> 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.
Actually, though, it was only a small proportion of the underlying mortgages that were defaulting (though larger than the norm). That led to a crisis in liquidity in the asset class as a whole because units were unwilling to buy what they were unsure of. Mark-to-market accounting records that as a plunge in the value of the whole range of mortgage-backed securities even though the bulk of the underlying payments will continue to come through and values are likely to recover in the future. It is quite possible that different market/institutional configurations could have handled it differently - and indeed much of the government rescue around the world is based on the assumption that demand for many assets will eventually recover - i.e. it's about liquidity rather than the worthlessness of the underlying revenue streams.
Mike Beggs