> How effective (or not) would centralized trading and settlement of CDO's and other shadowy OTC instruments have been in averting the crisis?
>
Not effective at all. The crisis happened because the fundamentals of the securities (the mortgage-backed securities) were defective. The borrowers couldn't pay back their mortgages and the houses that served as collateral were overvalued. It's that simple. It wouldn't have mattered how the securities were traded - or how they were insured, in the case of CDS - they were due for a depreciation come what may. It was the unexpected depreciation of those securities that set off a collapse of the interbank lending market, mostly because the securities were being used as collateral for much of that interbank lending. The collapse of interbank lending, and the resulting fire-sale of assets, *was* the crisis.
SA