Re: Madness: Bailing Out Greed in Wonderland

[David Farber <dave () farber net>]

Begin forwarded message:

From: Rahul Tongia <tongia () cmu edu>
Date: September 17, 2008 8:06:50 AM EDT
To: dave () farber net
Cc: ip <ip () v2 listbox com>, Lauren Weinstein <lauren () vortex com>,  
Rahul Tongia <tongia () andrew cmu edu>
Subject: Re: [IP] Re:   Madness: Bailing Out Greed in Wonderland

[I am NOT an economist, but do hang out with them :P]

I rarely link to articles from Time but the one from 6 months ago on  
Credit Default Swaps: The Next Crisis?
http://www.time.com/time/business/article/0,8599,1723152,00.html
is interesting and telling.
Collateralized debt obligations (CDOs) are part of this, and then they  
because sold/resold/repackaged as Credit Default Swaps (CDS). with  
complete lack of transparency.
*In particular*, see the size of the markets:

"The CDS market exploded over the past decade to more than $45  
trillion in mid-2007, according to the International Swaps and  
Derivatives Association. This is roughly twice the size of the U.S.  
stock market (which is valued at about $22 trillion and falling) and  
far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S.  
treasuries market, notes Harvey Miller, senior partner at Weil,  
Gotshal & Manges."

If we thought Enron broadband was bad (they doing a fiber and capacity  
swap with another company, and both booking revenues! With games on  
timings of costs vs. revenues), then this is worse, since in addition  
to passing things around, the repackaging led to complete opacity in  
underlying risks.  I leave it to those who know more whether this can  
or should be regulated.  If nothing else, I always remember from Econ  
101 that "free markets" need essentially perfect information.

Lack of information, cycles/bubbles, and passing the buck (yes,  
putting him lipstick on a pig!) are, amongst other things, what led to  
this mess.

Rahul




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