International Law

IN THE SHADOWS OF DEBT

By Karel.Frielink

Who is to blame for the current crisis?

Massive borrowing, hedge funds, credit default swaps (CDSs), collateralized debt obligations (CDOs) and other instruments seem to be part of the current trillion dollar problem. What was known of these instruments and the risks attached thereto in the past several years? There was quite much known from the beginning.

A must read is The Economist’s article ‘In the shadows of debt‘ of September 21, 2006 (click here). In 2006, Central bankers and supervisors worried about the risks to financial stability that could be lurking in the complex debt instruments dreamt up by the finance industry. But what have they done?

Another must read is The Economist’s article ‘CDO-Not cash on delivery‘ of July 26, 2001: “The chairman of American Express, Kenneth Chenault, was man enough to admit last week that his outfit “did not fully comprehend” the risk underlying a portfolio of whizz-bang investments known as CDOs (collateralised debt obligations)“. This 2001 contribution describes the risks attached to the various tranches of CDOs. Thus the risks were known years ago! So who is to blame?

Karel Frielink

Full post as published by Karel's Legal Blog on October 08, 2008 (boomark / email).