How Traders Might Just Have Caused the Collapse— For Profit

Today's NY Times piece, Banks Bundled Bad Debt, Bet Against It, and Won, by Gretchen Morgenson and Louise Story, is a must-read for anyone interested in understanding how the credit collapse of 2008 came about. It's a challenging story, detailing some of the staggering bets that Goldman Sachs and other derivatives marketers made against products they themselves were creating, even well into the housing market collapse.

If Congress and regulators are truly serious about better protecting the credit markets, some detailed questions should be answered about whether hair 'triggers' constructed in these instruments logarithmically increased the chances of a catastrophic housing securities market collapse. What's more troubling is the evidence that some of the CDOs were marketed by the same firms that were betting heavily against the housing market. The story raises the possibility that some CDOs were hyped just so that the firms' own bets against them would payoff more richly— even as their clients were enticed to buy more and more bad housing securities products.

It's a shame that this article appears on a day that most of its readers are busier with "The Night Before Christmas" than with the Grey Lady's front page.