Jan Ericsson is an expert in credit risk – particularly the arcane areas of credit derivatives and structured credits.
It’s a specialty that’s been much in demand of late.
Credit-default swaps – insurance-like derivative contracts that enable financial institutions to hedge against credit defaults – have grown into an estimated $45 trillion market from less than $1 trillion in 2000.
Structured credits, a category of financial instruments involving debt securities repackaged into portfolios, also exploded in scale during the past decade. These complex products are designed to transfer risk. But they have also become a source of concern. Collateralized debt obligations, a structured-credit product that often includes mortgage-backed securities, were a big factor in the financial market turbulence over the past year.
When the markets for certain securities of this type suddenly dried up last year, some financial institutions called on Ericsson to help sort out their books. “I’ve done some consulting, trying to trying to put fair value on some securities,” he says. Because the market had evaporated, “when an institution needed to put a price on their holdings for year-end, they had no idea. We came up with models that would allow them to at least estimate what they might be worth.”
The problem with collateralized debt obligations, or CDOs, is that the market “was so young,” Ericsson says. “It wasn’t sufficiently well-established (so) you had no idea what would happen if things went haywire,” he says. “Most of the models we have depend on the assumption of well-functioning markets.”
The CDOs are a valuable financial tool, Ericsson says. But “so many strange variations developed” that problems arose. “When there’s a new market, there’s this drive for investment bankers to make new, more complex products.”
As a PhD student in his native Sweden, Ericsson worked on corporate bonds. When he joined McGill in 1999, he was offered the opportunity to teach an executive course on credit derivatives. He knew little about the topic at the time, but saw it as a “fun” challenge, he says. So he dove into the subject and has been working on it ever since. “I think I hit the spot.”
Ericsson takes his expertise to Tokyo once a year, to teach several days of classes at McGill’s MBA Japan program.
Following two years of post-doctoral work at a university in Belgium, Ericsson was attracted to McGill partly because French is spoken in Montreal. The city, he says, is an easy sell to many Europeans, as a kind of “North-America-lite.”
The nearby Laurentians are an added bonus. Ericsson and colleague Peter Christoffersen organize an international risk-management conference at Mont-Tremblant every other year. The schedule is carefully planned to allow for a day of skiing. They plan to make it a tradition.
-- Chris Chipello
For more information on Jan Ericsson click here