4 ms·
Right, but consider that the sub-prime mortgage market was a tiny portion of the overall mortgage market in 2007. Derivatives written against sub-prime holding
by bwanab 7y ago
Right, but consider that the sub-prime mortgage market was a tiny portion of the overall mortgage market in 2007.
Derivatives written against sub-prime holdings tipped the balance when the fan was hit. There are tons of derivatives written against the indices, thus indirectly against those funds.
- AnimalMuppet 7y agoNo, not against those funds. Pass a royal decree that banishes all index funds from the face of the earth. The tons of derivatives written against the indices remain, unchanged. Those derivatives might be "somewhat in the neighborhood of the funds" or something, but it's not analogous to mortgages.
- navigatesol 7y ago>Derivatives written against sub-prime holdings tipped the balance when the fan was hit There's a bit more nuance to it: those derivatives were a problem because a substantial proportion of them were concentrated in a single, widely-connected, entity (AIG). The derivative market as a whole nets to zero; for every loser there is a winner.
- turk73 7y agoThere was the little problem of how sub-prime debt got whitewashed and turned into Aaa rated paper by the ratings agencies. All those sub-prime tranches, had they been correctly rated, would not have had such a magnifying effect. It was because of packaged bonds containing multiple tranches that couldn't be priced at anything but $0. Also, the interest bearing portions of loans were split into different bonds, further complicating matters. There wasn't (and still isn't) a mark-to-market in bonds. Many bonds aren't priced until bought/sold, e.g. illiquid.