Research Zeitgeist: Googling Subprime
A google search for “subprime” carried out 10 years ago would have yielded 14,500 results. Today that same search offers up 14.5 million results. A search for “credit default swaps” in October 1998 yielded 33,900 results, compared with over 1 million today, while results for “hedge funds” ballooned from 162,000 to over 8.5 million. By contrast, a search for “conventional mortgage” has risen only from 111,000 to 579,000.
Even allowing for extraneous factors, these are startling numbers. They help explain the continuing popularity of a Research Recap post from last December that combines “hedge funds” and “subprime.” Of course, interest in the massive liquidations by hedge funds no doubt played a part in making Role of Hedge Funds in Subprime Crisis Examined the top post of the week. Still, it just goes to show that good research has a long shelf life. So it’s worth taking a look back at that article by the International Monetary Fund’s Randall Dodd.
The article examines the role of hedge funds in the unfolding crisis, noting that Fitch Ratings warned of the risks in 2005.
“Hedge funds have quickly become important sources of capital to the credit market,” but “there are legitimate concerns that these funds may end up inadvertently exacerbating risks.”
That is because hedge funds, which invest in largely high-risk ventures, are not transparent entities—their assets, liabilities, and trading activities are not disclosed publicly—and they are sometimes highly leveraged, using derivatives or borrowing large amounts to invest, Dodd wrote. So other investors and regulators knew little of hedge funds’ activities, while, as Fitch Ratings put it, because of their leverage, their “impact in the global credit markets is greater than their assets under management would indicate.”
Among the potential remedies suggested by Dodd in December 2007: “applying industry standards and any existing regulations pertaining to the use of collateral (margin) to OTC derivatives and hedge fund borrowing.”
Likewise, the current meltdown had recent visitors looking back to our January 2008 Research Primer on Credit Default Swaps, based on a Fitch Ratings report.
More recently, our Ratings Roundups of recent ratings actions affecting financial institutions in the news continue to be popular, as is the Standard & Poor’s report detailing the sharp rise in delinquencies among not-quite-prime “Alt-A” mortgages.
Research Recap Headline of the Week:
Bonuses May Fall in London (The Wall Street Journal)
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