The Washington Post has one of its better stories on the rise and fall of mortgage securitization. My favorite anecdote in the story is on the last page, concerning the head of a firm that evidently sold a credit default swap to Wachovia, which made increasing demands for collateral to back the bet.
Uderitz has a less legalistic view. “They were obviously having some major, major problems,” he said. “I think there had to be a conscious shift in their thinking: Go get collateral from whomever we can. We have to save our *%&.”
In my view, his last two sentences describe institutional deleveraging in a nutshell. As I point out in my written testimony, a stern sheriff is needed to stop companies from reaching into each others’ pockets to grab short-term Treasuries.
READER COMMENTS
rpl
Dec 16 2008 at 5:48pm
Here’s my favorite part:
Apropos of this week’s Econ Talk, this positively reeks of regime uncertainty. They know they should dump the CDOs for whatever they can get for them so they can get on with their lives (and since CDOs are being valued basically at zero, it would actually improve their balance sheet, right?) The problem is, if the government comes along in three or four months with a big wad of bailout cash, the executive who dumped them for fifteen cents on the dollar will be the one losing his job. No, better just to sit tight and see what happens.
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