With emphasis on that word “exactly,” here is Gary Gorton’s superb paper The Panic of 2007.
Go ahead and read and read and read and the more you feel confused the more, in fact, you are being instructed. You are confused because it is confusing. Then I got to p.45 (!) and I almost split a gut (and cried, simultaneously) when I read the sentence:
Now we come to the first information issue.
It then goes like this:
What is the loss of information? The information problem is that the location and extent of the (2006 and 2007 Q1-2 vintage) subprime risk is unknown to anyone. It is very hard to determine the location of the risk, partly because of the chain of interlinked securities, which does not allow the final resting place of the risk to be determined. But also, because of derivatives it is even harder: negative basis trades moved CDO risk and credit derivatives created additional long exposure to subprime mortgages.
Highly recommended…
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