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August 11, 2008



Interesting idea. It doesn't cover the SIV mess - where contractually the banks did not have an interest in the assets but because they didn't want to upset the people who had, they bought them back anyway - and it would make the US banking system capitally inadequate (because so much stuff would come back on balance sheet that the bank's capital ratios would fall dramatically) so it will never happen, but it is interesting. One problem is that those put options are rather complicated things and hard to value: think of a credit card deal where the originator has to substitute cc receivables if performance is not good enough. At the beginning that option is hard to value and not much of a liability as the pool is performing, but as time goes on its value might go up very fast, giving a nasty surprise for investors.

Independent Accountant

Bravo! I've been saying this for years. By the way, SFAS 133 is absurd too.

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