Big Think

Richard Oakes on March 22, 2009, 5:38 PM

I think that the problems with “price discovery” in the current markets are a problem of liquidity rather than complacency. I concede that during the bull market in credit products (2003-2007) many credit products, particularly CDOs, were difficult to price because of their complexity. But they were priced and traded, all be it with limited price transparency. There was a great deal of effort on part of the Financial Risk industry to establish unified credit curves and establish common transparent valuations.
The real problems with price discovery in the global credit markets begins when these products stopped trading. If there are no trades going through, no one knows what fair value is. Price discovery in toxic asset is not occuring because nobody wants to buy them.

Richard Oakes on March 22, 2009, 5:42 PM

I don’t understand what you mean about “rules and laws that define business behavior that leads to bankruptcy”. In twenty-five years in the financial markets I have never seen a “natural order”. Markets are always inefficient. There are always concentrations of power and limited information. The failure to achieve efficiency almost always the fault of the market itself. I find the idea that governments should stay out of markets bizarre. In jursidictions like the U.S., the government is the agent working for fairness and transparency, while the market will concentrate, manipulate and conceal to maximise the profit of individual players at every opportunity.