The Devil Is In the Detail

November 4, 2009 by · Leave a Comment
Filed under: The Ratings System 

Collateralized debt obligations have become incredibly complex. So much so that the issuers, the actually assembler of these instruments, were sometimes unclear what it was that they had created.

Complexity should cause one to become wary. Particularly unnecessary complexity. And if you have invested in something you don’t understand, you have only yourself to blame.  It is one thing to sit through a presentation, hear the detail explained in glowing terms, but when you’re back at your desk you need to decide. If you’re taking a leap of faith based on what you heard in a conference room, you’re likely making an unsound decision. Plenty of investors didn’t buy these “Goldbergian” securities.

Trying to regulate complexity out of investment is unwise. Complexity can help to mitigate risk and improve return. Instead, investors need to take a deep dive into the detail. It is the issuer’s responsibility to ensure it can withstand scrutiny. If not, the decision to leave it alone should be obvious.

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