The Financial Abstraction Ladder: The Story of the Global Financial Crisis

It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” — Upton Sinclair

Each rung up the ladder adds complexity

FAL Rung #1: Originate-to-Distribute for Local Mortgages

FAL Rung #2: GSEs and Securitization in the Mortgage Market


FAL Rung #3: Originate-to-Distribute of CDOs by Investment Banks

How Investment Banks used CDOs as a Polishing Agent for Lemons

FAL Rung #4: The Magnetar Trade and CDSs

What does Magentar tell us about incentives?

In a financial system where extremely complex financial instruments are being bought and sold, information asymmetries will run rampant and the financial incentives of individuals need to be offset by regulation promoting transparency and risk disclosures in the market.

Holding up the FAL: Rating Agencies


Stanford B.A. Economics. Former Hedge Fund Manager. Author: God Money (book in progress). Follow me:

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store