Understanding the Credit Crisis

Though initial signs of the crisis were first seen in the subprime mortgage market meltdown, the crisis has led to a broader crunch affecting not only financial institutions but liquidity and credit markets around the world.

How did we get here? What is the rationale behind the flurry of recent policy developments? What types of litigation are most likely to unfold in the coming months, and what are the key economic issues at stake? Understanding the full scope of the credit crisis as it continues to evolve requires a grasp of the economic foundations and roles of each stakeholder in the affected markets; an understanding of how each of these markets performed and interacted over time; and a broad, objective analysis of the events that caused the meltdown.

 

Publications:

The Fed's Expanding Playbook: Economists' Views
Economists' Views: New Playbook for a Financial Crisis
Paulson Proposal: An Update on Economists' Views
Paulson Proposal: Economists' Views
Buying the Bad Stuff: Implementation Considerations for the Paulson Plan 

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Litigation

Examples of disputes that have already arisen include allegations of predatory lending, misrepresentation and omissions related to the valuation of the loans and the profits from selling or servicing them, suitability of investments, breach of contract related to loan servicing, and fraudulent conveyance issues. Litigation stemming from the crisis began in areas related to subprime lending, such as suits against issuers and lenders of mortgage-back securities, as well as ratings agencies, bond insurers, and asset management companies, but the range of litigation has expanded to include the commercial paper market, the leveraged buyout industry, and auction-rate securities, to name a few examples. As the write-downs continue to accumulate, additional types of lawsuits are expected.

Subprime Lending
 

Capabilities and Services

Publications:

The Use of Economic Analysis in Predatory Lending Cases: Application to Subprime Loans

Subprime Securities Litigation: Key Players, Rising Stakes, and Emerging Trends

The Subprime Meltdown: Understanding Accounting-Related Allegations

The Subprime Meltdown: A Primer

The Chilling Effects of the Subprime Meltdown (At A Glance)

Structured Finance Made Simple: A Primer from ABS to CDOs (Forthcoming)
By Dr. Elaine Buckberg and Dr. Thomas Schopflocher

Abstract
The Troubled Asset Relief Program (TARP) was designed to address the banking crisis that stemmed from widespread financial institution holdings of mortgage-backed securities that had become illiquid and lost substantial value, leaving banks and investment banks with inadequate balance sheet liquidity and arguably rendering them undercapitalized. Such mortgage-backed securities were originally designed to free the balance sheets of banks originating mortgages while creating a national financing market for mortgages. This paper explains how structured finance products are designed and structured, from simple mortgage-backed securities (MBS) to cash and synthetic collateralized debt obligations (CDOs). We also discuss the challenges of valuing CDOs that contributed to financial firms’ multi-billion dollar write-downs of structured finance securities and are rising issues in litigation.

Case Summaries:

Analysis of the Performance of Subprime Portfolios in Servicing and Breach of Contract Litigation

Teamsters Local 445 Freight Division Pension Fund, et al. v. Bombardier, Inc., et al.

The Canary in the Coal Mine: NERA Experts Provide Damage Analysis in Support of Settlement of Class Action Involving a Subprime Mortgage Lender
 

Auction Rate Securities
 

Auction-Rate Securities: Bidder's Remorse? (Primer)

Deep Freeze in Auction Rate Securities (At A Glance)

Securities Class Actions

Capabilities and Services

Publications:

2008 Trends in Securities Class Actions: Annual Filings Are at the Highest Level in Six Years, Driven by the Credit Crisis, While Median Settlement Values Stay Steady
2008 Trends: Subprime and Auction-Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High
Shareholder Class Actions and the Counterfactual
Recent Trends in Shareholder Class Actions: Filings Return to 2005 Levels as Subprime Cases Take Off; Average Settlements Hit New High
 

Complex Commercial Disputes

Capabilities and Services

Publications:

NERA's Complex Commercial Litigation Practice At A Glance
 

Bankruptcy and Restructuring

Key concerns for entities affected by the credit crisis include analysis of market factors and what was reasonably known at the time of a transaction, determining fair market values of loan portfolio and other assets, conducting econometric analysis of defaults, assessing solvency and capital adequacy, examining fraudulent conveyance issues, performing deepening insolvency analysis, and forecasting what a company's future cash flows are likely to be, or what they would have been at an earlier point in time.

Complex Valuation Services

Capabilities and Services

Publications:

The Economics of Fraudulent Conveyance

Financial Advisory

For financial and non-financial firms alike, there is heightened interest in the role that effectively managing risk plays in aligning their strategic plans and capabilities with shareholder value. In response to the deepening credit crisis, companies that seek to remain viable and retain shareholder and employee trust must find new methods, best practices, and market solutions in order to meet the challenges of the increasingly changing risk landscape. Areas of focus for these efforts include compensation and benefits, credit risk, energy risk, insurance, integrated risk assessment, litigation risk, and cash flow risk.

Publications:

Credit Ratings for Structured Products

Accounting Issues and FAS 157

Capabilities and Services

Valuing Complex Financial Instruments

Capabilities and Services