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This article was helpful. It seems to point to the same type of unpredictable tangle that we are seeing now in the real economy as capital seeks cheap labor and production facilities. Because none of that is transparent, unforseen dependencies arise, and when something breaks, things can unravel in spectacular ways.
Some things I don't quite understand, though. If a CDO is a seen as a package, how is it that people invest in different tranches? That is, if you can pick which tranche you buy, how is that any different from treating each tranche as an independent investment?
Or is the idea that, because the tranches are presented to the ratings companies as "a package" they only issue one rating for the whole, so an equal-weighted combination of AAA and CCC ends up looking like BBB (or something like that)?
I'm wondering what responsibility the ratings companies really bear? Did they somehow conceal the risk, or is this one of those wink-and-nod corporate things where they blindly accepted ("in good faith") absurd projections about default rates from whoever packaged the CDO?
Another thing I don't understand is all these billions of dollars that the (surprisingly panicky) central banks are said to be pouring into the world's economies. How do they do that? I mean... surely they're not just giving the money away. Either they're loaning cash to banks or... they're actually buying these junk loans so the banks can get them off their balance sheets while becoming flush with cash and able to... uh... make more loans (after the bonuses to management, of course). Is that it? Even if it works, the chickens must come home to roost at some point, right? Or is it just that they won't roost on the banks... it'll fall on us instead?
But I guess the really scary thing is that nobody knows who holds these increasingly risky assets or how much they may have leveraged them. The web of who-owns-what is too complicated and private, so we just won't know until more companies, perhaps even very large ones, start reporting unexpected losses. So what started out as a risk management exercise ends up creating a situation where risk is unknowable?
