The ongoing subprime crisis raises many concerns about the possibility of even
more widespread credit shocks. We describe a simple linear version of a
sophisticated model that can be used to extract information about macroeconomic
credit risk from the prices of tranches of liquid credit indices. The market
appears to price three types of credit risk: idiosyncratic risk at the level of
individual companies, sectorwide risk at the level of companies within an
industry, and economywide or systemic risk. We applied the model to the recent
behavior of tranches in the U.S. and European credit derivatives markets and
show that the current crisis has more than twice the systemic risk of the
automotive-downgrade credit crisis of May 2005.