IN THE SHADOWS OF DEBT
Who is to blame for the current crisis?
Massive borrowing, hedge funds, credit default swaps (CDSs), collateralized debt obligations (CDOs) and other instruments seem to be part of the current trillion dollar problem. What was known about these instruments and the risks attached to them in the recent past? There was actually quite a lot known right from the start.
A must read is The Economist’s article ‘In the shadows of debt‘ of September 21, 2006 (click here). In 2006, central bankers and supervisors worried about the risks to financial stability that could be lurking in the complex debt instruments dreamt up by the finance industry, but what did they do about it?
Another must read is The Economist’s article ‘CDO-Not cash on delivery‘ of July 26, 2001: “The chairman of American Express, Kenneth Chenault, was man enough to admit last week that his outfit “did not fully comprehend” the risk underlying a portfolio of whizz-bang investments known as CDOs (collateralised debt obligations)“. This 2001 contribution describes the risks attached to the various tranches of CDOs. The risks were therefore indeed known years ago! So who is to blame?
Karel Frielink
ps
Central bankers should read professor Jesus Huerta de Solo’s article Financial Crisis and Recession (posted on October 6, 2008). Click here for Arthur D. Little’s analysis of the credit crunch.
