25 - 02 - 2018
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Роль деривативов в мировом финансовом кризисе и их влияние на мировую финансовую систему

Evita Rudovich, Faculty of International Economic Relations,

3d-year Student, Financial University, Moscow, Russia

Key words: subprime mortgage crisis, derivatives, mortgage-backed securities, subprime credits

Ключевые слова: ипотечный кризис, деривативы, ценные бумаги, цена которых зависит от ипотечных кредитов, кредиты с высоким уровнем риска

Abstract: The article is devoted to the research of risks that are created by excessive use of derivatives. The subprime mortgage crisis of 2008 was taken as an example of the fact how derivatives could ruin the economy. Today’s situation on the auto market is analyzed in this connection.

Аннотация: В этой статье исследуются риски, вызванные чрезмерным использованием производных финансовых инструментов. Ипотечный кризис 2008 был взят примером того, как деривативы могут навредить экономике. По аналогии с этим, проанализирована текущая ситуация на автомобильном рынке.

Nowadays, derivatives figure prominently in world’s financial system: their amount grew immensely and so did their role over last decade. However, as Warren Buffet said, they can become a “potential time bomb” for the economy of the whole world [1]. That’s why I decided to scrutinize, what dangers do derivatives hide, using crisis of 2008 as an example, and how can their excessive use provoke even more horrible calamities.
The crisis of 2008 was definitely an awful experience for the world economy. Derivatives played a key role in it, causing subprime mortgage crisis to have such large-scale consequences. But derivatives are still essential for business development and provide wide range of opportunities. So, to prevent crisis like this in future, we should understand, what type of derivatives caused crisis, and how can we prevent dangers of this “weapons of mass destruction” in advance.
First of all, in order to realize, what terrible consequences can have derivatives’ excessive use, I figured out the role they played in the crisis of 2008. It’s a well-known fact that during 2002 – 2004 availability of loans in USA significantly rose. This lead to housing bubble growth, as due to easier access to various loan types, consumers has taken too big volume of liabilities. This resulted in an increasing volume of mortgage-backed securities and collateralized debt obligations, the price of which depended on mortgage payments and real estate prices. These innovative securities allowed investors from all over the world to invest in real estate in USA. After the decline of real estate prices in USA, the biggest international financial organizations, which invested considerable amount of borrowed assets in subprime securities, beard huge losses. And when the influence of a crisis spread far beyond real estate market, the amount of defaults on other credit types grew [7]. Derivatives actually exist for a long time, and appear to be really important instruments on the financial market. In that case, we should define what type of derivatives was the reason of crisis.
Generally, derivatives can be divided into two groups:

  • Ones that are used for hedging credit risks, the so-called Credit Default Swaps (CDS);
  • Derivatives that swap various credits into securities, or Collateral Debt Obligations (CDO) [9].

Obviously, CDO in particular redoubled consequences of the subprime crisis.
The main difference of derivatives and other financial instruments, such as options and futures is that the worth of credit derivatives doesn’t depend on interest, price or currency risks, but interconnected with some particular credit risks. Besides credit derivatives are, as a rule much more complicated than others, and risks are, on the contrary, much higher. One more essential factor, which enlarges credit derivatives’ infrastructure risks, is the fact that this market function outside of an organized market, i. e. exchange.
In spite of various myths concerning harm of this financial instruments, futures and options market is an essential part of the financial market, and extension of their trade contribute to general system risk decline on this market. Throughout years, futures and options in particular were popular and demanded in a wide circle of stock exchange participants, due to their vast possibilities of effective management alongside with minimizing costs.
Thus, it is clearly seen, that not derivatives are to blame for the development of world crisis, but their improper and undeliberate usage, and incorrect evaluation of this market’s volume and risks that it creates.
Nowadays, the amount of derivatives in the economy grew immensely, and that can provoke another crisis, which will have far more disastrous consequences. And these concerns are not an illusion. In 2017, the market of car loans experienced the same situation as was on the real estate market during the subprime mortgage crisis in 2008. The auto industry has been able to boost sales by giving second-class credits, or so-called subprime credits to people, who couldn’t actually afford them. One of the biggest subprime auto finance companies, Santander, verified income on just 8 % of borrowers [3]. Eventually, it caused a lot of those loans to start going bad, creating a very tense situation on this market [2].
It is quite obvious, that this autoloan pyramid is bound to collapse. And since it involves billions, or even tens of billions of dollars, we can expect that problems on the market of subprime mortgages will result in the beginning of a new wave of the world’s financial crisis. It would be naive to hope, that such crisis will be insular, and will damage only a few banks, because banks emitted lots of derivatives based on auto loans. And since they involve participants of the financial market from the whole world, their impact spread worldwide. Besides, all largest and most influential western banks don’t operate on their own – they are closely incorporated in western financial system [10]. But this huge amount of derivatives can be dangerous only in case of mortgage auto industry crisis. That’s why we should assess the current situation on this market and find out, how reasonable are those concerns.
First of all, it is necessary to point out sharp and fast-moving car price reduction. The used-vehicle price index from the National Automobile Dealers Association posted a 3.8% decline in February compared to the prior month. NADA also said wholesale prices fell 1.6%. [6].
And this tendency is going to stay. Ford company projects, that sales will continue to fall not only in current, 2017 year, but in the 2018 as well. And Morgan Stanley is projecting that used car prices “could crash by up to 50%” over the next four or five years [5]. But there are not only problems with prices, but with the selling of cars as well. It now takes an average of 74 days before a dealer is able to sell a new vehicle. This number is the highest that it has been since the last financial crisis. What’s more, right now, more than a million of americans are late with their credit payments. Subprime auto loan losses have soared to their highest level since the last financial crisis, and so did the delinquency rate on those loans – this is the worst data since last 7 years [4].
At this moment, approximately $200,000,000,000 has been loaned out by auto lenders to consumers with subprime credit [8]. Many auto loans, including those considered subprime, are securitized and sold to investors. But Morgan Stanley recently reported that the share of auto securities tied to “deep subprime” loans – those given to borrowers with a FICO credit score below 550 — has risen from 5.1 % in 2010 to 32.5 % today. It said defaults on those bonds have risen significantly in the past five years. [5].
Thus, we can’t deny that new subprime bubble is formed in the world today, and if the state of auto industry continues to deteriorate at such pace, accumulated derivatives will cause new wave of crisis.


[1]Marion Dakers. Warren Buffett issues a fresh warning about derivatives 'timebomb' // Telegraph Media Group URL:http://www.telegraph.co.uk/business/2016/05/01/warren-buffett-issues-a-fresh-warning-about-derivatives-timebomb/ (accessed: 30. 09. 2017)
[2]Martha C. White. Here's Some Very Bad News About Car Loans //Money: Time Inc URL: http://time.com/money/4233873/subprime-car-loans/ (accessed: 30. 09. 2017)
[3]Matt Scully. Auto Lender Santander Checked Income on Just 8% in Subprime ABS // 2017 Bloomberg Finance URL: https://www.bloomberg.com/news/articles/2017-05-22/subprime-auto-giant-checked-income-on-just-8-of-loans-in-abs (accessed: 30. 09. 2017)
[4]Matt Turner. An increasing number of Americans have stopped paying their car loans, and Wall Street is starting to worry // Business Insider Inc. URL: http://www.businessinsider.com/wall-street-is-worried-about-car-loans-2017-3/#fitch-deteriorating-credit-performance-will-be-more-acute-in-the-subprime-segment-1 (accessed: 30. 09. 2017)
[5]Michael Snyder. The Next Subprime Crisis Is Here: 12 Signs That A Day Of Reckoning Has Arrived For The U.S. Auto Industry // The Economic Collapse URL: http://theeconomiccollapseblog.com/archives/the-next-subprime-crisis-is-here-12-signs-that-a-day-of-reckoning-has-arrived-for-the-u-s-auto-industry (accessed: 30. 09. 2017)
[6]National Automobile Dealers Association //URL: https://www.nada.org/nadadata/ (accessed: 30. 09. 2017)
[7]Subprime mortgage crisis // Wikipedia URL: https://en.wikipedia.org/wiki/Subprime_mortgage_crisis (accessed: 30. 09. 2017)
[8]Wolf Richter. It Starts: Subprime Auto Loans Implode (in Your Bond Fund) // Wolf Street Corp URL: https://wolfstreet.com/2016/02/23/subprime-auto-loan-asset-backed-securities-come-home-to-roost-in-your-bond-fund/ (accessed: 30. 09. 2017)
[9]Иванов Михаил. Деривативы и кризис: миф и реальность // Журнал "Рынок ценных бумаг" URL:http://www.rcb.ru/rcb/2008-22/16415/ (accessed: 30. 09. 2017)
[10]Сабпрайм-кошмар возвращается // ФинФронт: новости с финансовых фронтов URL: //http://finfront.ru/2017/05/26/return-of-the-subprime-nightmare/ (accessed: 30. 09. 2017)

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