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

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  •  But (1+ / 0-)
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    ...when you buy a CDO sold as riskless...

    That doesn't happen.  In the case of CDOs, barrels do just fall out of windows -- there is risk involved even in the absence of lemons.  The problem is that even when you can tell that the performance of the entire pool of CDOs didn't match up with the price the market put on the CDOs and tranches, you can't tell whether that was because the pricing model was wrong or because the CDO creator slipped in some lemons.  And from the individual buyers perspective, you can't tell whether your particular tranche underperformed because of a fault in the pricing model, or because you just got unlucky with the mortgages (or whatever underlying assets) in your particular CDO, or whether the CDO creator acted in bad faith by slipping lemons into your particular CDO.

    •  To a certain degree, that's true (0+ / 0-)

      so it would really involve looking at the entire class of CDOs.  For example now, the mortgage back securities are in general not doing well, suggesting that something was done wrong somewhere.  Thus, even if you couldn't tell if a particualr one was faulty, you could attach liability as a matter of law to anyone who sold any CDO in the faulty class.

      I think the strict liability model is probably better.  The idea that vague statements that "there is risk" lets the investment banker off the hook is what any of these theories should try to get around.  If we can't show that any particular product is faulty becaue of lemons, then probably the solution is to hold all purveyors liable, even without a showing of specific fault.  

      Yes, this means the seller retains the risk of an investment going south.  That at lesst would make them more careful.

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