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All they have to do is bundle these mortgages together with safer ones and sell the resulting bundle as a security. The market will accurately assess the risk o
by mikeash 7y ago
All they have to do is bundle these mortgages together with safer ones and sell the resulting bundle as a security. The market will accurately assess the risk of the combined product and set prices accordingly. Because of the way this spreads out risk and incentivizes smart, objective analysis of the products, this is guaranteed to work well.
- formercoder 7y agoThe default risk must be uncorrelated though or else you get no gains from diversification. This was a big part of how CDOs justified the security of a AAA tranche, when in reality everything was correlated because bad loans were made to everyone.
- mikeash 7y agoFortunately, there’s no reason to ever expect that defaults would be correlated. There’s just no phenomenon that could cause it.
- dsfyu404ed 7y ago>All they have to do is bundle these mortgages together with safer ones and sell the resulting bundle Sounds strikingly familiar...
- peonicles 7y agoIsn't this bundling what caused the subprime crisis ? How is this time "guaranteed to work well" ?
- mikeash 7y agoThrough the power of extreme sarcasm.