Credit Derivative Orgy is Behind Liquidity Crisis

Credit Derivative Orgy is Behind Liquidity Crisis | by Martha Rosenberg / August 22nd, 2007

Financial Times warned against them. So did Warren Buffet, Alan Greenspan, Jim Sinclair and the chief economist at Morgan Stanley.
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Sure banks and financial institutions love the structured investment vehicles — especially collateralized debt obligations (CDOs) — because they let them get loan risk off balance sheet and take on more lending. And they can hold them at cost without recording losses or marking to market–or so accounting rules indicate.

Sure the rich like the cyber-constructs as tax dodges in their Cayman Islands registered hedge funds.

Sure traders love their leverage power — kind of like investor crack — which exceeds any position they could take in the cash markets.

But they are IOUs and don’t represent actual ownership of assets. (See Ponzi capitalism.) And that means they can keep house of card companies alive and looking solvent until they implode. And cause a cascade of implosions as the underlying assets on which the derivatives — and positive balance sheets — are written are found lacking. ....