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

Source

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

Conclusion

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

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