More Fallout from Fannie Mae and Freddie Mac?

When over-the-counter derivatives began to gain traction in the financial world, Wall Street insiders and industry regulators constantly proclaimed their virtues, and ignored their shortcomings.

Among other things, they argued that these paper promises would allow complex risk to be broken down into its constituent parts and redistributed to those who wanted and understood the exposure they were taking on.

In truth, no one really knew what it was they were slicing-and-dicing, what new risks were being created in the process, and where all this stuff was actually ending up.

Proponents also claimed that new age finance would make the financial system more resilient because risks would be disbursed far and wide, rather than being concentrated in a small number of institutions or portfolios.

Again, those who were allegedly in the know failed to take account of the fact that in a tightly-connected world, serious problems in one part of the system would invariably spill over and affect other parts.

We now know, of course, that many proponents of Frankenstein finance were clueless charlatans or greedy insiders creating smokescreens that helped facilitate a major Ponzi scheme.

Unfortunately, at this point, it's too late to do anything about it. In the days and months ahead, we are bound to see more reports like the following,

"What Will Mac ’n’ Mae Cost You and Me?" by the New York Times' Gretchen Morgenson, highlighting developments that will only worsen the fallout as things continue to unravel.

Comments

[helplessobs...:]

Problems in the debt market are so reoccurring its a wonder that margin requirements are not raised so that unreasonable debt leverages of 30 to 40 to 1 become prohibitive. Except for the '87 crash where portfolio insurance was supposed to transfer risk to S&P Futures Market equity leverage has not been a significant problem in the financial markets.

2008 Aug 25 11:48 AM

[warburg1:]

Double I'm telling you!!!

2008 Aug 25 11:57 AM