Thursday, February 19, 2009

Sorry, John Paulson

The beauty of Obama bailing out the bottom tranche is a textbook demonstration of why "legal risk" is such a notoriously difficult parameter to put inside a risk model. Trading companies zeroed in on the most outrageous mortgages like heat-seaking missiles, since they had the most edge when they shorted them. However, since bets were clustered in the same place -- the ratio of CDSes to Underlyings on bottom tranche mortgages is something like 7:1 -- so, if it is structured correctly, every dollar Obama gives away to the most obviously unworthy recipients should take away seven dollars from utterly unworthy trading companies. It almost gives one hope.


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