Saturday, May 9, 2009

Beyond 19: principle #20 for financial reform

20. Properly value implicit options
Banks can't renegotiate mortgages that have been securitized and resold, even though they would be better off cutting their losses. For some reason, the option of doing so was apparently not taken into account when the assets were created. I don't know why, but at least it's something specific to point to as needing to be fixed.

Making commitments can be advantageous. A modern economy couldn't run without binding contracts. But option values are real too.

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