toxic cds
an interesting paper on toxic financial derivatives was published recently. the good and bad mortgages are supposed to be grouped together at random. suppose i am willing to cheat. and i know that some of the good mortgages should really be in the bad category. and i know that some of the bad mortgages should be in the toxic category. i can "randomly" put them together into the same contract and sell them to a competitor. the paper showed that the buyer will be unable to tell the difference between a legitimate contract and this booby trapped contract. but wait. it gets worse. once the thing blows up, there's no way to prove that i didn't select the goods and bads completely at random. you could have just been very unlucky. niiiiice. i'm hoping this result holds up to scrutiny. and makes these things too risky to play with. even if that makes it more difficult for marginal incomes to get a home loan.