Risk Management

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By Thomas F. Huertas (auth.)

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Provided the underlying loans in the original securitisations kept paying interest and amortisation, the cash would flow as modelled. But once the cash in the underlying securitisations was insufficient to service the stub or mezzanine tranche of that securitisation, the cash would stop flowing altogether to the CDO-squared. Estimation of the cash flows on a CDO-squared issue therefore required analysis of the cash flows on the underlying securitisation issues – a truly daunting task. Few investors had the time or capability to make such analyses on their own.

In January 2008, KfW subscribed to a convertible bond issue and in February/March 2008 to issues of new equity. Upon completion of the final equity issue in August 2008, KfW held over 90% of the equity of IKB all of which it subsequently (October 2008) sold to a private equity investor, Lone Star, at a loss of over €8 billion. But no depositor and no creditor lost money. A similar story and a similar fate applied to Landesbank Sachsen. Its business model also called for making loans to German enterprises at 44 Crisis: Cause, Containment and Cure low spreads.

Conditional Containment 41 The ECB forecast similar rates of inflation for the Eurozone for 2008 and 2009, as did the UK government and the Bank of England for the United Kingdom. If anything, the pressures on prices in the early stages of the crisis were strongly in the upward direction as a result of an ongoing boom in commodity prices, particularly oil. 2). 5%. There were two additional rate cuts during the first months of 2008, but Bank Rate was still at 5% in October 2008, more than a year after the crisis started.

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