CDO Fallout
Posted: Tue Nov 10, 2009 2:29 pmHere's about CDOs and similar derivatives.
To summarize, the problem of whether or not a collection of assets in a CDO are junk or not is intractable. Meaning that given a CDO tranche and all relevant information about it, the buyer cannot figure out a reasonable estimate about what its value is. Further, even after it has lost the buyer money, they cannot prove whether or not they were cheated. This means they could never be reasonably regulated.
If this all bears out to be true, the market for CDOs will completely disappear. There will be no buyers ever again. That's the good news. The bad news is that none of the CDOs currently in existence could ever be sold again either, which would force their owners to hold for the terms of the contract. That would lock trillions of dollars up in worthless assets for years (decades?) to come.
To summarize, the problem of whether or not a collection of assets in a CDO are junk or not is intractable. Meaning that given a CDO tranche and all relevant information about it, the buyer cannot figure out a reasonable estimate about what its value is. Further, even after it has lost the buyer money, they cannot prove whether or not they were cheated. This means they could never be reasonably regulated.
If this all bears out to be true, the market for CDOs will completely disappear. There will be no buyers ever again. That's the good news. The bad news is that none of the CDOs currently in existence could ever be sold again either, which would force their owners to hold for the terms of the contract. That would lock trillions of dollars up in worthless assets for years (decades?) to come.