[lbo-talk] origins of the housing boom

Ted Winslow egwinslow at rogers.com
Tue Aug 30 09:27:27 PDT 2011

SA wrote:

> *everyone* knew these investments would go bust if house prices fell.

But this isn't the risk. The risk is the likelihood that they will fall. As a bubble develops it becomes practically certain that they will. Moreover, in the case of many CDOs this wasn't the only risk. The lending practices to which securitization led created other significant risks.

If "everybody" had known of these risks, bets (CDSs) would not have been readily available that treated them as negligible. A small number of individuals did figure out the actual risks and made very successful bets on these terms. Their stories are the subject of Lewis's "The Big Short."

Quant irrationality is a particular form of the kind of irrationality that has always characterized financial markets. It is, however, a form that made a significant difference to way that irrationality played out in the most recent crisis.


More information about the lbo-talk mailing list