Raghu: > Is this really at the heart of why unwinding the credit derivatives is so > systemically dangerous: it has > less to do with complexity and large number of counter-parties and more to do > with bogus and > inconsistent valuations of those securities?
It is part of the problem, although I do not think it is the heart. The other things you mentioned also play important roles. Yet, even the experts do not know how to price these things, as Darrell's article I sent also points out. Supposedly, I am one of the experts of pricing these things, I was teaching pricing them at the PhD level at Bilkent University, yet even I am almost clueless. The main problem as far as pricing these things is concerned is the correlations, and we do not know how to get them "right," even the best and the brightest among us, including Darrell. Maybe there is no way to get them "right," who knows? By the way, a run on banks (the real banks, not the banks of the shadow banking system) seems to have started already in the earnest. Someone close to me just gave me a call from a Citibank branch to ask my opinion about what to do. She is not a financial wizard or anything, but heard today that the Citigorup stock went down 75% during the day, before recovering 20% later (according to her). Apparently, she is concerned and the solution Citibank offered to her was to divide her account into smaller and legally different pieces so that each piece is FDIC insured. She is getting that done now. I told her that she should consider buying US Treasuries directly from the US Treasury. Best, Sabri _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
