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Politics Foreign Affairs Culture Fellows Program

Remember the Financial Crisis? CPDO Edition

Back in 2008, at the end of my Wall Street career, I wrote a very long post describing why I had once thought that structured finance (or, the corner of structured finance in which I worked) had some real social benefit, and why, by 2006, it should have been obvious to anyone who was actually […]
cpdo-image

Back in 2008, at the end of my Wall Street career, I wrote a very long post describing why I had once thought that structured finance (or, the corner of structured finance in which I worked) had some real social benefit, and why, by 2006, it should have been obvious to anyone who was actually involved in the business that something had gone very, very wrong. And I used as the example to prove how bad things had gotten by then the launch of a product called the Constant Proportion Debt Obligation, or CPDO.

If you want to know the details, read that old post. If not, my conclusion was that the product was prima facie absurd, and yet got a rating of AAA from S&P. Which should have been prima facie evidence that S&P had become absurd. But nobody seemed to draw that conclusion.

Well, now an Australian judge has done just that, and he’s done us the service of laying out just how outrageously malfeasant the ratings agency was in this instance. I thought they were pretty malfeasant, but they turn out to have been much, much worse.

This is just a tiny wrinkle on a much bigger story, but it’s important to realize that, four years after the crisis erupted, we still don’t really have a new model for how finance is supposed to work that fully incorporates the lessons of the crisis. Indeed, some of the post-crisis reforms – like the new bank capital rules of Basel III from two years ago – doubled down on precisely the conceptual mistakes that helped create the crisis.

Until we see that new conception of finance develop, I’m going to be rooting for politicians who simply don’t trust Wall Street. Whatever their other faults, at least they’ve got that going for them.

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