asked six experts for advice on investment strategy.
From: January 23, 2008 in Finance and Investment
What's Ahead for the Global Economy in 2008? Reports from the Knowledge@Wharton Network
Though the subprime mess and rising oil prices slammed the U.S. economy during much of 2007, other emerging markets -- especially China and India -- seem to be on a roll. China's growth rate of more than 11% is likely to continue, and India, too, should be able to sustain a high rate of GDP growth, even if it slows from last year's 9%. Latin America, meanwhile, is cautiously optimistic but could see a moderate decline in 2008. The Knowledge@Wharton Network sites -- including Universia Knowledge@Wharton, China Knowledge@Wharton and India Knowledge@Wharton -- spoke with Wharton faculty and other experts about what to expect during the coming year.
From: January 09, 2008 in Finance and Investment
Jeremy Siegel on the Interest Rate Cut: The Fed May Be 'Behind the Curve'
For the third time in the past few months, the Federal Reserve's Open Market Committee has chosen to cut short-term interest rates by a quarter percent or 25 basis points. The Fed cut its main short-term rate target to 4.25% and the "discount rate" charged on direct Fed loans to commercial banks to 4.75%. In its statement justifying the decision, the Fed noted, "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time." Will the Fed's decision help promote "moderate growth?" Knowledge@Wharton asked Jeremy Siegel, a professor of finance at Wharton and author of The Future for Investors, to analyze the Fed's decision and its impact on the markets.
From: December 12, 2007 in Finance and Investment
A Closer Look at Sovereign Wealth Funds: Secretive, Powerful, Unregulated and Huge
The Abu Dhabi government is buying a 4.9% stake in Citigroup for $7.5 billion. UBS is selling a 10.8% share to the government of Singapore and an unnamed Middle Eastern investor for $11.5 billion. Two Middle Eastern government funds now own a third of the London Stock Exchange. Governments, through investment pools known as sovereign wealth funds, have put tens of billions of dollars into Western financial firms this year. But is foreign ownership -- or, more precisely, foreign government ownership -- really a good thing? Many experts think this mushrooming trend bears watching, especially for any sign that these funds are evolving from pure investment vehicles into tools for exerting political pressure on the "target" countries.
From: December 12, 2007 in Finance and Investment
The Subprime Drama Continues, but for How Long?
Almost every day, a new twist seems to appear in the subprime crisis drama. This week, the investment arm of the government of Abu Dhabi announced an infusion of $7.5 billion to acquire a 4.9% stake in Citigroup, which has been slammed by enormous losses in the credit market. The announcement came on the heels of a report from Bank of America that the subprime mess is about to get messier as interest rates "reset" -- or rise -- on more than $360 billion worth of adjustable rate subprime mortgages. Has the crisis run its course? Knowledge@Wharton asked that question and several more to Richard Herring, a Wharton finance professor and co-director of the Wharton Financial Institutions Center.
From: November 28, 2007 in Finance and Investment
Good, Bad or Ugly --Is It Impossible to Predict What's Ahead for the U.S. Economy?
At the end of October, the Federal Reserve gave the financial markets just what they had been asking for: a 0.25% cut in the federal funds rate. But in early November, stocks plunged and the dollar hit a new low. Applause turned into hand-wringing -- then back to applause as the markets rebounded in the middle of the month. Why can't the experts make up their minds? Is the outlook good or bad? According to Wharton faculty, forecasting is particularly hard now because some of the key factors -- such as the credit crunch arising from the subprime mortgage mess, spiking oil prices and the plunging dollar -- have little historical precedent. The result: Finance experts, including the Fed, may not be able to see too far down the road.
From: November 14, 2007 in Finance and Investment
The Subprime Blame Game: Where Were the Realtors?
It is a scene millions of Americans have been in -- sitting next to a real estate agent at closing to sign the papers for a new home. Often, the buyer has spent months with the agent. And to hear agents tell it, they are indispensable guides through the hazardous home-buying terrain. How is it, then, that millions of borrowers took on toxic subprime mortgages that could cost them their homes? Why did their agents not warn them off? While much criticism has been leveled at subprime lenders and mortgage brokers, some experts say that real estate agents have managed to escape their share of blame for the subprime mess.
From: October 17, 2007 in Finance and Investment
What's Ahead for Financial Markets? Perspectives from Jeremy Siegel and Jacob Wallenberg
After a terrible August, when the U.S. stock market appeared to be headed for the pits, October 1 saw a massive rally that sent the Dow Jones Industrial Average soaring above 14,000. The following day, however, stocks began to fall again, mainly due to a sharp drop in home sales. In short, Wall Street still seems to be sending out mixed signals. What will be the long-term effects of the Fed's decision to cut interest rates? Will the U.S. economy move past the sub-prime mortgage mess? How will these developments affect the European market? Knowledge@Wharton spoke with Wharton finance professor Jeremy Siegel and Jacob Wallenberg, chairman of the board of Investor AB and vice chairman of Sweden-based SEB.
From: October 03, 2007 in Finance and Investment
How We Got into the Subprime Lending Mess
When mortgage default rates started to climb earlier this year, many experts thought the damage would be confined to the minority of issuers that had binged on subprime lending. It hasn't turned out that way. Consumer spending is off, the credit crunch is spreading and the housing market is in a slump. "The degree and the extent of the harm done were not expected. It surprised me. But the fact that this would end badly was not surprising," says Wharton real estate and finance professor Susan Wachter. Wachter and colleague Richard K. Green trace the evolution of the home-financing market over the past decades in a new paper titled, "The Housing Finance Revolution."
From: September 19, 2007 in Finance and Investment
The U.S. Auto Industry: Dangerous Curves Ahead?
Among the U.S. auto industry's many challenges are the ongoing negotiations between General Motors and the United Automobile Workers union aimed at coming up with a new contract to replace the one that expired on September 15; the recent takeover of Chrysler by private equity firm Cerberus Capital Management; and a possible slowdown in consumer spending as a result of fallout from the subprime mortgage crisis. Meanwhile, industry watchers are awaiting the outcome of reported efforts by India's Tata Motors to take over two of financially plagued Ford Motor's luxury brands, Jaguar and Land Rover. Wharton management professor John Paul MacDuffie, co-director of the International Motor Vehicle Program, spoke with Knowledge@Wharton about these and other issues.
From: September 19, 2007 in Strategic Management
Real Estate Developer and 'Grave Dancer' Sam Zell: 'It's All about Supply and Demand'
Sam Zell, the master real estate investor, has built a fortune on the cycles that shape his industry. These days, he believes the current turmoil in financial markets is more an emotional reaction to yet another period of excess rather than a true credit collapse. In a talk at Wharton moderated by real estate professor Peter Linneman, the Chicago-based investor said markets currently are spooked by problems with U.S. subprime lending. However, they still have capital to deploy, unlike other real estate downturns. "We're not really in a 'credit crunch.' I think what we are in is a 'confidence crunch,'" Zell told his audience.
From: September 19, 2007 in Real Estate
Home Truths about the Housing Market
The sub-prime mortgage crisis and the credit crunch that has followed in its aftermath are taking their toll on the housing market. On August 28, the S&P Case-Shiller U.S. National Home Price Index showed that home prices fell 3.2% in the second quarter. According to the National Association of Realtors, the inventory of unsold homes is at a record high. As sales have fallen, many home builders have seen their stock prices drop by more than 60% during the past year. How serious is this situation? Is there light at the end of the tunnel? Joseph Gyourko, director of Wharton's Samuel Zell and Robert Lurie Real Estate Center, and Todd Sinai, a professor of real estate, spoke to Knowledge@Wharton about these questions and more.
From: September 05, 2007 in Real Estate
What's Ahead for the Stock Market -- and Quant Funds
After weeks of skittishness and fear, investors showed signs on Tuesday of settling down. "Yesterday was one of the dullest days in the market that we've had in a while, and that's good in many ways," says Wharton finance professor Jeremy Siegel. Investors have been reeling from widespread problems in the subprime sector, stocks have fallen, yields on Treasury securities have dropped and some companies are finding it hard to borrow money -- all of which spurred the Federal Reserve last week to announce a cut in interest rates. Meanwhile, the upheaval has shown that quant funds, despite their computer power, aren't immune to mistakes and market downturns. So what can we expect in the weeks ahead?
From: August 22, 2007 in Finance and Investment
'Getting the Models Right': How to Value Hard-to-Price Assets
Trying to determine what things are worth is a huge challenge in today's business world, where companies are increasingly being pressed to account for the changing values of complex financial instruments -- from insurance policies to employee stock options to exotic derivatives. Consequently, firms are turning to ever more intricate financial models that attempt to deduce values using an array of indicators, even though such models are complicated and can be easily manipulated. This dilemma was the topic of the Tenth Annual Wharton/Oliver Wyman Institute Risk Roundtable held on May 31-June 1.
From: June 27, 2007 in Finance and Investment
Subprime Meltdown: Who's to Blame and How Should We Fix It?
Troubles in the subprime mortgage industry seem to be spreading. The stock market is in turmoil. Alan Greenspan and others say the economy is being hurt. Consumer groups predict that up to two million Americans will lose their homes. Should the government do something? A growing list of people say it should, from Democratic senators Christopher Dodd and Hillary Clinton to a string of advocates for the poor. But Wharton faculty, including those who have studied the mortgage market and past government bailouts, aren't convinced.
From: March 21, 2007 in Real Estate
Hedge Funds Escape Regulation: Should Investors Be Worried?
When the Lilliputians came upon the sleeping Gulliver, they didn't know if he was friendly or hostile, but he was so big it seemed prudent to tie him down. Should the 9,000 hedge funds -- the secretive investment pools controlling $1.4 trillion in assets -- be treated the same way? The President's Working Group on Financial Markets doesn't think so. In a late-February report, the group urged vigilance but concluded that new regulations are not needed. Was this the right decision? Wharton faculty weigh in on the issue.
From: March 07, 2007 in Finance and Investment
Could Tremors in the Subprime Mortgage Market Be the First Signs of an Earthquake?
For months, the steady drip of news about troubles in the subprime mortgage market didn't seem too bad, and many economists started to feel reassured about the health of the general housing market. But now some experts wonder whether those feelings of reassurance came too soon. They suggest that the growing number of borrower defaults in the "aggressive lending" market, which includes various types of risky mortgages besides subprime loans, could shock the broader housing market and economy after all.
From: February 21, 2007 in Real Estate
