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NYU Stern Hosts Panel Discussion on the Credit Crunch and Subprime Crisis

NYU Stern's Office of Alumni Affairs and Annual Giving, the NYU Stern Alumni Council Finance Committee and the Stern Salomon Center for Research in Financial Institutions and Markets recently co-hosted a panel discussion on the subprime credit crisis.

More than 550 NYU Stern alumni, students and industry leaders gathered to hear from expert researchers and practitioners on the topic, including the role of the Federal Reserve, the impact of subprime defaults on the real economy, financial market volatility and the credit crunch.

"We consider business the most important driver of social change, and it is our responsibility as educators to be leading the dialogue on how business affects society," said Thomas F. Cooley, Dean, NYU Stern School of Business. This event, the first of many, brought together Stern faculty and industry professionals to discuss the issues that intersect both business and society. Panelists included: Edward Altman, Max L. Heine Professor of Finance; Thomas F. Cooley, Richard R. West Dean and Paganelli-Bull Professor of Economics; Robert Engle, Michael Armellino Professor of Finance and 2003 Nobel laureate; Mickey Levy, Chief Economist, Bank of America Corporation; Mark Patterson, MBA '86, Chairman and Co-founder of MatlinPatterson Global Advisers; and Paolo Pellegrini, Managing Director, Paulson & Co., Inc. Matthew Richardson, Charles Simon Professor of Applied Financial Economics, Sidney Homer Director, Salomon Center, and Professor of Finance, moderated the discussion.

Over the last few years there have been three characteristics of credit markets: an abundance of credit, low spreads, and loans issued at weaker and weaker standards. The collateralized debt obligations (CDO) market experienced exponential growth, mainly from leveraged loans. In the end of 2005, residential construction began to fall and around September 2006, there was an increase in subprime delinquencies. All of this had, and still has, an affect on hedge fund trades. Pellegrini and Paulson's firms are both players in the credit markets, and both agreed that the impact of this situation will be felt for a while. Pellegrini said that this is a genuine credit crisis, not a liquidity crisis, and that there is froth in the market.

Engle spoke on market volatility, noting that while current market volatility is high relative to the last several years, it is not as high as in 2000-02. He explained that while big banks like Citi and Merrill Lynch, which both took large write-downs because of their subprime exposure, should be able to absorb this hit due to their size, but are not insulated from fraudulent loans, poor risk management and securitized loans. He also noted that there is difficulty in tracing the owners of these loans.

Patterson explained that the current situation likely happened because no one was correlating structured investment vehicles (SIV) with housing with loans, etc., and therefore did not fully comprehend the scale of what was happening. Patterson doubted that the market has seen the last of this mess and predicted more write-offs over the next six months. Altman forecasted that higher default rates next year, observing that events such as the US presidential election and the Beijing Olympics would moderate any rise in defaults during 2008.

Cooley and Levy then provided macroeconomic perspectives, commenting on the Fed's decision to cut the federal funds rate and revive the discount window to reassure markets that the Fed would provide support. Cooley, explaining that the Fed was created to promote the stability of the banking system, said that the Fed's actions create moral hazard and are disingenuous. Levy predicted that the economy will not go into a recession, but cautioned that as finances unwind so, too, will the housing market.

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