[lbo-talk] Capitalism on Derivatives? (Was: Responsibilities)

Jordan Hayes jmhayes at j-o-r-d-a-n.com
Sun Feb 28 00:28:01 PST 2010


SA writes:


> Marv Gandall wrote:
>
>> 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.

Such a strong statement about something that's not clear at all.


> The crisis happened because the fundamentals of the securities
> (the mortgage-backed securities) were defective.

Of all the issues involved in this highly complex subject, I think I can state categorically that this one is incorrect. Mortgage-backed securities are not to blame in this, even in the slightest. MBS (and more generally CDO) I think are uncontroversially a net win for banks and consumers alike.

You can't blame the culture of easy money on securitization, even though they are coincident.


> The borrowers couldn't pay back their mortgages and the houses
> that served as collateral were overvalued. It's that simple.

That certainly explains the end of the housing bubble; it doesn't begin to explain what happened in the 3rd and 4th quarters of 2008 to the credit markets, banks -- especially central banks -- and investment banking generally.

/jordan



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