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The complexities of Wall Street finance and the simplicity of the boom bust cycle.

Posted by Adrian on August 27, 2007

As the markets resume a degree of calm, the only metaphor I can equate this too is the quite in the eye of the storm. A quick retrospective, before things go south again. Is to look at the complexity of the buying and selling of debt, commercial paper and other complex derivatives from business and personal debt. As it’s been discussed numerous times on business websites and blog discussions, the complex aspect of collatrized debt obligations is now pure risk, or as the markets like to call them now – ‘toxic waste’. This contagious toxic waste has infected everything from banks to hedge funds to pension funds to Australian council’s (using rate payments to buy commercial paper debt or CDO’s). The main originator? Subprime mortgage debt, repackaged in an complex, yet frenzied way. Rated by credit rating agencies as ‘good’, and sold. But why didn’t the technical analysis of Wall Street see this coming? Yet they didn’t. For every sophisticated graph, or stochastic system they all failed to see the horrendous amount of risk in the mortgage market. Maybe the simplicity of greed won in the day. The lure of huge returns and ‘safe’ bet’s with these CDO’s, almost blindly overlooked the risk in the overbought and highly leveraged mortgage markets in the US.

So, with the reserve banks around the world injecting millions into the banking sector to keep it liquid. The lingering global credit crunch and liquidity crisis was and still is, a frighting prospect. To think that so many banks bought these CDO’s and other paper debt is staggering.

We can only watch the markets carefully, as the problems with the worldwide financial markets do not appear to be over.

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One Response to “The complexities of Wall Street finance and the simplicity of the boom bust cycle.”

  1. […] Street risk management and judgment comprised by blindness, madness and greed’, and also ‘The complexity of Wall Street and the simplicity of the boom bust cycle’; the easiest answer to give, in respect to the huge errors, overestimations and over enthusiasm, […]

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