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Real-time (compared to equities) pricing as you know it does not exist in mortgages and would not be enabled by what you're describing. Transparency in somethi

by whatok 9y ago

Real-time (compared to equities) pricing as you know it does not exist in mortgages and would not be enabled by what you're describing. Transparency in something like this also does not help in the case of massive gaps downward in price which happened with a lot of these instruments and in fact would probably accelerate sell-offs. Transparency of the underlying was not the issue. Anyone investing in this stuff could have figured it out if they wanted to.

Certhas 9y ago
In fact I believe the rating agencies that mis-rated the risk of these CDOs had full access to all this information anyways.
- trevelyan 9y ago
  You're right that it was possible for people to consult the original (think, paper-based prospecti) in at least some cases, but most people relied on the ratings agencies and they claim to have essentially greenlit their ratings on what the Black–Scholes equation told them, using assumptions that were convenient but untrue (i.e. Gaussian cupola -- that defaults would not be correlated).
trevelyan 9y ago
Transparency was absolutely the underlying issue. Read "Too Big To Fail" or "The Great Short" or any of the other histories of the Financial Crisis. The way CDOs were bundled and tranched made it effectively impossible for purchasers or banks to know which properties were actually covered by any CDO. No-one knew what was in them -- the value was asserted by the ratings agencies and they were purchased based on expected rate-of-return. Even the people who went short on the market ended up using heuristics: there is a wonderful passage in The Great Short which describes a character who tells his broker that he will short anything bought by one of the people he has just met. Once the extent of fraud became clear the entire market dumped down to 35 cents on the dollar. The fact that transparency was an issue is also apparent right here, since nowhere near 65% of consumer mortgages failed. But no-one would buy because no-one could tell if any particular CDO was backed by anyone who was still capable of making payments. With Ethereum and smart-contract based mortgage systems this completely disappears, since the blockchain broadcasts every single payment made in real-time and it is possible for anyone to simply look and see if whether defaults are rising or falling among the mortgages that underpin their collateralized securities.
- jhwang5 9y ago
  I don't think you understand how CDOs are priced. The fact that CDOs were trading 35cents on the dollar is largely a part of default EXPECTATIONS resetting up. Smart contracts cannot expedite this process of resetting expectations. Ethereum (which, by the way, is too slow to run CDO pricing models) can only broadcast what the latest market price is. Ethereum helps price dissemination no more than a Bloomberg terminal can.
  - trevelyan 9y ago
    > is largely a part of default EXPECTATIONS resetting up Yes, exactly! But take the next step and ask what sets EXPECTATIONS about the worth of a security in a smart-contract environment? It stops being generalized market fear and it starts being actual DATA about performance. > Ethereum (which, by the way, is too slow to run CDO pricing models) You don't run the monitoring software ON the blockchain (you could but it would be inefficient). You run that off-chain using blockchain analysis software.

by whatok 9y ago

Certhas 9y ago

In fact I believe the rating agencies that mis-rated the risk of these CDOs had full access to all this information anyways.

trevelyan 9y ago
You're right that it was possible for people to consult the original (think, paper-based prospecti) in at least some cases, but most people relied on the ratings agencies and they claim to have essentially greenlit their ratings on what the Black–Scholes equation told them, using assumptions that were convenient but untrue (i.e. Gaussian cupola -- that defaults would not be correlated).

trevelyan 9y ago

Transparency was absolutely the underlying issue. Read "Too Big To Fail" or "The Great Short" or any of the other histories of the Financial Crisis. The way CDOs were bundled and tranched made it effectively impossible for purchasers or banks to know which properties were actually covered by any CDO. No-one knew what was in them -- the value was asserted by the ratings agencies and they were purchased based on expected rate-of-return. Even the people who went short on the market ended up using heuristics: there is a wonderful passage in The Great Short which describes a character who tells his broker that he will short anything bought by one of the people he has just met. Once the extent of fraud became clear the entire market dumped down to 35 cents on the dollar. The fact that transparency was an issue is also apparent right here, since nowhere near 65% of consumer mortgages failed. But no-one would buy because no-one could tell if any particular CDO was backed by anyone who was still capable of making payments. With Ethereum and smart-contract based mortgage systems this completely disappears, since the blockchain broadcasts every single payment made in real-time and it is possible for anyone to simply look and see if whether defaults are rising or falling among the mortgages that underpin their collateralized securities.

jhwang5 9y ago
I don't think you understand how CDOs are priced. The fact that CDOs were trading 35cents on the dollar is largely a part of default EXPECTATIONS resetting up. Smart contracts cannot expedite this process of resetting expectations. Ethereum (which, by the way, is too slow to run CDO pricing models) can only broadcast what the latest market price is. Ethereum helps price dissemination no more than a Bloomberg terminal can.
- trevelyan 9y ago
  > is largely a part of default EXPECTATIONS resetting up Yes, exactly! But take the next step and ask what sets EXPECTATIONS about the worth of a security in a smart-contract environment? It stops being generalized market fear and it starts being actual DATA about performance. > Ethereum (which, by the way, is too slow to run CDO pricing models) You don't run the monitoring software ON the blockchain (you could but it would be inefficient). You run that off-chain using blockchain analysis software.