Sunday, August 12, 2007

The Epicurean Dealmaker does it again

And by "does it again" I mean that TED delivers a summation of the collective impact that the Collateralized Debt Obligation meltdown in the U.S. has had on financial markets around the world in a way that makes it virtually impossible to quote in brief summaries.

The Epicurean Dealmaker: Grains of Sand
This writer and many others have pointed to the principal sources of this contagion across sectors: cross-sector investment portfolios (which transmit selling pressure across nominally unrelated security classes and markets when price declines in one market encourage an investor to liquidate unrelated securities to meet margin or redemption requirements) and financial leverage applied to portfolios. This writer has further maintained that—notwithstanding the broad dispersion of risk across investors in recent years—market-making investment banks remain important if not critical transmitters of both of these forces in the market. Unfortunately, knowing the proximate causes of contagion in the markets does not provide much illumination as to when and whether the meltdown will stop, or indeed how further contagion might play out.

Just read the whole damn thing. You'll be smarter and better off for having done so.

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