I think there is some overexaggerating going on here – the market is not efficient as we’d like it, but not nearly as bad as you guys are writing about. MBS or any ABSs for that matter are tied to assets. Those assets don’t just vanish – we’re not talking about worthless bonds that are issues – they are backed -hence their name. The value of those assets may decrease, but they do not go to 0 as a collective. If they go to 0, the world is ending and we all have a lot more to worry about. Homes do not just become worthless – the question as someone else pointed out is liquidity and speculation. There are always 2 sides to every market – you can bet its going to go up or down. And make money on both sides – its about picking correctly. CDSs are the same – someone is betting on the likelihood of default, or perhaps hedging their underlying position.
The institutional market will be just fine as whoever lost their pants in this subprime mess means another player also made a shitload of money. Goldman for instance made all those risky – yet very profitable and correct wagers.
The valuation question – its whatever people will pay. Debt gets pooled all the time and sold off – its not a newly created financial vehicle. From big companies who issue AAA rated bonds to little guys, or any type of debt you can think of – gets pooled. Are the pools difficult to evalute, yes, but is there a market price at the end of the day, yes. Its like complaining that Google at 600 is overpriced. Perhaps yes, but someone is willing to buy it at 600. That’s the beauty of the financial markets.
