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View Diary: Scientists *Prove* Toxic Assets are Impossible to Regulate (268 comments)

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  •  Um, that's called due diligence. (2+ / 0-)
    Recommended by:
    burrow owl, Mz Kleen

    This is just a moral hazard issue, isn't it?  The buyers didn't do due diligence because they didn't feel like the time and effort was worth it, given the multiple backstops that exist for stupid financial speculation.

    Al que no le guste el caldo, le dan dos tazas.

    by Rich in PA on Sun Oct 18, 2009 at 07:20:57 AM PDT

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    •  The point is (7+ / 0-)

      the article claims to show that due diligence, in this case, is effectively impossible.  

      You'll pay me the 8s I won of you a-betting?

      by Boreal Ecologist on Sun Oct 18, 2009 at 07:29:28 AM PDT

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    •  In the cases, (7+ / 0-)

      post crisis, where analysts did take CDO's apart, a very difficult process because the constituent parts are a lot of very small portions of a lot of instruments with varying parameters of pay off, they were unable to find a CDO without "questionable" instruments.

      Your mortgage has two amounts in every payment, the principle and the interest. In most CDO's these two are separated and the instrument gives you a right to the cash flow from one or the other. The amount of principle and interest in each monthly payment differs by the rule of 78, which is based on the date of inception. Each of the thousand mortgages in the CDO may have a different date of inception, rate of interest and amount of prepaid and monthly fees. That means that two things are very difficult to predict; the actual cash flow and the risk of default. These guys are saying that the difficulty has gotten to the level of a "hard problem". In computer science that means that there is no algorithm that can be applied to make it soluble within finite computing time. They say, and it seems reasonable to me, that due diligence is not possible in real time.

      "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

      by johnmorris on Sun Oct 18, 2009 at 07:46:32 AM PDT

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      •  Having read it quickly (5+ / 0-)

        the seller's secret knowledge (and the nature of the + function, as they point out in Sec. 5) enter in an essential way.  However, it's reasonable that real setups probably remain hard even with much less secret knowledge.  (For example, if you have counterparty risk, the "secret" is just the strength of your counterparties, which isn't something you can easily assess.)

        "Dream for just a second and then do it!" -- Kolmogorov

        by theran on Sun Oct 18, 2009 at 07:51:47 AM PDT

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