The Donovan Law Group

How Credit Derivatives Brought the U.S. Economy to the Brink of a Second Great Depression

How Credit Derivatives
Brought the U.S. Economy
to the Brink of a Second Great Depression

By Brian J. Donovan

February 19, 2010


As the name implies, a derivative is a contract whose value derives from some other asset, such as a commodity, bond, stock, or currency. Rather than trade or exchange the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset. Key to derivatives is that those who buy and sell them are each making a bet on the future value of that asset. Derivatives can be used by investors to speculate and to make a profit if the value of the underlying asset moves the way they expect. Alternatively, traders can use derivatives to hedge or mitigate risk in the underlying asset, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out.

Futures, options and swaps are the most common types of derivatives. Futures are contracts to buy or sell an asset on or before a future date at a price specified today. Options are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. In the case of a European option, the owner has the right to require the sale to take place on (but not before) the maturity date; in the case of an American option, the owner can require the sale to take place at any time up to the maturity date. If the owner of the contract exercises this right, the counterparty has the obligation to carry out the transaction. Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of commodities, bonds/interest rates, stocks, currencies/exchange rates, or other assets.

The modern era of derivatives trading began when the Chicago Board of Trade was established in 1849, allowing for the buying and selling of futures and options on agricultural commodities. Wheat farmers might buy futures before harvest on the price their wheat would bring in, hoping to hedge against low prices in the event of a bumper crop. Speculators would take on the risk of the losses farmers feared in the hopes of big payoffs that all too often turned horribly bad.

In the late 1970s, a bold new era of derivatives innovation was inspired by a set of technological breakthroughs and increasing volatility in the financial markets. It brought derivatives from the world of commodities into the domain of finance. The post-WWII Bretton Woods system of credit and exchange controls, which had maintained relative stability in world markets, broke down, and the values of foreign currencies, which had been pegged to the dollar, became free-floating. That led to unpredictable swings in exchange rates. Investors tried to find ways to protect themselves from the devastating impact of the high interest rates and from relentless swings in exchange rate.

Historically, the best way to insulate against such volatility was to buy a diversified pool of assets. If, for example, a company with business in both the United States and Germany were concerned about swings in the dollar-to-deutsche mark rate, it could protect itself by holding equal quantities of both currencies. That way, either way the rate swung, the losses would be offset by equal gains. But an innovative way to protect against swings was to buy derivatives offering clients the right to purchase currencies at specific exchange rates in the future. Interest-rate futures and options burst onto the scene, allowing investors and bankers to gamble on the level of rates in the future.

Another active area of the derivatives trade, which evolved shortly thereafter, involved “swaps.” In these deals, investment banks would find two parties with complementary needs in the financial markets and would broker an exchange between them to the benefit of both, earning the banks huge fees.

Salomon Brothers was one of the first banks to exploit the potential of derivatives swaps, brokering a pioneering deal between IBM and the World Bank in 1981. In 1979, IBM needed to raise a good deal of cash in dollars and had substantial excess quantities of Swiss francs and deutsche marks from having sold bonds to raise funds in those currencies. Normally, IBM would have had to go to the currency market to buy dollars. Salomon Brothers realized that IBM might instead be able to swap some of its francs and marks for dollars without actually having to sell them if some party could be found who could issue bonds in dollars to match IBM’s bonds in francs and marks.

The World Bank was a likely candidate, as it always needed cash in many currencies. IBM and the World Bank could swap their bond earnings and their obligations to the bondholders without any bonds actually changing hands. In 1981, after two years of wrangling over the details of the deal, Salomon Brothers announced it had concluded the world’s first currency swap between IBM and the World Bank, worth $210 million for ten years.

Players also had different motives for wanting to place bets on future asset prices. Some investors liked derivatives because they wanted to control risk, like the wheat farmers who preferred to lock in a profitable price. Others wanted to use them to make high-risk bets in the hope of making windfall profits. The crucial point about derivatives was that they could do two things: help investors reduce risk or create a good deal more risk. Everything depended on how they were used and on the motives and skills of those who traded in them.

Shortly after Salomon announced the big IBM-World Bank swap, J.P. Morgan started looking for ways to do more such deals. Initially, the epicenter of innovation was not J.P. Morgan’s New York headquarters but the London branch of a corporate offshoot known as Morgan Guaranty Limited (MGL). After the crash of 1929, a populist backlash against Wall Street led to the introduction of the Glass-Steagall Act, which forced banks to split off their capital markets operations – the trading of debt and equity securities – from their commercial banking businesses.

While the Glass-Steagall regulations prohibited the main New York bank from playing in the capital markets, Glass-Steagall didn’t apply overseas. London’s regulatory authorities took a more laissez-faire attitude, generally permitting banks to engage in a wider range of services. As a result, Morgan Guaranty had built up a good capital-markets business. In the 1970s, Morgan Guaranty moved into the world of sovereign and corporate bond issuance. Business boomed in part because American companies realized they could pay less tax by raising finance in London rather than in New York.

Moreover, back in New York the J.P. Morgan managers had realized that there was no explicit provision in Glass-Steagall against trading in derivatives products. As a respected commercial lender, Morgan had access to a huge array of blue-chip companies and governments that were often eager to conduct derivatives deals. The bank was also one of the very few with a top-notch AAA credit rating, which reassured clients that the bank could stand by its trades. By the end of the 1980s, derivatives groups were no longer pairing only with other parties to make derivative deals, they also were using their own capital to make trades with clients on a huge scale. When clients cut deals with J.P. Morgan, the AAA rating assured them that the bank would always be around to fulfill its side of those deals.

In June 1994, several dozen young bankers from the “swaps” department of the offices of J.P. Morgan in New York, London, and Tokyo gathered in Boca Raton, Florida for an off-site meeting to discuss how the bank could grow its derivatives business. By the time the J.P. Morgan swaps team gathered in Boca Raton, the total volume of interest-rate and currency derivatives in the world was estimated at $12 trillion, a sum larger than the American economy.

One key idea started to emerge at this off-site meeting: using derivatives to trade the risk linked to corporate bonds and loans. Commodity derivatives let wheat farmers trade the risk of loss on their crops. Why not create a derivative that enabled banks to place bets on whether a loan or bond might default in the future? Defaults were the biggest source of risk in commercial lending, so banks might well be interested in placing bets with derivatives that would allow them to cover for losses, using derivatives as a form of insurance against defaults.

After all, the swaps team reasoned, the world was full of institutions – and not just banks – that were exposed to the risk of loan defaults. J.P. Morgan itself had a mountain of loans on its books that were creating regulatory headaches. What would happen, they asked, if a derivative product of some kind could be crafted to protect against default risk – or to deliberately gamble on it? Would investors actually want to buy that product? Would regulators permit it to be sold? If so, what might it mean for the financial world if default risk – the risk most central to the traditional craft of banking – were turned into just another plaything for traders?

If you could really insure banks and other lenders against default risk, that might well unleash a great wave of capital into the economy. This was the birth of credit derivatives.  As with all derivatives, credit derivatives were to offer a way of controlling risk, but they could also amplify it. It all depended on how they were used. Controlling risk was the initial goal of the J.P. Morgan swaps team. It would be the second feature that would come to dominate the business a decade later, eventually bringing the U.S. economy to the brink of a second Great Depression.


Since the dawn of modern finance, governments have been beset by the question of how much banking should be regulated. On the one hand, twentieth-century American and European governments have generally accepted that the business of finance should be exactly that, a business run privately in a profit-seeking manner. But finance is also not quite like other areas of commerce. Money is the lifeblood of the economy, and unless it circulates readily, the essential economic activities go into the equivalent of cardiac arrest. Finance serves a public utility function, and the question government regulators must wrestle with is to what degree private financiers should be allowed to seek a profit and to what degree they must be required to ensure that money flows safely.

Relevant U.S. Regulation
(a) The Banking Act of 1933 (the Glass-Steagall Act), a reaction to the collapse of a large portion of the American commercial banking system in early 1933, prohibited any one institution from acting as any combination of an investment bank, commercial bank, and/or an insurance company. Although there was no explicit provision in Glass-Steagall against trading in derivatives products, it did prevent banks from forming a seamless in-house pipeline between the raw material (credit risk) and the final product (derivatives trading). The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, repealed the Glass-Steagall Act. The Gramm-Leach-Bliley Act, signed into law by President Bill Clinton on November 12, 1999, legitimized the concept of combining commercial and investment banking to construct “one-stop shopping” empires. The industry was rapidly adjusting to a new reality that banks needed to be big and offer a full range of services in order to compete at all;
(b) The Federal Reserve imposes rules specifically on U.S. commercial banks. A bank’s lending is ultimately limited by the amount of its equity, based on the capital ratio (This is the ratio of a bank’s capital to its risk-weighted assets. The Fed requires a minimum capital ratio of 4% to 8%, depending upon the type and quality of its assets.) requirement set by the Fed.  Banks must also meet a reserve ratio requirement, but in fact the Fed normally provides the required reserves in order to maintain control of the interbank lending rate, i.e. the Fed funds rate. If banks over expanded their assets and failed to keep adequate reserve capital to cover potential losses, they were at risk of collapse, as had happened after the Crash of 1929. The regulations in London also impose minimum reserve requirements; and                                                                                                                                                                                                     (c) The Securities and Exchange Commission (SEC) was the main regulator of the brokerages. Until 2004, the SEC had imposed controls on the amount of assets a brokerage could hold on its balance sheet relative to its core equity. However, in April 2004, the SEC’s five commissioners decided to lift that so-called leverage ratio control. By 2005, the increased leverage of super-senior risk was tolerated.

Relevant International Regulation
The Basel Accord, agreed to by the Group of Ten nations, plus Luxembourg and Spain, was drafted in 1988 under the management of the Basel Committee on Banking Supervision (BCBS), whose governing body is based at the Bank for International Settlements (BIS). The first set of rules, known as Basel I, imposed globally consistent standards for prudent banking, most notably by demanding that all banks maintain reserves equivalent to 8 percent of the value of their assets, adjusted for risk.

Unfortunately, these regulations had been drafted before the explosion of derivatives innovation. They could be extended into the derivatives world to some extent; aspects of the Basel Accord set out, for example, levels of reserves that banks must hold if they were engaging in derivatives activity. But the urgent issue now was that the business had expanded so much, and in such complex ways, that regulators couldn’t get good estimates of the risks involved. The issue didn’t worry regulators too deeply at first. In the early 1980s, swaps deals accounted for so little of overall banking activity and were being done by such a relatively small and elite group of players that regulators regarded the sector as a sideshow. But, as the 1980s wore on and the business began to take off, some regulators became uneasy. They began to tweak the banking rules in a manner that forced banks to lay aside more capital against their derivatives business. That left bankers nervous. They feared that profits could drop if regulators became even more involved. In response to this, in 1985, a group of bankers working for Salomon Brothers, BNP Paribas, Goldman Sachs, J.P. Morgan, and others held a meeting in a Palm Beach hotel for the purpose of agreeing on standards for swaps deals. The goal was to draft legal guidelines for the deals. The result was the establishment of an industry body to represent the swaps world, subsequently known as the International Swaps and Derivatives Association (ISDA).

In 1987, ISDA estimated the value of the total volume of derivatives contracts to be  approximately US$865 billion. Shocked by that number, the Commodities Futures Trading Commission (CFTC) proposed to start regulating interest-rate and currency swaps in the same way it monitored the commodities derivatives world. That idea provoked horror from the banking world. Any existing derivatives contracts would be thrown into a legal limbo because the CFTC legislation stipulated that all deals not done on its exchange would be illegal. ISDA sponsored a lobbying campaign on Capitol Hill. They prevailed two years later when the CFTC backed down. That victory was just temporary, though. By the early 1990s, government scrutiny of derivatives was intensifying again, as the business continued to boom and a range of exotic new offerings were introduced. In truth, most regulators and central bankers still didn’t know in any detail how the swaps world worked. Its esoteric nature raised the troubling issue at the center of the regulatory dilemma: how could they allow this booming business to keep flourishing and still ensure that it didn’t end up jeopardizing the free flow of money around the “real” economy? Regulators didn’t want to stifle positive innovation, but they were growing leery.

At J.P. Morgan, quantitative experts developed a technique with a 95% confidence level, the concept of value at risk (VaR), that could measure how much money the bank stood to lose each day if the markets turned sour. The assumption of VaR was that the future was likely to look like the recent past. Banks argued that VaR provided them with both the incentive and the ability to navigate wisely in the derivatives world without the need for government interference.

The Group of Thirty (G30), established in 1978 with funding from the Rockefeller Foundation, is a private, nonprofit, international body composed of very senior representatives of the private and public sectors and academia. It aims to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in the public and private sectors, and to examine the choices available to market practitioners and policymakers. Paul Volcker is Chairman of the Board of Trustees. On July 21, 1993, the G30 released its three-volume study of the derivatives markets. The report recommended that: (a) all banks adopt VaR tools; (b) banks’ senior managers learn in detail how derivatives products worked; (c) banks use ISDA’s legal documents for negotiating and drafting deals; and (d) banks record the value of their derivatives activity each day according to real-time market prices (“mark-to-market”).

Shortly after the release of the G30 study, the U.S. General Accounting Office (GAO) published a highly critical study of the derivatives market, with conclusions diametrically opposed to those of the G30 study. The GAO study argued that derivatives may produce a debacle as bad as the savings and loan catastrophe. Charles Bowsher, head of GAO,  stated that Congress should step in to regulate derivatives.

In 1994, four bills proposing regulation of the derivatives market had been submitted to the U.S. Congress. In response, J.P. Morgan/ISDA lobbied Congress and preached that the derivatives industry was perfectly capable of self-regulation, using the G30 report as a template.

Before Bill Clinton entered the White House, in1992, he had taken an anti-Wall Street stance. However, once in office the Clinton administration shifted view. “Derivatives are perfectly legitimate tools to manage risk,” Treasury Secretary Lloyd Bentsen said in a May 1994 speech to securities dealers. “Derivatives are not a dirty word. We need to be careful about interfering in markets in too heavy-handed a way. Right now our principal emphasis is on making sure existing regulatory authority is fully reviewed and implemented.” The head of Clinton’s new National Economic Council, Robert Rubin, turned out to have spent the 1980s as an arbitrageur for Goldman Sachs.

By the end of 1994, the J.P. Morgan/ISDA lobbying campaign had been so brilliantly effective that all four derivatives regulation bills in Congress were defeated. It was an extraordinary victory for J.P. Morgan/ISDA – one of the most startling triumphs for a Wall Street lobbying campaign in the 20th century. Self-policing had won the day!

On February 4, 1994,  Fed Chairman Alan Greenspan raised the federal funds rates thereby triggering a sharp fall in bond prices and causing carnage in the derivatives world. Notwithstanding this fact, Greenspan was a staunch believer in free markets and a leading voice against regulating credit derivatives. “By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives,” Greenspan declared in a March 1999 speech. Greenspan believed derivatives were making markets more efficient.

In 2000, President Bill Clinton signed into law the Commodity Futures Modernization Act  (CFMA), which specifically stressed that “swaps” were not futures or securities, and thus could not be controlled by the CFTC, or the SEC, or any other single regulator. The CFMA, later called the “Enron loophole,” has been blamed for contributing to the meltdown of the U.S. financial market.


Default Risk
Default risk is the danger that a borrower will not repay a loan or bond. Banks have collapsed because they misjudged default risk or had too much exposure to a single sector or entity.

Derivatives had been used to separate out part of the risk attached to bonds, namely, the risk that interest rates would rise and result in the decrease of a bond’s value. Derivatives traders had been able to sell that risk as a product to investors who were willing to bet that interest rates would not actually rise. The question was whether derivatives could be applied to the default risk associated with a loan. Doing so would overturn one of the fundamental rules of banking: that default risk is an inevitable liability of the business. If a technique could be developed to package default risk so that it could be traded, that would be an enormous boost for banking in general. This would free up banks to make more loans, as they wouldn’t need to take losses if those loans defaulted. The derivatives buyers who had gambled on that risk would take the hit.

The Basel I Accord of 1988 stipulated that all banks needed to hold capital reserves equivalent to 8% of the corporate loans on their books ($8 of spare funds for every $100 lent out). J.P. Morgan believed this was a complete waste of resources and curbed the degree to which the bank could grow its business. The J.P. Morgan swaps team believed it needed to find a way to shift credit risk off its books. Doing so would make the Basel I capital reserves “problem” disappear.

Credit Default Swap
In 1993, after Exxon was threatened with a $5 billion fine as a result of the Valdez oil tanker spill, the company had taken out a $4.8 billion credit line from J.P. Morgan and Barclays. J.P. Morgan wanted to find a way to shift the credit risk of the Exxon deal off its books, but without selling the loan. J.P. Morgan agreed to pay the European Bank for Reconstruction and Development (EBRD) a fee each year in exchange for the EBRD assuming the risk of the Exxon credit line. If Exxon defaulted, the EBRD would compensate J.P. Morgan for the loss; but if Exxon did not default, then the EBRD would be making a substantial profit in fees. The EBRD was insuring J.P. Morgan for the risk of the loan to Exxon. The Exxon/J.P. Morgan/EBRD transaction was the world’s first Credit Default Swap (CDS).

The J.P. Morgan dream was that credit derivatives would allow the bank to remove the credit risk of its loans thereby allowing the bank to lower its capital reserves. This reserve cash would then be freed up for use in generating more profits, turbo-charging not only banking but the economy as a whole. The question was: if banks used credit derivatives to shift their default risk, would the regulators let them cut their capital reserves? The two principle institutions responsible for regulating this issue were the U.S. Federal Reserve and the Office of the Comptroller of the Currency (OCC). In August 1996, the Federal Reserve issued a statement suggesting that banks would be allowed to reduce capital reserves by using credit derivatives.

The challenge for J.P. Morgan was to transform the CDS trade from a cottage industry into a mass-production business.

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. Securitization distributes risk by aggregating debt instruments in a pool, then issues new securities backed by the pool. The term “securitization” is derived from the fact that the form of financial instruments used to obtain funds from the investors are securities. A typical example of securitization is a mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a collection of mortgages. The process works as follows:

First, a regulated and authorized financial institution originates numerous mortgages, which are secured by claims against the various properties the mortgagors purchase. Then, all of the individual mortgages are bundled together into a mortgage pool, which is held in trust as the collateral for an MBS. The MBS can be issued by a third-party financial company, such as a large investment banking firm, or by the same bank that originated the mortgages in the first place. Regardless, the result is the same: a new security is created, backed up by the claims against the mortgagors’ assets. This security can be sold to participants in the secondary mortgage market. This market is extremely large, providing a significant amount of liquidity to the group of mortgages, which otherwise would have been quite illiquid on their own.

By linking credit derivatives technology to securitization, securities could be divided into “tranches,” each with a different level of risk, and of return, for the investor. The highest risk and highest return were called “junior,” the middle level were called “mezzanine,” and the lowest risk and lowest return were called “senior.” The concept was that if defaults on any loans in the bundle did occur, those losses would be charged against the junior level securities first. The key attraction of this bundling, multi-tiered approach was that investors could choose the level of risk they wanted. Now, mortgages, corporate bonds, loans, and credit derivatives could be “sliced and diced.” The idea of J.P. Morgan’s swaps team was that, instead of grabbing a portfolio of different mortgages and selling investors a stake in it, they would instead sell a bundle of credit derivatives (CDS) contracts that insured somebody else against the risk of default.

Special Purpose Vehicles (SPVs)
SPVs were offshore shell companies that J.P. Morgan created to insure J.P. Morgan for the risk of the entire bundle of loans, with J.P. Morgan paying a stream of fees to the SPV and the SPV agreeing to pay J.P. Morgan for any losses from defaults. Meanwhile the SPV would turn around and sell smaller chunks of that risk to investors, in synthetically sliced-out junior, mezzanine and senior notes. The SPV would invest the money it earned from the sale of the notes to investors in AAA-rated Treasury bonds, so that if it were ever needed, there would be no doubt the money would be there.

In December 1997, BISTRO (Broad Index Secured Trust Offering) was unveiled by J.P. Morgan! The J.P. Morgan team believed they had found a way to circumvent the Basel I rules. Bistro-style CDS trades took off in 1998. The market for credit derivatives had grown overnight from a cottage industry into a business where tens of billions of dollars of risk was changing hands. The intent of J.P. Morgan was to fine-tune a bank’s exposure to risk in order to free up credit limit constraints and reserve capital. BISTRO also generated substantial revenue via hefty fees.

In 1996, when the Federal Reserve wrote its first formal letter to the banking community about credit derivatives, it warned that regulators would allow the banks to cut capital reserves only if they had truly removed the risk of loans from their books. In the second half of 1998, regulators were uneasy with BISTRO. This J.P. Morgan innovation did not fit neatly under any existing regulations. The swaps team had to find a way to remove or insure the amount of risk that was unfunded in the BISTRO scheme if they wished to get capital relief.

Super-Senior Risk
Super-senior risk is the most senior part of the capital structure of a CDO, which is allegedly the least exposed to the risk of default. Such risk always carried a AAA-rating from the credit ratings agencies. The J.P. Morgan swaps team convinced American International Group (AIG) to take over J.P. Morgan’s super-senior risk by simply signing credit derivatives contracts that would insure J.P. Morgan against any loss. AIG, as an insurance company, was not subject to the same burdensome capital reserve requirements as banks. That meant that AIG would not need to post capital reserves if it insured the super-senior risk. J.P. Morgan had found a way to remove the rest of the credit risk from their BISTRO deals!

Ironically, shortly after the J.P. Morgan/AIG deal, OCC and the Fed informed J.P. Morgan that after due reflection they thought that banks did not need to remove super-senior risk from their books after all. But, the banks would need to post reserves worth 20% of the usual capital reserves (or 20% of 8%, meaning $1.60 for every $100 that lay on the books) and the notes being issued by a BISTRO-style structure had to have a AAA stamp from a “nationally recognized credit rating agency.” Some said BISTRO now stood for “BIS Total Rip Off.”

By 1999, super-senior risk had swelled to $100 billion on J.P. Morgan’s balance sheet.

Risk assessment models are only as good as the data that is fed into them and the assumptions that underpinned their mathematics. The modeling of risks involved in BISTRO-style deals had its limits. An example is the issue of “correlation,” or the degree to which defaults in any given basket of loans might be interconnected. J.P. Morgan statisticians knew that company defaults are connected. If a car company goes into default, its suppliers may go bust, too. Conversely, if a big retailer collapses, other retail groups may benefit. Correlations may go both ways, and working out how they might develop among any basket of companies is complex. Statisticians studied the past correlations in corporate default and equity prices and programmed the models to assume the same pattern in the present. In truth, the assumption about correlation levels is not infallible; it is just guesstimation.

BISTRO Product Development
As earnings from CDS deals declined, the J.P. Morgan swaps teams explored the use of other assets, such as mortgage loans, for the BISTRO concept. However, data to track mortgage defaults was in short supply. When bankers assembled models to predict defaults, they want data on what normally happened in both booms and busts. Mortgage risk was just too uncharted. If defaults on mortgages were uncorrelated, then the BISTRO structure should be safe for mortgage risk, but if they were highly correlated, it might be catastrophically dangerous. Therefore, J.P. Morgan, unlike many of the bank’s competitors, stayed away from mortgage-based CDS deals.

Single-Tranche CDOs
In early 2001, the first generation of BISTRO deals had evolved into a class of standardized products widely referred to as “synthetic collateralized debt obligations.” A popular variation on the BISTRO concept was known as “single-tranche CDOs.” These were bundles of debt that were sold to a shell company, as with the BISTRO scheme, but then the shell company offered only one class of notes as opposed to junior, mezzanine, and senior. This meant that more of the risk of the loan bundles was retained on the shell company’s books, not just the super-senior risk.

CDO Squared
This is identical to a CDO except for the assets securing the obligation. Unlike the CDO, which is backed by a pool of bonds, loans and other credit instruments, CDO-squared arrangements are backed by CDO tranches. A CDO squared is essentially a CDO of CDOs. CDO-squared allows the banks to resell the credit risk that they have taken in CDOs.  Here, rather than the shell company purchasing a bundle of loans, it would purchase pieces of debt issued by other CDOs and then issue new CDO notes. Typically, the shell company would purchase only the riskiest notes from the other CDOs, because doing so allowed them to offer higher returns. The ultimate goal of all this complexity was to create more leverage and thus more potential return.

Subprime Mortgages
Alan Greenspan’s lowering of interest rates prompted a boom in the housing market, as mortgages became more affordable. As the stock market tumbled, it was becoming clear that the new action in investing was on the credit side of business, not in equities. The rapidly mounting piles of mortgage loans were fertile fodder for the CDO machine at many banks. Especially since many of the new mortgages were high risk which allowed the banks to offer extremely attractive returns. During the 1990s, CDOs had been constructed only out of “conforming” mortgages, meaning those that conformed to the high credit standards imposed by federal-government-backed housing giants Fannie Mae and Freddie Mac. In the late 1990s, a group of new mortgage lenders and brokers started to offer “nonconforming” mortgages, more commonly called “subprime” mortgages. Loans were increasingly extended to borrowers with bad credit history. By 2005, sales of nonconforming mortgage bonds reached $800 billion. That meant that, in 2005, almost half of all mortgage-linked bonds in the U.S. were based on subprime loans. For returns-hungry investors, subprime-mortgage CDOs were gold dust. The lending of the subprime mortgages was driven by the demand of end investors, in what would prove to be a vicious cycle.

Mortgage lending had become an assembly-line affair in which loans were made and then quickly reassembled into bonds immediately sold to investors. A bank’s ability to extend a loan no longer depended on how much capital that institution held; the deciding factor was whether the loans could be sold on as bonds to investors.

Banks repackaged mortgage-based bonds in various ways: a CDO of asset-backed securities (CDO of ABS); a “mezzanine CDO of ABS,” which took pools of subprime mortgage loans and used them as the basis for issuing bonds carrying different degrees of risk. This essentially involved bankers repeatedly skimming off the riskiest portions of bundles, mixing them with yet more risk, and then skimming them yet again – all in the hope of higher returns; and “synthetic CDO of ABS” which was a product banks created not out of actual bundles of mortgage loans but out of derivatives made of mortgage loans. This innovative scheme enabled investors to place bets on whether mortgage bonds would default or not.

Structured Investment Vehicle (SIV)
An SIV is a type of quasi-shell company for purchasing the loans and selling the bonds sliced and diced from them. SIVs were tied to banks, not completely separate as with the shell companies known as SPVs. The banks provided some of the funding, as opposed to all of that being raised by the shell company itself, through selling notes. SIVs sat off the balance sheets of banks. SIVs were like a garage of a house: a useful place for banks to park assets they did not want inside their home banks. The key concept was that SIVs allowed the banks to evade the Basel rules that limited the amount of assets they could hold on their balance sheets, thereby freeing them to leverage their capital a good deal more. The SIVs exploited a loophole in the Basel Accord. The loophole was this: the Basel Accord stated that banks didn’t need to hold capital resources for any credit lines that were less than a year in duration. Therefore, banks typically extended credit lines to SIVs that were 364 days or less. The SIVs raised their funding in the short-term commercial paper market. In this market, the SIVs would sell notes that paid off in only a few months, somewhat like a CD. The cash the SIVs raised was used to purchase safe, long-term debt instruments, such as mortgage bonds. The SIVs made a profit because their short-term borrowing costs were lower than the returns they made on the long-term bonds they purchased.

Ratings Arbitrage
Investors generally relied on a simplistic ratings scale (Triple-A, B, C) from the credit ratings agencies (Moody’s, Standard & Poor’s, and Fitch) to guide them through the strange new CDO world. However, by 2005, bankers were using the very same rating agency models to test new products to see what they were likely to earn. The banker’s aim was to get as high an agency rating as possible, with the highest level of risk, so that the CDO could produce the highest investor returns. In banking circles, this game was known as “ratings arbitrage.”

Although many may argue the bankers’ use of ratings arbitrage to game the system was highly unethical, a greater danger was the conflict of interest that existed between the bankers and the ratings agencies when it came to CDOs. While in the corporate bond world, the agencies rated the bonds of thousands of companies and were not dependent on any one company for fees, CDOs were being produced by a small number of banks. These banks routinely threatened to boycott the agencies if they failed to provide the desired AAA-ratings, thereby jeopardizing the sizable fees the credit ratings agencies earned from the banks for their services.

The Gaussian Copula Model
The ratings agencies faced the same correlation problem that the J.P. Morgan team confronted when it considered going into mortgage-based BISTRO deals: lack of good data to determine how likely it was that one default would trigger others. The Moody’s “statistical engine” tried to plot the probability of future defaults based on historical data. However, a model is only as good as the data fed into the engine. The CDO world was so new that there was not always that much data available. Starting in March 2000, the Gaussian copula model was used to estimate the degree of correlation. The problem was all banks were using the same statistical method. Because everyone was using the same statistical method of devising their CDOs to contain risk, in the event of economic conditions that defied that modeling, huge numbers of CDOs would suffer losses all at once. This risk was ignored because, due in large part to mortgage-based CDOs and CDSs between 2003 and 2004, revenues of the largest investment banks grew 14%.

Federal Reserve Chairman Alan Greenspan argued that the mathematicians were improving their formulas to make the derivatives business less risky. But the more security the math seems to give, the greater the risk on the day the highly improbable happens. Eighty years ago Frank Knight, arguably one of the greatest American economists ever, wrote that economists did not always make clear “the approximate character of their conclusions, as descriptions of tendency only.” In theoretical mechanics, perpetual motion was possible; in real life it was not. “Policies must fail, and fail disastrously, which are based on perpetual motion reasoning without the recognition that it is such,” Knight wrote.

The extent to which bankers, regulators, rating agencies, and investors blindly used what Knight called “perpetual motion reasoning” in dealing with derivatives explains, at least in part, how the abuse of credit derivatives brought the U.S. economy to the brink of a second Great Depression.


Between 1997 and late 2005, house prices rose more than 80%! In 2005 Ben Bernanke, then chairman of the President’s Council of Economic Advisers, declared: “House prices have risen nearly 25% over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”

Notwithstanding the rosy picture painted by Bernanke, in 2005 American households extracted no less than $750 billion of funds against the value of their homes, compared to $106 billion a decade earlier, of which two thirds was spent on personal consumption, home improvements, and credit card debt. In 2006, a number of subprime borrowers decided they were better off abandoning their mortgages. As a result J.P. Morgan raised its underwriting standards and reduced the level of unsold mortgages it held on its books. The bank also purchased credit default swaps from third parties which promised to redeem any default losses on the mortgage bonds it would begin selling. However, none of J.P. Morgan’s competitors slowed down their mortgage-backed credit derivatives production lines.

CDX in U.S. and iTraxx in Europe were indices of credit default swaps. LCDX was an index of loan derivatives; TABX tracked derivatives on mortgage tranches; CMBX was an index of derivatives on commercial mortgages. By 2006, bankers and investors were using all of these indices to trade as if their risk assessment models were infallible.

In January 2006, ABX, an index for tracking mortgage derivatives was launched. At the same time, the mortgage repackaging business was falling victim to a vicious cycle: banks were issuing more and more subprime mortgages, which were riskier and riskier, so that these loans could be repackaged into more and more CDOs in order to compensate for the declining profit margins. In the process, those selling the CDOs were creating a huge amount of super-senior risk.

The problem for the banks was what to do with this super-senior risk. There were three basic options: simply park the super-senior risk on the bank’s books, buy insurance, or create an SIV network to purchase the super-senior risk.

There was no regulatory pressure to manage risk! The SEC was the main regulator of the brokerages. Until 2004, the SEC had imposed controls on the amount of assets a brokerage could hold on its balance sheet relative to its core equity. In April 2004, the SEC’s five commissioners decided to lift that so-called leverage ratio control. By 2005, the increased leverage of super-senior risk was tolerated.

Liquidity Puts
Citigroup, as a commercial bank, had easy access to the raw material needed to create CDOs. However, unlike the brokerages, Citi could not park unlimited quantities of super-senior risk on its balance sheet. The U.S. regulatory system did still impose a leverage limit on commercial banks. Citi decided to circumvent that rule by placing large volumes of its super-senior in an extensive network of SIVs and other off-balance-sheet vehicles that it created. Citi even threw in a buyback provision to entice the SIVs to buy the risk. Citi promised that if the SIVs ever ran into problems with the super-senior notes, Citi would buy them back. These buyback guarantees were called “liquidity puts.”

The Originate & Distribute Approach
In January 2006, when Ben Bernanke took over the Fed from Alan Greenspan, the dominant creed at the Federal Reserve and U.S. Treasury was that credit risk had been so widely dispersed, via credit derivatives and CDOs, that any blows would be absorbed. However, the Bank for International Settlements (BIS) disagreed with the Federal Reserve and U.S. Treasury. The BIS believed that financial institutions had become highly leveraged in ways policy makers could not see. Malcolm Knight, managing director of the BIS, noted,  “What worries me is what might happen if – or when – the system starts to de-leverage.” The “originate & distribute” approach has had benefits but will have side effects.

The Housing Bubble Bursts
On October 6, 2006, Kara Homes, known for their construction of “McMansions,” filed for bankruptcy.  In December 2006, Ownit and Sebring, two mortgage brokerages collapsed. In February 2007, mortgage defaults were rising sharply at both Household Finance and New Century Financial. However, banks continued to issue mortgage-based CDOs. Merrill Lynch, Morgan Stanley, and Bear Stearns even acquired stakes in midsize mortgage lenders. Between October and December 2006, banks issued $130 billion worth of CDOs. The raw material for forty percent of these CDOs was subprime mortgages. Banks had to keep finding CDS contracts to create CDOs, to keep their investors happy and keep earning fees.

Maturity Mismatch
On June 12, 2007, a big hedge fund in New York, with close links to Bear Stearns and with significant exposure to subprime mortgages and huge levels of leverage, fell 23% in value. As the subprime mortgage market began to turn sour, the price of some mortgage securities and derivatives fell. On June 15, 2007, Moody’s cut its ratings on 131 bonds linked to subprime debt. Mortgages were defaulting at a rate materially higher than original expectations. The hedge funds were plagued with “maturity mismatch”: they bought long-term mortgage-linked assets that were hard to sell in a hurry, and they funded those purchases by raising short-term debt that could suddenly disappear. During summer of 2007, panic and uncertainty in the asset-backed commercial paper (ABCP) market intensified. This made it too expensive for SIVs to raise funds. On August 6, 2007, American Home Mortgage Investment Corporation filed for bankruptcy after suffering substantial losses on its mortgage assets and finding it impossible to sell ABCP notes.

The further problem with SIVs was that there were no procedures to follow in the event of the collapse of an SIV. A corporation could file for bankruptcy. There was precedent for handling a failed bank. However, SIVs were not covered by any regulatory rules.

On August 9, 2007, U.S. investors panicked and were dumping everything that might contain default risk. The price of gold and the price of U.S. Treasury bonds were rising. The price of risky corporate bonds and the price of mortgage-backed assets were falling. However, the official position of the Federal Reserve and the U.S. Treasury was that mortgage problems were “contained” and that the market turmoil would be a short-lived storm.

On August 15, 2007, Countrywide, America’s largest independent mortgage lender, announced the rate of foreclosures and defaults of subprime loans had risen to the highest levels since 2002 and mortgage-backed bonds were not being purchased by investors.

Shadow Banking System
In August 2007, the real concern was a run on the shadow banking system, which was approximately US$1.3 trillion in size, funded by ABCP. The question was whether the “real” banks were going to have to bail out their “shadow bank” offspring. It was astonishing how little policy makers and regulators knew about the workings of ABCP and CDOs!

The rate on adjustable rate mortgages rose from 3.5% in late 2005 to 5% in the autumn of 2007. As a result, households were defaulting in surprisingly large numbers.

In September, 2007, the U.S. Treasury called a meeting of U.S. banks to discuss the state of the shadow banks. Until this meeting, U.S. federal government had insisted that it did not want to get directly involved in trying to bail out SIVs or any other shadowy vehicles. However, now money-market funds were holding large quantities of notes issued by SIVs which were not covered by any federal safety insurance. If SIVs collapsed, money-market funds would suffer heavy losses and consumers would realize that their super-safe investments were not so safe after all. U.S. government regulators wanted to try to avert the panic that would result.

On October 11, 2007, Moody’s cut its ratings on some $32 billion worth of mortgage-backed bonds. The subprime mortgage market was not behaving as the models had predicted. Houses were being left by borrowers in a very bad state! Entire neighborhoods were being blighted. It was hard to predict how mortgage defaults would impact CDOs at the other end of the chain. When houses went into default, the delinquency process could last for months, a sort of limbo of cash flow. When losses reached a certain predetermined level, the trustees of a CDO were supposed to declare an “event of default” and repay assets to note holders.

The entire structured credit system had been built on the assumption that AAA was ultra-safe and AA almost rock solid. Now that pillar of faith was crumbling. In October 2007, Merrill Lynch announced a $8.4 billion write-down on its credit assets due to super-senior CDOs on its books. On November 4, 2007, Citi announced that it would report revised losses for the second quarter of between $13.7 billion and $16.7 billion as a result of having to write down the value of its corporate and mortgage assets. The problem was that Citi held on its books approximately $43 billion of super-senior risk. Citi’s “liquidity puts” chickens had come home to roost!

Due to the fact that banks had been slicing and dicing risk so enthusiastically, most regulators and investors had assumed that banks would be exposed to only a tiny part of any credit losses. Risk was supposedly scattered throughout the system. However, the regulators and investors were wrong. Between June 2007 and late November 2007, approximately $240 billion had been wiped out of the market capitalization of the dozen largest Wall Street banks. The more that the banks revealed losses on super-senior assets, the more investors became panicked thereby causing the prices of the assets to fall still further which, in turn, caused the banks to announce more write-downs. The vicious cycle could not be stopped.

Bear Stearns
Because Bear Stearns was a brokerage, with no real commercial banking operations, it had no stable pool of bank deposits providing cash flow. Bear used the “repurchase” market. This is a corner of finance where banks use assets they hold, such as mortgage-backed bonds, as collateral for borrowing money from other investors for one or two days. The cost of buying insurance against default with CDSs was becoming more expensive. If Bear had been a commercial bank, it could have gone to the Fed for a loan. Brokerages were supervised by the SEC. However, the repurchase market investors who had lent money to Bear included state-backed Asian institutions that were threatening to pull their loans to all American brokers if Bear defaulted on its contracts. On March 16, 2008, the Fed cut a deal: If JP Morgan Chase bought Bear for $2 a share, the Fed would take $30 billion of Bear’s assets and place them into a special, ring-fenced vehicle. If those ring-fenced assets lost value, JP Morgan Chase would absorb the loss, up to $1 billion. After that, the Fed would absorb the loss.

In March 2008, the Federal Reserve also announced that it would extend its liquidity provisions to all the twenty primary dealers that buy Treasury securities from it, meaning that it was agreeing to provide a safety net for the brokerages, comparable to that for the commercial banks. This was the first time the Fed employed this measure since the Great Depression.

The shadow banks and brokerages were deeply interconnected with commercial banks through a complex web of trades. Quite apart from whether they were “too big to fail,” they were too interconnected to ignore.

In April 2008, the Basel committee recommended that banks: (a) lay aside much bigger reserves; (b) focus more on liquidity issues; and (c) be more discriminating in their use of credit ratings.

Black September
On September 7, 2008, the Federal Reserve put the two state-backed mortgage giants, Fannie May and Freddie Mac, under “conservatorship.” Like the shadow banks and brokerages, these two mortgage giants had been operating with very high levels of assets relative to their equity.

On September 14, 2008, Lehman Brothers announced bankruptcy. After rescuing Bear Stearns and placing Fannie and Freddie in “conservatorship,” there was no political will for a federal bailout of Lehman.

On September 16, 2008, the $62 billion Reserve Primary Fund, the country’s oldest money-market fund, announced: “The value of the debt securities issued by Lehman Brothers Holdings (face value $785 million) and held by the Primary Fund has been valued at zero effective as of 4:00 p.m. New York time today.” A run on the money-market funds now seemed inevitable.

By the summer of 2008, AIG was holding approximately $560 billion in super-senior risk. The AIG problem was the following: When AIG insured super-senior CDO debt, AIG often promised to post collateral to back up that insurance. But AIG had not accumulated the reserves that it would need to follow through on that commitment in the event of a wave of claims. The perfect market storm had been created: Lehman collapses, the money-market panic, and now the prospect of an AIG default. In order to prevent a catastrophic meltdown of the entire financial system, on September 16, 2008, the Fed announced it would extend an $85 billion loan to AIG in exchange for taking a 79.9% stake in the group.

On September 18, 2008, the Treasury announced a safety net for money-market funds.

On September 19, Henry Paulson announced the Troubled Asset Relief Program (TARP) wherein the Treasury would earmark up to $700 billion in funds to purchase “troubled assets,” such as super-senior risk, from the banks.

Consolidation and state intervention was intensifying day by day:
• Goldman Sachs and Morgan Stanley applied to change their status from brokers into banks, bringing them more firmly under the Fed umbrella and ending the era of independent investment banks.
• FDIC took control of WaMu and sold it to JP Morgan Chase.
• Wells Fargo acquired Wachovia.

The October Ultimatum
On October 13, 2008, the U.S. Treasury called a meeting of the heads of the nine largest U.S. banks. Paulson told the banks they would sell shares of their banks to the government. It was a “take it or leave it” deal.

By the winter of 2009, economists estimated that mark-to-market credit losses had reached almost $3 trillion. By early 2009, two-thirds of mortgage CDOs issued in 2006 and 2007 (approximately $300 billion) were in a state of default.


The benefits of credit derivatives are:
(a) they provide a simple device for banks and others to hedge the risks associated with a particular company or group of companies – Alan Greenspan and others have argued that credit derivatives served as a shock absorber during the corporate crises of 2001 and 2002. Because many of the lenders to companies like Enron and WorldCom had hedged their risk, the corporate scandals did not spread to the banking industry. By limiting their exposure, banks averted what could have been a parallel wave of banking failures;
(b) the ability to transfer risk and allocate it to those investors most able and willing to take it –
The Exxon/J.P. Morgan/EBRD transaction, wherein the EBRD insured J.P. Morgan for the risk of the $4.8 billion credit line to Exxon, was the world’s first Credit Default Swap (CDS) and demonstrates the ability of credit derivatives to transfer risk and allocate it to those investors most able and willing to take it;
(c) increased liquidity in the credit markets – Since credit derivatives limit the bank’s downside risk (and pass it on to other parties, such as insurance companies and pension funds), banks are willing to lend much more money to many more businesses. Credit derivatives thus significantly expand companies’ access to capital from bank lending;
(d) contractual standardization – Credit derivative agreements have become standardized. This standardization reduces the transactions costs of deals and provides the other familiar benefits of standardization; and
(e) the valuable signals provided by credit derivatives to other market participants – A greatly overlooked benefit of credit derivatives is their informational value to other market participants. To the extent the pricing of credit derivatives is disclosed or available to the market, it provides a source of market-based information, separate and apart from that provided by the credit rating agencies, about a company’s financial health.

However, credit derivatives brought the U.S. economy to the brink of a second Great Depression due to:
(a) The Gramm-Leach-Bliley Act, signed into law by President Bill Clinton on November 12, 1999, which legitimized the concept of combining commercial and investment banking to construct “one-stop shopping” empires;
(b) The Commodity Futures Modernization Act, signed into law by President Bill Clinton on December 21, 2000, which specifically stressed that “swaps” were not futures or securities, and thus could not be controlled by the CFTC, or the SEC, or any other single regulator;
(c) The SEC was the main regulator of the brokerages. Until 2004, the SEC had imposed controls on the amount of assets a brokerage could hold on its balance sheet relative to its core equity. However, in April 2004, the SEC’s five commissioners decided to lift that so-called leverage ratio control. By 2005, the increased leverage of super-senior risk was tolerated;
(d) The risk assessment models banks and funds used were miscalculating the true degree of default correlation in mortgage-based credit derivatives;
(e) The abusive use of SPVs and SIVs by banks to evade the Basel rules that limited the amount of assets they could hold on their balance sheets, thereby freeing them to leverage their capital a good deal more;
(f) Interconnectivity – The shadow banks and brokerages were deeply interconnected with commercial banks through a complex web of trades. Quite apart from whether they were “too big to fail,” they were too interconnected to ignore;
(g) The conflict of interest that existed between the bankers and the ratings agencies when it came to CDOs;
(h) The use of “ratings arbitrage” by banks to game the credit ratings system;
(i) The development of overly-complex and highly leveraged credit derivative products with exotic names such as Single-Tranche CDOs, CDO Squared, a CDO of asset-backed securities (CDO of ABS); a “mezzanine CDO of ABS,” and “synthetic CDO of ABS” that the vast majority of bankers, regulators, policy makers and end-users did not understand in terms of their ability to amplify risk. Opacity reduces scrutiny and confers power on the few with the ability to pierce the veil. But though derivatives have indeed become extremely complex, in actuality, they are as old as the idea of finance itself. The credit derivatives market should borrow a thought from Leonardo: “Simplicity is the highest form of sophistication;”
(j) Subprime Mortgages – The rapidly mounting piles of mortgage loans were fertile fodder for the CDO machine at many banks. Loans were increasingly extended to borrowers with bad credit history. Mortgage lending had become an assembly-line affair in which loans were made and then quickly reassembled into bonds immediately sold to investors. A bank’s ability to extend a loan no longer depended on how much capital that institution held; the deciding factor was whether the loans could be sold on as bonds to investors. The lending of the subprime mortgages was driven by the demand of end investors, in what would prove to be a vicious cycle;
(k) Super-Senior Risk – The Federal Reserve allowed banks to keep an enormous amount of super-senior risk on their books. It is astonishing how little policy makers and regulators knew about the workings of CDOs; and
(l) Liquidity Puts – Citi placed large volumes of its super-senior in an extensive network of SIVs and other off-balance-sheet vehicles that it created. Citi even threw in a buyback provision to entice the SIVs to buy the risk. Citi promised that if the SIVs ever ran into problems with the super-senior notes, Citi would buy them back. These buyback guarantees were called “liquidity puts.”

Credit derivatives are excellent risk management tools, but they can also amplify risk. It all depends on how they are used.


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Cohan, William D., House of Cards: A Tale of Hubris and Wretched Excess on Wall Street (Anchor, 2010).

Dufey, Gunter and Rehm, Florian, An Introduction to Credit Derivatives (University of Michigan Business School Working Paper No. 00-013, 2000).

Feinman, J., Reserve Requirements: History, Current Practice, and Potential Reform, Federal Reserve Bulletin, June 1993,

The Group of 30, Derivatives: Practices and Principles, (Global Derivatives Study Group, 1993).

J.P. Morgan, The J.P. Morgan Guide to Credit Derivatives (Risk Publications, 1999).

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About the Author
Brian J. Donovan is an engineer and attorney with over thirty-four years of international business experience. Mr. Donovan is C.E.O. of Renergie, Inc. (“Renergie”). Renergie was formed on March 22, 2006 for the initial purpose of raising capital to develop, construct, own and operate a decentralized network of ten modular-designed small advanced biofuel manufacturing facilities (“SABMFs”) in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita. Each SABMF has a production capacity of five million gallons per year of fuel-grade ethanol. Renergie’s unique “Field-to-Pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. “Field-to-Pump” maximizes rural development and job creation while minimizing feedstock supply risk, the burden on local water supplies, and the amount of energy necessary to process sugar into fuel ethanol. “Field-to-Pump” disrupts the status quo by allowing advanced biofuel producers to be drivers of transportation fuel prices rather than merely price takers in the market. Renergie is in the process of transferring its proven renewable energy technology worldwide by working closely with developing countries in Latin America, the Caribbean, Asia and Africa.

Mr. Donovan drafted the “Advanced Biofuel Industry Development Initiative” for the State of Louisiana. On June 21, 2008, Louisiana Governor Bobby Jindal signed into law the Advanced Biofuel Industry Development Initiative (“Act 382”). Act 382, the most comprehensive and far-reaching state legislation in the U.S. enacted to develop a statewide advanced biofuel industry, is based upon Renergie’s “Field-to-Pump” strategy. On February 24, 2009, the U.S. EPA granted Renergie a first-of-its-kind waiver for the purpose of testing hydrous E10, E20, E30 & E85 ethanol blends in non-flex-fuel vehicles and flex-fuel vehicles in Louisiana. On-site blending pumps, in lieu of splash blending, are used for this test.

Mr. Donovan, a member of The Florida Bar, The U.S. District Court, Middle District of Florida and The United States Court of Appeals for the Eleventh Circuit, holds a J.D. from Syracuse University College of Law (where he was recipient of the “Global Law & Practice Award” as the outstanding graduate in the areas of International Law and International Business Law) and a B.S., with honors, in Marine/Mechanical and Nuclear Engineering from the United States Merchant Marine Academy.

Mr. Donovan does not represent, nor has he received any compensation from, any party in regard to Wall Street reform legislation.


One Response

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  1. said, on February 14, 2013 at 6:04 am

    Precisely what truly motivated u to create “How
    Credit Derivatives Brought the U.S. Economy to the Brink of a Second Great Depression The Donovan Law
    Group”? I personallydefinitely enjoyed it!
    Regards ,Preston

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