“…
The action in the markets now all hinges on how certain species of “derivative” paper — certificates based on the value of other certificates — are valued. The certificates in question are mortgage-backed-securities (MBSs), collateralized debt obligations (CDOs), and other instruments based on debt rather than equity, that is loans rather than wealth. Of course, one problem associated with these things is that they exist now mainly in the forms of electrons in computer systems, represented by pixels on screens, not in paper contracts or promises to pay. Thus they are abstracted not just in derivation but in representation. The further and more crucial problem is not that there is necessarily disagreement over their value, but that, in fact, there’s a growing consensus that their value is close to zero. And there is enough of the worthless crap to choke banks all over the world.
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The recognition is growing that our financial markets have been subject to mischief so egregious that there will be hell to pay.”
