Thursday, August 16, 2007

Bubble bursting, or something else?

The current meltdown in global markets is driven by sub-prime debt. The following article from TIME.com is a short and readable explanation of the linkages:

Wall Street's Geniuses Blow Up the Lab
By RICHARD BOOKSTABER
Looks like Wall Street's mad scientists have blown up the lab again. The subprime mess that is cutting so wide a swath through financial markets can be traced to the alchemy of creating collateralized debt obligations (CDOs) compounded by the enormous amount of leverage applied by big hedge funds. CDOs are derivatives — synthetic financial instruments derived from another asset.
(...Read More)

Bookstaber is a former hedge fund manager and the author of A Demon of Our Own Design. He blogs here.

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