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How Cdos Are Like Stocks

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by Felix Salmon
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Oct 07 2008 9:00pm EDT

How CDOs Are Like Stocks

I had lunch today with Moe Tkacik; I was talking about how I've always been much more comfortable in the world of bonds, which can be valued quite easily, rather than stocks, which are essentially impossible to value with any kind of certainty.

Moe had a very powerful insight: the advent of CDOs essentially turned conceptually easy-to-value debt instruments into something so complex and opaque that it might as well have been a stock, for all that anybody could realistically forecast what its cashflows were going to be.

Why anybody thought this was a good idea, I have yet to work out.

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