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Actually, the whole point of rating that stuff AAA was a regulatory arbitrage. Buying AAA-rated CDOs and buying credit default swaps against them was a capital-
by byrneseyeview 15y ago
Actually, the whole point of rating that stuff AAA was a regulatory arbitrage. Buying AAA-rated CDOs and buying credit default swaps against them was a capital-efficient way to lever up. And that level of leverage was only possible due to central banking backstops.
If deregulation caused the crisis, why weren't hedge funds (the least regulated entities out there) a big part of it? I seem to remember a bunch of the major investment banks (much more regulated) losing money because of their positions in mortgages (a very strongly-regulated investment).
It's really hard to describe the financial crisis without talking about decisions that only make sense in the context of gaming regulations.
- TheCowboy 15y agoHedge funds may not have been a big part of this crisis. But the next to last major financial crisis is a case study in this: http://en.wikipedia.org/wiki/Long-Term_Capital_Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management Hedge funds were also more a result of a lack of regulation, or side-stepping current regulations by being defined differently, not so much a matter of deregulation. See it as regulators not stepping up or not allowed to step up and adapt. It's not like regulation serves to make any financial crisis avoidable. But smarter, more adaptable regulation can limit the depth of the rot, help shore up the integrity and health of the financial system, and possibly allow for a softer landing.