• Overview and Structure of the Course.
  • First Assignment : Kmart's 2002 Bankruptcy Case.
    • Relevant Bloomberg Screens and Notes.

• Quiz 1: Kmart Case. (In the Harvard Course Pack)
• Discuss the Kmart Case, and bankruptcy as a process.
  • Guides to the Discussion:
    • ``A Strategic Perspective on Bankruptcy,'' by Bill George, Jim Sharpe, and Andrew N. McLean. (In the Harvard Course Pack)
    • Financial Contracting: A Survey of Empirical Research and Future Directions, by Michael R. Roberts and Amir Sufi.
    • ``Practical Issues in Debtor-in-Posession Financing,'' by Jeffrey Weston Shields.
    • Accompanying Slides.

• Defensive Debtor-in-Posession Financing,'' by James S. Rankin, Jr.
• ``Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors' Bargain,'' by Mark J. Roe and Frederick Tung.

• Quiz 3 will cover: Corporate Bond Default Risk: A 150-year Perspective,'' by Kay Giesecke, Francis A. Longstaff, Stephen Schaefer, and Ilya Strebulaev.
• Banking and Bank Regulation.
  • Background Slides.
    • The Basel Framework.
    • Originate to Distribute:
      • The role of Banks in Asset Securitization by Nicola Cetorelli and Stavros Peristani.
      • The Rise of the Originate-to-Distribute Model and the Role of Banks in Financial Intermediation by Vitaly M. Bord and João A.C. Santos.
      • The Role of Bank Credit Enhancements in Securitization by Benjamin H. Mandel, Donald Morgan, and Chenyang Wei.
      • Are Banks Still Special When There is a Secondary Market for Loans? by Amar Gande and Anthony Saunders.
    • Leveraged Loan Market

• Moody's Distressed Exchanges Surge in 2009.
• Moody's Report on Corporate Credit Risk in 2011.
• Commercial Paper and the Credit Cliff
• Bond Ratings and the Ratings Agencies
  • How and Why Credit Rating Agencies are not Like Other Gatekeepers, by Frank Portnoy.
  • Moody's: Don't blame us for ``investment grade''
  • Moody's on Japan.
  • Moody's Ratings Definitions.
  • Jerome B. Van Orman, Jr.'s lament on the Credit Cliff.
  • The Credit Rating Agencies by Lawrence J. White.
  • Marcin Kacperczyk and Philipp Schnabl on Commercial Paper in the financial crisis.
  • Slides.

• Extensions to Merton's Model.
  • Flat Barrier (First passage time)
  • Black-Cox Barrier
    • Spreadsheet with Black Cox Model.
    • Hull, Section 24.6 (pp. 558--561).
  • Jumps in the Asset Value
    • Spreadsheet with Merton's Model and jumps.
  • Practical Applications (KMV)
    • Moody's KMV (Advantages of a structural approach.)

• Credit Default Swaps
  • Reduced Form Models of Default and Credit Default Swaps
    • Hull 500--506.
    • Hull, Chapter 23.
    • Total Return Swap is now the Tool of Choice to Provide Leverage (from Sober Look).
    • Slides reviewing Structural, Reduced Form, and Empirical Methods, and their implementation.
    • Spreadsheet with valuation of Credit Default Swap.
    • Spreadsheet with the basic information for our In-Class Activity on Corporate Bond Replication using CDS and IRS.
    • An example of the CDS-Bond Basis during the financial crisis.
    • Spreadsheet with trade on the CDS-Bond basis (Northrup-Grumman bonds on April 9, 2014).
    • Credit Event Fixings. (ISDA settlement protocol for Credit Default Swaps).
    • ``Counterparty Risks and Contract Volumes in the Credit Default Swap Market,'' by Nicholas Vause, BIS Quarterly Review, December 2010.
    • ``Credit default swaps market outstandings shrink as dealers tear up offsetting agreements,'' Global Finance, December 2008.
    • ``An Analysis of CDS Transactions: Implications for Public Reporting,'' by Chen, Fleming, Jackson, Li, and Sarkar. Federal Reserve Bank of New York, September 2011.
    • ``The Determinants of the CDS-Bond Basis During the Financial Crisis of 2007--2009,'' by Jennie Bai and Pierre Collin-Dufresne, December 2011.

  Spreadsheet with the auction data and results for the Greek Sovereign CDS fixing auction of March 19, 2012.

  Slides.

• CDOs and Correlated Defaults
  • ``The Economics of Structured Finance,'' by Joshua Coval, Jakub Jurek, and Eric Stafford.
  • Use Monte Carlo Analysis to evaluate tranches with varying correlations of default (in the spirit of the Gaussian copula).
    • Fortran code that evaluates the CDO in Coval, Jurek, and Stafford's example.
    • Fortran code that evaluates the CDO^2 in Coval, Jurek, and Stafford's example.

• The 2008 Credit Crisis.
• What happened?
  • ``Reputation and the Non-Prime Mortgage Market'' Insightful and prescient speech from William Poole, President and CEO, Federal Reserve Bank of St. Louis.
  • The Rise in Mortgage Defaults, by Christopher Mayer, Karen Pence, and Shane Sherlund.
  • Banks, Bank Runs, and Run-Arounds, Slides on the run on the shadow banking system.
• Policy Response.
  • Board of Governors Web Site.
    • The run on the Shadow Banking System
    • Understanding the Risks Inherent in Shadow Banking: A Primer and Practical Lessons Learned,'' by David Luttrell, Harvey Rosenblum, and Jackson Thies, Staff Papers, Dallas Fed, November 2012.
      • Shadow Banking by Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky.
      • Shadow Banking: A Review of the Literature by Tobias Adrian and Adam B. Ashcraft.
      • Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007 by Gary Gorton
      • Sizing Up Repo by Arvind Krishnamurthy, Stefan Nagel, and Dmitry Orlov.
    • Slides on Shadow Banking and the Crisis.
    • The Modern Repo Market:
      • ``Key Mechanics of the US Tri-Party Repo Market,'' by Adam Copeland, Darrell Duffie, Antoine Martin, and Susan McLaughlin; Federal Reserve Bank of New York Economic Policy Review.
      • ``The increase in triparty repo usage and other developments in the repo markets,'' Sober Look, February 3, 2012.
      Final Report of the Financial Crisis Inquiry Commission January 2011.

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